Frank Newman: Lifeline for Air NZ as market crashes

For the second time in 20 years the government has bailed out Air New Zealand.

Last time was in 2002 when the government stumped up with $885 million - $300 million in interest bearing equity (preference shares) at 24 cents a share and $585 million in new shares at 27 cents. Interest was paid in new equity rather than cash. 

The effect was the Crown ended up with an 82% stake. The rescue followed the Company reporting a $1.425 billion loss after its ill-fated investment in Ansett Australia. It returned to profitability in 2003. 

Fast forward 18 years.

• The Crown owns 52% of the shares. The balance is held by institutions or private investors.
• The 2020 life-line totals $900 million.
• The money will be available as two loans. The first $600 million at an interest rate of between 7% and 8% and the second $300m at 9%.
• The facility will be available for a period of 24 months. Should the loans not be repaid within 12 months, as is likely, the interest rates will step-up a further 1%.
• The $123 million interim dividend payment announced last month has been cancelled and no further distributions to shareholders will be made until the loans have been repaid.
• The Crown may at its discretion and after six months require the Company to raise new capital to repay the debt (via a rights issue to shareholders for example as was the case in 2005) or it may at its discretion convert its loans to equity on terms that have either not been determined or not disclosed.
• The bail out makes no mention of staff retention. Air New Zealand has stated that up to 30% of its 12,500 "may not be needed". (Although Air NZ may benefit from the $600 million aviation rescue package announced last week by the Transport Minister.)

The Company has of course welcomed the lifeline. In reality, they had few if any alternatives. What is surprising is that the terms are so glaringly commercial. It's very similar to the deals Warren Buffett negotiated when bailing out companies after the 2008 financial crisis: A credit line at a premium interest rate, and the right to convert the debt into equity.

Finance Minister Grant Robertson is reported as saying the interest rates were based on advice and considered reasonable and appropriate in the current environment. I disagree. Unlike 2002 when the bail out was the result of poor corporate governance, this trauma is the result of government policy and with the greater good in mind.

In my view an interest rate closer to the government's cost of capital would have been more appropriate and more sympathetic to the circumstances the Company now finds itself in. Not so long ago the Finance Minister was saying now was a good time for the Crown to spend on infrastructure because it could borrow at less than 2%. It's lending it to Air NZ at four times that rate.

Given the Crown owns 52% of the Company, the ones affected by the high interest cost are the other shareholders who own 48%, yet they have had no say in the arrangement because the NZX granted Air New Zealand a waiver from the NZX Listing Rules requiring shareholder approval. They did so because of the because of the extraordinary decline in the Company's market capitalisation, which is understandable.

It seems very likely that the 2002 scenario will play out again. It will be some time before dividends are resumed, and it is likely that the Company will have to recapitalise via a rights issue. In that case existing shareholders would have to front up with further capital and there would be a significant dilution of their shareholding if the Crown converts its debt to equity, as it likely.

Given the destruction of shareholder value and the likely loss of a substantial number of employees the gesture by the Air NZ Board of directors to take a 15% pay cut is especially disingenuous.

According to the 2019 Annual Report in the year ended June 2019 the Chairman received $270,000, Deputy Chairman $164,000 and other Board members between $110,000 and $140,000. In addition each board member received a travel entitlement of between $19,603 and $86,130. It's nice work if you can get it, but leading a company requires leadership qualities. When times are tough one expects leaders to inspire and support others through their actions, and more so when they are about to axe a third of their workforce. A 15% cut of what is secondary income for most directors is trivial when compared to the loss some 3,000 of their staff are about to endure.

Personally I have nothing but contempt for people who are so lacking in basic compassion. To redeem themselves the Directors should immediately forgo remuneration for six months.

Disclosure of interest: None.

Frank Newman, a writer and investment analyst, is a former local body councillor.