David Hargreaves looks at the difficult juggling act the Government is attempting with Air New Zealand

First up, I should make something of a confession. When a then Labour Government moved to bail out Air New Zealand just over 20 years ago (in 2001) I was against my taxpayer money being used to prop it up.

I freely concede that the only other likely option at the time was the nuclear one - letting it go under. And that might have led to a certain amount of, er, total chaos, as people were left without a national carrier to move them around the country. 

But actually, letting the airline go under would probably not have been as stupid as it sounds because, yes, there would have been immediate mayhem, but somebody would have stepped into the breach and started operating services here. Things would have settled down.

To me it was always questionable whether running an airline was the best use of taxpayer money.

Now 20 years on we have the situation where the taxpayer again is being invited to open his or her wallet for the airline.

It might all sound familiar. In reality, it's very different. 

In many respects the position of the Government of today (coincidentally, Labour again) is MORE difficult now than it was 20 years ago.

I'll summarise it with a slightly flip question: What's worse than bailing out an airline that's been run into the ground by private sector business interests? Why, bailing out an airline you already majority own, of course.

For the benefit of any doubt, the latter, with the NZ taxpayer owning 52% of Air NZ, is the current situation.

In 2001 the Government didn't own any Air NZ shares. It was able to come along with a hugely dilutive share offer that bought it just under 80% of the shares for $885 million. As some means of comparison, the Reserve Bank's trusty inflation calculator suggests that notionally one would have to stump up $1.35 billion to achieve the same thing today.

Already owning 52% of the airline is making things hugely complicated when it comes to recapitalising Air NZ now.

It means that walking away is not really an option. And actually, it would be downright unfair to hang the airline out to dry when it has been Government decisions around Covid that have provided much of the pain for Air NZ.

So, how to best manage the situation?

A common thought has been that Air New Zealand will need at least $1 billion in new capital. I reckon the further we go into this the more that figure begins to look pretty light. I reckon the airline might need more like $1.5 billion or even $2 billion if it is to be restored to something like former glory.

That of course will include repatriating significant portions of the fleet that are currently providing a home for snakes in California's Mojave Desert.

With the announcement of the new financing package between the Government and Air NZ, the taxpayer is currently on standby to the tune of $2 billion.

At time of writing Air NZ has 'used' only about $500 million of that. And the theory is that all of this money currently advanced by the Government, and that which might subsequently be advanced - even for the redeemable shares, would be repaid by the airline following a capital raising.

To maintain the status quo in the shareholding, the assumption is that the Government would buy just over half of all the shares being issued. So, even if we assume the capital raising is that bare $1 billion, the taxpayer will have to commit north of $500 million, which doesn't sound like a great deal just to maintain the current level of control. If I'm right with my $2 billion estimate of what the airline will ultimately need, then it could be closer to $1 billion or more that the taxpayer needs to stump up - so, more in (pre-inflation) dollar terms than the whole bailout in 2001 cost.

The really big problem for the Government in all this has been the 48% of Air NZ that it DOESN'T own. 

At time of writing the Air NZ share price was around $1.55. That bears NO relation to the degree of financial difficulty the company is in. What it reflects is the belief/understanding on the part of the public buying those shares that the taxpayer will continue to support the airline, and help revitalise it - so, that those shares will ultimately be worth a lot more.

By agreeing to keep supporting Air NZ, the Government - courtesy of the taxpayer - is directly underwriting the shareholders who own 48% of the shares. These are shares that would be worth WAY less than $1.55 if the Govt/taxpayer was not benignly standing by.

Finance Minister Grant Robertson would appear to be well aware of all these complications and that, I would suggest, is why the Government has been leery about actually committing to buying new shares.

It presumably doesn't want to get into a situation where it starts bankrolling the airline and then has to keep tipping in more money. And remember, a very crucial thing here is when and how Air New Zealand can begin to rebuild itself as an international airline again - assuming that's even what we want? 

As we breathlessly await our first Omicron variant case here - and it won't be too far away, you can bet on it - it's still by no means clear when some pathway to 'normal' airline travel can be mapped out. Or what that might even look like. It's been nearly two years now.

Ultimately the best way out of this might be for the Government to not own the airline. Or how about a split between domestic operations (National Airways Corporation, anyone?) and international operations - with the domestic operations and therefore essential travel within NZ still coming under the auspices of the Government? 

One thing the Government could possibly consider as part of perhaps a splitting of the airline would be to NOT buy any shares in an Air NZ capital raising - but to act instead as an underwriter to it, if it was able to do so under takeover rules. This would then properly test the mettle of the 48 percenters who are currently riding on the taxpayers' coattails.

Under that scenario the Government could end up either with a greatly diluted shareholding (which could then be sold) or alternatively with enough shares to launch a full takeover.

The best thing long term would be for the Government/taxpayer to either own all of the airline (not likely as things stand because the 48 percenters would want too much for their shares) or to sell down its holding over time. 

I suspect the latest announcement regarding the restructuring of the Government's financial support for Air New Zealand is forerunner to a further delay in implementing a capital restructure. 

It's understandable that in terms of wanting to avoid beginning to tip in open-ended sums of money the Government wants some certainty about how the airline can and will operate in future.

But I think we are starting to get into a chicken and egg situation. The Government seems to want some sort of certainty. But how long will that take? The best way of giving Air NZ some certainty is to get it recapitalised. A decision needs to be made - something this Government is not good at doing. 

It's really not fair to have a company and staff that have already been shunted from pillar to post left in some kind of ongoing stasis. 

Either we have a national airline, or we don't. Right now it is the Government's choice.