Asian airline industry faces fresh shakeup

Qantas would not be allowed to control rival Ansett

By staff and wire reports

SYDNEY, Australia (CNN) -- The Asia Pacific airline industry is facing another major ownership shake-up amid moves by Australia's Qantas Airways to take a large stake in neighboring national carrier Air New Zealand.

Qantas and regional rival Singapore Airlines have confirmed they are in talks for Qantas to buy a significant stake in Air New Zealand, which is 25 per cent owned by Singapore Airlines and 30 per cent owned by Brierley Investments.

The deal would also see offload domestic its wholly owned Australian subsidiary Ansett, which includes a small international offshoot, to Singapore Airlines.

Shares in both Qantas and Air New Zealand leapt on the Australian Stock Exchange, with Qantas closing 3.88 percent firmer at A $3.48 and Air New Zealand's B shares soaring 10.22 per cent stronger at NZ $1.51.

International rating agency Moody's Investor Service said it was closely monitoring the proposals. It has a negative outlook on Qantas' credit rating.

The proposed transactions would be subject to approval by various foreign investment regulators, and limited by laws restricting controlling ownership by foreign companies of national flagship carriers.

They are only in the most formative stages; with a Singapore Airlines statement saying the Qantas proposal was "only a concept".

Analysts see the cross-border wheeling and dealing as further evidence the Asia-Pacific airline industry is moving into a period of enormous uncertainty.

Few airlines in the black

As few as three Asian international carriers are seen to be in healthy financial condition -- Qantas, which is 25 percent owned by British Airways, as well as Singapore Airlines and Hong Kong's Cathay Pacific.

Only that small few are seen to have enough room on their balance sheets to make acquisitive moves into foreign markets.

Singapore Airlines is one of the few carriers in Asia with a strong balance sheet

The rest include a host of national flagship carriers such as Thai Airways, Malaysian Air Service, Air India, Indonesia's Garuda International, Korean Air, Air Philippines and a handful of state-owned Chinese operators.

Most, if not all of those, are heavily indebted and inefficient, having been run as bureaucracies for much of their operating lifetimes. Very few would have the ability to launch raids on foreign carriers in either international or domestic markets.

"In fact, because of rising fuel costs and maintenance, and plunging Asian currencies, many of these companies are could find themselves in a lot of trouble over the next six months to a year," says W.I. Carr Indosuez aviation analyst Damian Kestel.

Although the aviation industry is heavily regulated, stopping cashed-up operators from acquiring their weaker rivals, analysts say market forces could play a role in hastening the consolidation.

"So many of these carriers are up to their eyeballs in debt. None of these guys hedge against movements in currency, and they are buying in baht, ringitts, won, pesos and yen," says one observer, who asked not to be named.

"All those currencies have taken a hit and so fuel prices for the carriers are soaring."

Market forces

"All it takes is for them to start crimping on their maintenance costs as they drive to pay off debt and stay afloat, then a plane falls out of the sky and pretty soon nobody is flying with them and they're gone."

Quality on some of the regional airlines already appears to be on the wane -- Thailand's Prime Minister Thaksin Shinawatra recently being reported in the Bangkok Post as saying he thought Thai Airways "sucks".

The explosion that nearly claimed Thailand's prime minister was blamed on a mechanical fault

Earlier this year Thaksin narrowly escaped injury when a Thai Airways jet exploded shortly before he was due to board it.

Says Kestel: "It's not inconceivable that Qantas, Singapore Airlines and Cathay could end up controlling the Asian market."

Even for a world airline, Singapore Airlines is considered an anomaly. Hugely profitable, it is the world's sixth largest airline by passenger numbers and seventh largest by cargo hauled.

It also part-owns subsidiaries in airline services and engineering, which stabilize its revenues, and has a total value of more than $9 billion.

Strict regulation

But it has been blocked from lifting its 25 per cent stake in Air New Zealand, a relative minnow on the world scale, by the New Zealand government.

Former New Zealand-based Brierley Investments, now headquartered in Singapore, owns another 30 percent of Air New Zealand but may well be looking to offload that investment.

Qantas said Tuesday it had had preliminary discussions with Air New Zealand, Singapore Airlines and Brierley and was awaiting further advice or contact from the Air New Zealand board and the stakeholders before it took the matter any further.

In a statement to the Australian Stock Exchange Tuesday Air New Zealand company secretary John Blair said the proposed ownership changes were "conceptual and no valuations have been incorporated in the proposal at this stage."

"However, the board will consider the proposal ... and has established an independent committee of directors to consider the proposal as well as other options," he said.