A decision with long-range implications for Australasion aviation is due from the New Zealand Government by early September before the next meeting of the Air New Zealand (ANZ) board.

Wellington has promised to respond swiftly to its flag carrier's request that Singapore Airlines (SIA) be allowed to lift its equity stake beyond the current 25% cap. A unanimous ANZ board seeks approval of this request as its preferred way to raise capital for a much-needed fleet upgrade of wholly-owned subsidiary Ansett Australian Airlines.

ANZ chief executive Gary Toomey has called for the government to approve the move, saying it is "fast approaching the point of no return". He adds: "We can go forward to our goal of being a top 20 world airline with an Australasian base - or we divert to become a smaller South Pacific operation with a limited international focus."

Even if Wellington gives SIA the nod, uncertainty remains over how much capital a bigger SIA stake will generate. At agreed prices for new-issue ANZ shares, analysts predict a boost in SIA's share from 25% to 35% would generate NZ$151 million ($63 million), while a boost to 49% - which ANZ would prefer - would raise NZ$466 million. SIA is also willing to participate in a further capital rights issue, but conversion of those rights into more equity could be blocked by Wellington's limits.

Participation in a rights issue by independent New Zealand investors could also help, but ANZ's board recognises that it still needs outside financing for its NZ$4-5 billion refleeting plans no matter how much shareholders contribute. Yet any boost in capital will strengthen ANZ's balance sheet, lower its borrowing costs, and affect how much it ultimately can borrow.

ANZ's case has prompted an unprecedented move toward trans-Tasman co-operation between the transport ministries of New Zealand and Australia. During a visit by Australia's transport minister John Anderson to his New Zealand counterpart Mark Gosche, the two agreed to form a joint working group to review the ANZ proposal and other aviation questions, such as Virgin Blue's request to fly trans-Tasman routes, that may require regulatory approval by both countries. They have chosen a Wellington merchant banker to negotiate on behalf of the group with all parties involved in the ANZ bid.

The ANZ case has clear implications for Australia. If Wellington allows SIA to boost its ANZ stake, ANZ will become a stronger rival to Qantas and Ansett will become a more credible competitor within Australia. Ansett's Australian market share has slumped in recent years because of a capital drought resulting from the long struggle over its ownership. A New Zealand go-ahead for SIA to lift its ANZ stake would almost certainly prompt the Australian Government to relax its foreign caps on Qantas to the same degree.

Conversely, if Wellington denies ANZ's request, that would improve the odds for a Qantas counter-bid backed by Australia's transport minister. Qantas wants to replace SIA as a 25% ANZ stakeholder, with SIA moving its share ownership from ANZ to Ansett. Each of these divergent approaches has major implications for ANZ, and so for Australasian aviation.

Source: Airline Business