Speech by Gary Toomey -- "Point of No Return"

The following speech was delivered by Air New Zealand President and CEO at an American Chambers of Commerce luncheon held in Auckland.

POINT OF NO RETURN

Thanks for your welcome today. It's a great opportunity to meet with a group of significant business and community leaders, colleagues, and clients - at a time when you're probably wondering : what's happening at Air New Zealand.

To give you some idea - the title of this address is "point of no return".

In aviation, that means you're at the point in your flight when you must go on to your destination, or to some alternate. You can't go back

Bluntly, Air New Zealand is fast approaching the point of no return.

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.

That is essentially the decision that must be made very soon.

Within the next fortnight, the New Zealand Government will determine if it can relax current limits on foreign investment in Air New Zealand to allow Singapore Airlines to increase its shareholding from a 25% stake to around 49% and inject additional capital into the Air New Zealand - Ansett Australia Group.

The New Zealand Government has three major concerns -

* the retention of international landing rights for New Zealand's flag carrier airline - and that means retaining effective New Zealand control of Air New Zealand;

* the impact on competition in the domestic and international aviation markets; and

* the effect on the branding and promotion of New Zealand as an international tourism destination.

We understand those concerns. We share them. So does our Board and Singapore Airlines. We are committed to the principle that the Government is entitled to require terms and conditions to ensure that the interests of New Zealand and Air New Zealand are properly protected and advanced.

The Australian Government is also concerned. It wants to secure two, strong and competitive airlines in Australia. It wants to ensure there is balanced competition in the Australian, regional, and global aviation markets.

Again, we understand those concerns and are prepared to address them.

Naturally, our major rival in the region - Qantas - has a strong interest in what's happening. Right now, it wants to buy a 25% stake in Air New Zealand and move into partnership with us... to compete with our current partner airlines Ansett and Singapore.

The result is that there is now a complex mesh of conflicting interests - national, political and commercial - which the New Zealand Government must address before Air New Zealand can see clearly where it must go.

We remain hopeful - but concerned - that the critical decisions can be made before the end of this month, because we are at the point of no return.

On September 4, we must come to the market with a comprehensive strategy for future development when we announce what everyone is aware will be a disappointing result for the last financial year.

Why are we in such a position ?

Let me outline a little history - and express the hope that we can learn from it.

This is one of the most interesting and challenging periods in the development of the global airline industry.

The changes we're seeing in our region are probably the starkest, most dramatic and dynamic to be seen anywhere in the world.

Where else have you seen two major airlines integrate, three budget domestic airline start-ups, one significant domestic airline collapse, another swallowed by its major rival, another expressing fear for its survival.

Where else are you seeing the market's largest airline proposing a partnership with the second largest - to spin off part of the business to one of its major international rivals?

All here - and all in less than a year.

Our industry is going through a savage shakeout - locally, nationally, and internationally. Sky Wars are forcing a radical reconfiguration of the airline businesses of the world.

I'm delighted to be in the hot seat of change at the Air New Zealand - Ansett Group - working with a great team of people who are determined to be change-makers not change-takers.

That's a compliment, coming from someone who's spent most of his career competing against both Air New Zealand and Ansett.

At Australian Airlines and Qantas, I watched Ansett take the lead domestically - first loyalty programme, first premium customer lounges, first in-flight video, first with ticketless travel, first with e-check in.

I watched Air New Zealand undertake a dramatic expansion of its international network - earn a run of customer and business class service awards in the UK, America, and Asia - and position itself shrewdly for the development of the Australasian Single Aviation Market.

But I also saw Australian political and aviation interests out-manoeuvre the Kiwis on the development of that Market - to Air New Zealand's continuing disadvantage.

The Single Aviation Market Agreement - signed in 1992 - ultimately envisaged a full exchange of domestic and international operating rights for New Zealand and Australian carriers.

At the time, Australia already had a 100% Australian owned carrier working the New Zealand domestic market - Ansett New Zealand.

The agreement gave Air New Zealand the promise of entry into Australia's domestic market - in November 1994.

In terms of the international market ,Qantas didn't need beyond rights to access most of the New Zealand inbound/outbound traffic.

Conveniently, Australia stands between New Zealand and the world's most significant international destinations and tourism markets.

But at least the Single Aviation Market gave Air New Zealand beyond rights for up to twelve 747 flights a week between Australia and other destinations or markets - and the promise of unfettered access to Australian international traffic by the end of 1994.

Despite the obvious disadvantages, Air New Zealand demonstrated its strength - more than holding its own domestically against Ansett New Zealand, generating steady profits at a time when most international airlines were swimming in red ink.

But when the promise of the Single Aviation Market fell due towards the end of 1994, I watched the Australian Government shut the door on the kiwis - and suspend further development.

I was intrigued by former Prime Minister Paul Keatings' version of the story when he spoke at the recent Knowledge Wave conference.

Australasia should be one integrated aviation market, he said.

So why was its development suspended in 1994 when he was Prime Minister ?

Well, he was just about to privatise Qantas - and Ansett wasn't in great shape. Not a good time to let the Kiwis loose in the market.

However, his Government did leave open the opportunity for Air New Zealand to negotiate the purchase of Ansett .

According to him, this purchase could have been made at a time when Air New Zealand could have put a stamp on Ansett and Australian airline policy in a way that was far more advantageous to New Zealand than now.

But the people who actually owned Ansett in 1994 didn't see this "opportunity" in the same way as Mr Keating.

As soon as the Australian government suspended further development of the Single Aviation Market, Air New Zealand started knocking on Ansett's door.

It took a year to work out a deal to acquire 50% of Ansett from TNT - and an operating partnership agreement with the other 50% owner, News Limited.

Then it took the best part of another year to gain the necessary Government approvals to conclude the deal - with the most protracted part of that process being in Australia.

In 1999, Singapore Airlines made News an offer for its 50% stake in Ansett that News. The Australian Government was prepared to support the transaction - then.

This deal would have created the very same Singapore-Ansett-Air New Zealand "behemoth" that now strikes fear into the hearts of Qantas and the same Australian Government that was ready to support its birth in 1999.

I guess they were both "saved" when Air New Zealand stepped in and exercised its pre-emptive purchase right to match any offer News was prepared to accept for its Ansett stake from another party.

Air New Zealand had to make its Ansett purchase decision under pressure - its pre-emptive rights existed for a period of just 30 days.

As you know, Air New Zealand dug deep to make the deal - and if you look objectively at their situation you can see why.

There simply wasn't any other way for Air New Zealand to hold its own against Australian rivals who were free to enter every element of its small home market of 3.8 million people from their own largely protected market of 19 million.

Air New Zealand couldn't ignore the fact that 52% of its customers travelling overseas are heading into Australia - and Australia is New Zealand's largest source of overseas visitors.

Here was the first - and probably the only chance Air New Zealand had to bring together an integrated Australasian airline business with the scale, the network, and the market opportunity to close the gap on its major rival.

This was an investment that Air New Zealand couldn't afford NOT to make.

It delivered comprehensive market access to Australia that was otherwise denied - and scale and efficiency benefits that otherwise couldn't be achieved.

It attracted Singapore Airlines as a new cornerstone investment partner in Air New Zealand with a 25% shareholding in the expanded Australasian business.

And it secured influence for us in STAR - the most significant and stable global airline alliance that's been created.

Yes - the decision to purchase 100% of Ansett also delivered a set of problems and challenges.

But they would still have arisen if Air New Zealand and Ansett had continued as separate businesses.

Both businesses would have been crunched between a significantly larger rival and new competition from lower-cost niche carriers.

Both businesses would have been hit by soaring fuel and forex costs.

Ansett would still have had to confront its own heritage of engineering and maintenance oversights.

Air New Zealand would still have been looking for funds to meet its medium term growth requirements.

As a Group, Air New Zealand and Ansett have more capacity and more options to meet the challenges that confront every airline in the world today - and some that are all our own.

Where would Ansett have been if we hadn't been able to call in planes and crews from Air New Zealand when 25% of Ansett Australia's capacity was grounded at Easter ?

Equally, I can't imagine Air New Zealand operating successfully without comprehensive reach into the Australia - the largest of its inbound/outbound markets by far.

So, I'll agree that Paul Keating's government created an opportunity for Air New Zealand to purchase Ansett.

But it was not an opportunity to put a stamp on Australian airline policy even though it was taken up as quickly as the Australian Government and Ansett's owners would permit.

That's clear from the flip that's taken place in Australian airline policy since 1999.

In 1999, Singapore Airlines was acceptable to Australia as a 50% shareholder in Ansett alongside Air New Zealand.

But today Singapore Airlines appears not to be acceptable to the same Australian government as a 49% shareholder in Air New Zealand and Ansett. Why ?

Transport Minister Anderson tells us that this proposal would create an unhealthy imbalance in the global, regional and Australian aviation markets.

He wants to ensure Qantas isn't confronted by a behemoth - facing a future where it can't compete effectively.

I'd like to explode this "behemoth" myth.

From where we're sitting - Qantas and its 25% shareholder British Airways look a pretty big combination. Qantas alone is much bigger than Air New Zealand - Ansett combined... and the Qantas-British Airways team is much bigger than the Air New Zealand-Ansett-Singapore Airlines combine.

In total, they have more than 500 aircraft against our combined total of just over 280 - carry 54 million passengers a year compared to our 36 million - and currently pull in more than twice as much revenue each year as we do.

The Qantas-BA partnership is already a behemoth compared to a Singapore, Ansett and Air New Zealand combination.

If you went with Minister Anderson's preference, we'd make them even bigger - with British Airways owning 25% of Qantas and Qantas owning 25% of Air New Zealand.

The Qantas plan sees this behemoth lined up against Singapore Airlines as 100% owner of a besieged Ansett Australia and putative founder of some yet-to-be established airline in New Zealand and on the Tasman.

I leave it to you to work out what that does to the balance of competition in the Australian and New Zealand aviation markets - let alone the rest of the world.

While the New Zealand Government has agreed to explore Minister Anderson's preferred option, Air New Zealand can't consider it.

The Qantas option to buy 25% of Air New Zealand simply can't happen because Singapore Airlines owns that 25%.

It doesn't want to sell it. It wants to increase its stake in Air New Zealand and Ansett. It wants to inject additional capital into the combined business - because it wants a strong partner in this part of the world to combat the Qantas-British Airways presence.

Singapore Airlines is prepared to accept reasonable conditions required by the New Zealand Government to protect effective New Zealand control of Air New Zealand, the international landing rights available to Air New Zealand, the Air New Zealand brand, and Air New Zealand's ability to promote New Zealand as an international tourism destination.

If it accepts these conditions, our public opinion polling shows that 75% of New Zealanders would support a Government decision to relax its foreign investment rules and allow Singapore Airlines to have a 49% shareholding in Air New Zealand.

All the areas of concern - including the need for more balanced competition in the global, regional, Australian and New Zealand markets - can be addressed.

If they are, we can proceed to our intended goal - and deliver another locally-based world top 20 airline to our home region.

If they aren't, it seems inevitable that we will have to shrink Air New Zealand. There is no obvious alternative source of capital to grow it and rejuvenate Ansett.

Our vision of building an Australasian airline business of global significance would - in all probability - be lost.

Remember, under the present uncompetitive rules of this international industry, we are expected to source 51% of our equity from NZ's tiny capital market.

We then have to compete against carriers that access most of their equity from the giant equity markets of USA, Europe and Asia. Even Australia.

That's the All Blacks against Vanuatu - with no disrespect to our friends in that lovely country.

In the event that Qantas is able to strike a deal with Singapore Airlines and buy its 25% stake in our company - we will also have to shrink Air New Zealand.

Competition authorities on both sides of the Tasman would have tremendous difficulty in permitting the continued direct operation of both Qantas and Air New Zealand in the Australian and New Zealand domestic markets and across the Tasman - as partners against other rivals.

We have pledged our support to assist the Government in exploring the Qantas proposal. But, from our perspective, it isn't a flyer - and the exploration shouldn't take very long.

We are eager to get on with the job, and I think over the last six months the Air New Zealand - Ansett Group has really demonstrated its commitment and capacity to serve the public interest.

Ansett has worked through two groundings at peak demand periods, kept its customer base intact and improved its on-time performance.

I'm not proud of the fact that those groundings were necessary - the result of flawed maintenance planning and control practices that were uncovered by us in the first month our new management team took over the Ansett engineering operation.

However, I am proud of the way our people worked round the clock to satisfy regulators of the safety of our fleet and operations - and kept our passengers moving.

I'm also proud of the way Air New Zealand stepped up to the mark to support their Ansett colleagues during the Easter grounding.

The very next weekend, they really pulled out all the stops at home to move an additional 25,000 passengers at just a few hours notice - when Qantas New Zealand collapsed and left them stranded.

Beyond meeting these major challenges, we've also taken significant steps in the last six months to strengthen our services on both sides of the Tasman.

For the regions and provinces, we've:

* ordered a fleet of 16 new Beech 1900D turboprops to replace the Metroliners and Bandeirantes in Air New Zealand Link services

* added 55-seater CRJ jets to the Ansett Australia Link fleet,

* purchased a regional airline in New South Wales, and

* salvaged the operations of another in Queensland.

In domestic main trunk services, we've

* introduced four new B737-300s to our Group fleet - two to Ansett Australia and two to Air New Zealand National.

* added four Bae146's to the Air New Zealand domestic fleet.

* launched New Zealand's first domestic budget airline - by adding two 737-300s to the Freedom Air fleet to operate between main centres.

On top of that, we've:

* secured global engine giants Pratt & Whitney as partners in the establishment of a new international engine maintenance and repair facility at Christchurch

* pioneered e-check in systems at Australia's major airports.

Looking ahead, we have

* committed to add 12 jets to the Ansett Australia domestic fleet before the end of this year - that's four 767-300s, four 737-300s and four Bae 146s

* will add and another 767-300 to the Air New Zealand International fleet on Asian routes and a 737-300 to the National fleet before the year's end.

* negotiated a sale, leaseback, and replacement deal on our B767-200 aircraft that'll see us completely rejuvenate this component of the Group fleet over the next three years.

We have taken these steps because the Directors of our Group are looking beyond the significant operating loss we'll record this year with confidence to our medium term future.

Our new management team has vigorously attacked the task of developing a 5-year strategic development plan for the integrated Air New Zealand-Ansett Group.

This process identified the capital-raising problem we confront today.

We need capital to rejuvenate and grow a run-down Ansett in Australia. We need capital to continue the steady growth of Air New Zealand.

Under the current rules, we must raise more than 50% of our equity capital within New Zealand. Our calculation - confirmed by expert external analysis - is that it can't be done.

It's not a problem we have to ourselves - my former colleagues at Qantas are also lobbying to have the limit on British Airways investment in their business lifted from 25% to 40% because they need broader access to capital than the Australian equity market provides.

Change is inevitable - not just for us, but for everyone in the aviation industry.

All international airline operators have to compete in a global market for capital, equipment, talent and customers - and in an industry that is increasingly compelled to globalise its activities to meet consumer demand.

Today and tomorrow, the international barriers to the flows of trade, investment, information and people will keep on coming down - and the opportunities for efficient international airlines just go on growing.

In this environment, Australia and New Zealand need robust, locally-based competitors capable of vying with all other comers to provide efficient air transport services at regional, national, and international level.

Without strongly committed, locally-based air transport operators, New Zealand and Australia can only be incomplete, minor branch office economies... two remote and fragmented nations of dislocated communities.

That's a future we can't avoid by turning back the clock.

We can't snuggle back into the cosy duopoly or the even cosier monopoly of decades past.

I don't believe that's a future that thinking New Zealanders and Australians would want to share - one that consumer-conscious governments would be prepared to tolerate - or one that the rest of the world would allow us to create.

Consumers, governments, and operators have seen the opportunities and benefits that airline competition creates.

And the people in my industry know it.

Today, my former colleagues at Qantas fear our building of an Australasian airline system, and now seek to do it themselves, exclusively

My colleagues at Singapore are interested in securing a stronger position in the airline industry of our region.

I find that really encouraging.

It confirms the judgement of our Group that we're in the right place and on the right track - even if we are currently at the point of no return.

I hope the Governments on both sides of the Tasman make the right choice this month.

My Board and management are strongly united on what should be done.

Our proposal will ensure that we continue to see robust competition between two major locally-based, substantially locally-owned national and international carriers right across the Australasian market .

It will strengthen the Air New Zealand and Ansett Australia brands, operations and networks - and their presence and performance in overseas tourism markets.

It can be constructed and controlled in ways that ensures Air New Zealand can continue to exercise all the international landing rights that the New Zealand Government has won for New Zealand designated carriers.

That's something we have already achieved in Australia as 49% owners of Ansett International.

The battle for the consumer's favour - the fight to generate proper returns for our investors - can continue with the same intensity you've seen so far.

Looking further into the future, I believe the composition of the ownership of our airlines is likely to become more fluid and dynamic as deregulation progresses.

But deregulation is placing the consumer - not the producer - in the driving seat.

In three to five years' time, air travellers will want improved quality, choice, comfort, speed, convenience, personal control, individual consideration, safety, security and value from the airlines competing to meet their needs - whenever and wherever you go.

Actually - I know that's what you'd like from us tomorrow, or, preferably, today.

The airline that delivers these benefits faster than its competitors will also be the airline that's most likely to deliver the best returns to investors, generate the best business for its partners and suppliers, and provide the best work environment to its employees.

Air New Zealand and Ansett both have a tradition of setting the pace - and, over the last six months, our joint management team, supported by committed staff, have built a strong track record of achievement under pressure.

To meet the long-term challenges ahead in the next five years, we need more capital than the New Zealand market can provide - just as Qantas says it needs more capital than the Australian market can provide.

We have put a proposal before the New Zealand Government to solve our problem.

Qantas has put a proposal to the New Zealand Government to solve our problem.

We are near the point of no return - and it's decision time.

The "sky wars" of Australasia have reached a crucial turning point.

The decisions taken this month by the Australian and New Zealand governments will determine who wins - who loses.

Air New Zealand wishes them well in their deliberations - and will provide whatever they need to come to fully-informed conclusions.

I've made it crystal-clear what Air New Zealand hopes will happen.

I've done my best to explain why our proposal will promote the public interest in Australasian airline development better than any other.

And I appreciate the hearing you've given me today.

Thanks very much.