Air New Zealand must be pondering the real value of its imminent stake in Australia's Ansett after the Melbourne-based carrier plunged into the red in the second half.

The New Zealand flag carrier has disclosed it will pay TNT A$325 million (US$260 million) for its 50 per cent of Ansett and inject A$150 million more capital. Ansett's other owner, News Ltd, will contribute A$50 million.

The money is sorely needed. The airline's earnings declined in the second half of 1995/6, leaving it with a $3.4 million after-tax profit for the full year, compared with a $51.5 million profit the previous year. The poor performance had already prompted the carrier's chairman Ken Cowley to call for annual savings of A$150 million and a revenue increase of at least $100 million.

Ansett's shaky finances highlighted growing evidence that Australasia's airlines are facing a tough period in their bid to maintain profitability. Although Air NZ announced a A$193.5 million net profit for 1995/96, the figure was 13 per cent down on the previous year - the result of a strong currency and a slow down in inbound travel. Worse still, New Zealand independent Kiwi International Airlines went into liquidation in early September.

Qantas also faces potential problems, despite a 1995/96 net profit of A$246.7 million, 36.8 per cent up on the previous year. Chairman Gary Pemberton predicts lower revenue growth and a stronger Australian dollar will affect this year's performance. Analysts agree, suggesting exchange rates could hit Qantas badly. 'While the airline has a natural hedge from the denomination of most of its debt in foreign currencies and the purchase of fuel and aircraft, which are priced in US dollars, it will still need to undertake extensive currency hedging to mitigate year-to-year revenue weakness,' says Peter Negline, an airline analyst with Salomon Brothers in Hong Kong. To compensate, the carrier plans to intensify cost reduction this year, raising the target from A$230 million to A$330 million.

Also worrying is a revenue decline in two key markets. European sales dipped from A$741.8 million in 1994/95 to $706.2 million, while Japanese revenue also shrank, from $797.3 million to $742.1 million. Peter Harbison, managing director of the Centre for Asia Pacific Aviation, believes the high-level of competition means the Kangaroo route is destined to remain a low yielding route, particularly for northbound sales. 'Its main prospects rest in the potential for growth. This should start to be realised when the large continental market economies improve.' He believes the Qantas' alliance with BA gives them an important edge in the market, and moves to cut costs should ensure the partners remain the route's most successful operators.

In the Japanese market, Harbison says that with a 9:1 imbalance in favour of Japanese originating traffic, the route has always been prone to dominance by fifth freedom operators. Increasing competition, combined with the still slow Japanese economy, has meant that the once lucrative route has lost some of its sparkle,' he adds.

Meanwhile, the airline has sealed a wages deal with the 5,500 members of the Transport Workers Union, giving them an 8 per cent pay increase over two years in return for some productivity improvements. While the move has averted industrial action it will add to the company's wages bill and make cost cuts more difficult.

Tom Ballantyne

Source: Airline Business