Ever since New Zealand’s government was forced to re-nationalise Air New Zealand in 2002 to save the airline from bankruptcy, the investment has paid off.
It has paid off in the long run by delivering an annual return estimated at 8.4%, according to estimates by New Zealand’s treasury.
The NZ government took an 82% stake in Air New Zealand at the start of 2002 to save a company reeling from its disastrous investment in Ansett Australia, which it was forced to put into administration in September 2001, a day after reporting a net loss of NZD 1.4 billion. It injected a further NZD 149 million into the recapitalised airline in 2004, taking its total investment to about NZD 1.04 billion.
Taking into account the original investment, dividends received, the selldown of the Crown’s stake, the current value of the shares and a time-value of money adjustment, NZ treasury staffer Justin Anderson calculated the NZ government’s internal rate of return (IRR). He stops short of saying whether 8.4% is a good return.
“You could argue that 8.4% is greater than the Crown’s cost of borrowing over the period from 2002 to today and on that basis the investment was good,” Anderson said in a report on the treasury’s website. “This would not be a sound argument for a number of reasons – for example, it ignores risk.”
He says a better benchmark would be to consider market estimates of Air New Zealand’s cost of equity, which was between 12% and 16% a few years ago – higher than the IRR. But this, too, was problematic, because the Crown wasn’t a market investor and its motivation for investing wasn’t purely financial.
His report says the Crown has received dividend payments of about NZD 869 million since January 2002, excluding any dividends paid to Crown financial institutions such as the New Zealand Superannuation Fund and the ACC that may have held the airline stock. It does include dividends on the redeemable preference shares which converted to ordinary shares in 2005.
The Crown subsequently netted NZD 365 million in cash to sell its stake down to 53% in 2013, bringing total cash received to about NZD 1.2 billion. At today’s price of NZD 2.20, the Crown’s remaining 583 million shares were worth NZD 1.28 billion (although Anderson did his calculation on May 9, when they were NZD 2.30, or a total NZD 1.34 billion).
On the face of it, the Crown doubled its money but Anderson says it has to be taken into account that the investment was made 14 years ago and on that basis NZD 1,000 invested at 5% for 14 years would have grown to almost NZD 2000.
Air New Zealand has forecast before tax earnings of around NZD 800 million for its 2016 year after the airline posted record first-half earnings of NZD 457 million.
By Jonathan Underhill