Air NZ and Qantas To Form Major Airline Grouping

Monday 25 November 2002

Air New Zealand And Qantas To Form Major Airline Grouping

Statement made by John Palmer, Chairman, Air New Zealand Limited

The Board and Management of Air New Zealand have unanimously supported the entry by the airline into a major strategic alliance with Qantas.

Earlier today, the Boards of the two companies concluded a far reaching agreement which will secure long-term opportunities for both parties, bringing substantial economic benefits to the companies and public benefits to New Zealand and Australia.

The basis of the strategic alliance is the absolute commitment of both parties to Air New Zealand being New Zealand controlled, and managed autonomously under the oversight and direction of its own Board.

Under the alliance all the airline activities of Air New Zealand will be combined with those parts of Qantas which operate to, from or within New Zealand, under the commercial management of Air New Zealand.

This establishment of a major airline grouping in the region provides both parties with a sound base from which to strengthen their global presence in overseas markets, develop new routes and improve scheduling and frequency of services. These markets account for over three quarters of Air New Zealand’s international passengers who travel to this country as tourists and business visitors.

The strategic alliance is a bold response to the challenges both airlines face. The agreement emerged from a commonly held view of the future which sustained the lengthy discussions between the two parties initiated some 12 months ago.

Air New Zealand considered two strategies, that of joining with another airline and then competing against Qantas, or working with Qantas and competing as a strong alliance. The Qantas alliance offered the best outcomes, both from the Company’s, and the national interest, perspective.

It makes commercial sense for two airlines with a common vision, based in this region, to work together. It ensures each airline remains successful and retains the potential to operate globally and remain its own country’s national airline. Importantly, it promotes a sustainable future for Air New Zealand and builds our capability to develop new routes.

The name Air New Zealand will remain and the Koru symbol will continue to fly proudly to major international destinations.

To have reached an understanding with Qantas based on the strengths we can bring to the alliance demonstrates the progress Air New Zealand has made in 12 short months. Qantas recognises the additional value Air New Zealand has created through the strategic introduction of initiatives such as Express Class.

Independent economic analysis has identified benefits to New Zealand from the alliance approaching $1 billion over five years arising from areas including:-

 Generation of up to 50,000 additional tourists to New Zealand each year
 Additional and more effective promotion of New Zealand in overseas markets
 Enhancement of air-freight services to and from New Zealand
 Creation of more than 200 additional highly skilled jobs within Air New Zealand

It represents an excellent outcome for the country, for the travelling public, for New Zealand’s exporters and business people, for all our shareholders and for all of the staff of our airline.

The alliance will be supported by an injection of approximately up to $550 million in new capital from Qantas who will subscribe for sufficient Air New Zealand shares equating to up to 22.5% of the Company’s enlarged capital. An initial placement to Qantas of 4.99% is proposed in the form of Convertible Notes. The remaining shares are to be issued first upon approval of the transactions by Air New Zealand’s shareholders, increasing Qantas’ interest to 15% (including the Convertible Notes which would convert to shares at that time) and the balance of 7.5% either on the same date or, at Qantas’ election, three years from that date. The issue of the Convertible Notes and the shares will require, and are subject to approval by, the Kiwi Shareholder.

An application by Qantas is being lodged today with the Minister of Transport, Hon Paul Swain, for consent to own shares in Air New Zealand.

In conjunction with this new capital, the Board currently plans to offer all shareholders an opportunity to participate in a rights issue next year to raise approximately a further $200 million. No final decision has been made and an announcement will be made about this issue early in 2003.

The co-ordination between the companies will be further strengthened by reciprocal Board representation. One director of Air New Zealand will be invited to join the Qantas Board and, reflecting their equity interest, two directors will be nominated by Qantas to join the Air New Zealand Board.

Once the strategic alliance is operational Air New Zealand will manage the commercial activities of operations within the alliance. That is the scheduling, pricing, routes and marketing of all Air New Zealand flights and all those Qantas flights which operate to, from or within New Zealand. Each airline will remain fully responsible for its own flight operations including matters such as aircrew, provision and maintenance of aircraft, and passenger services.

In addition we will be exploring with Qantas code share opportunities across their network.

The combined operations will be supported by a small advisory group made up of three representatives from each airline.

Air New Zealand sees for itself a future in which it:

• Takes New Zealand business and its trade and produce to world markets, and New Zealand travellers to international destinations

• Substantially increases the extent and effectiveness of the marketing of New Zealand as a tourism destination, bringing increasing numbers of tourists and visitors direct to New Zealand

• Provides domestic travellers with a world class and affordable service

• Retains its autonomy and identity

• Protects the commercial integrity of its Express Class, trans Tasman and long-haul services, and critical customer benefits such as Airpoints

 Provides a robust basis for growth.

The vision of a strong Australasian group building international influence in key global markets is critical for both airlines, which together account for less than 4% of the world’s commercial aviation.

We believe that regulators, including the New Zealand Commerce Commission and Australian Competition and Consumer Commission, will see the merits of this strategic alliance.

The global airline industry has recognised it needs to change from traditional, stand alone national carriers competing against every other airline. The industry will continue to evolve as airlines seek ways to reverse the large financial losses many have experienced and many airlines are exploring opportunities to establish strategic relationships.

The alliance between Air New Zealand and Qantas was concluded following nearly a year of consideration and testing of a number of alternatives. None provided the benefits that the Qantas alliance creates.

A stand alone Air New Zealand is possible in the short-term but to think in the long-term we can be globally competitive with a New Zealand home market of four million people is unrealistic.

The people of Air New Zealand have demonstrated considerable resilience, determination and innovation in dramatically turning around the airline and rapidly rebuilding on the recapitalisation in February this year.

Our strategic shift in the New Zealand domestic market to Express Class has been a resounding success with the travelling public.

We now want to build on that spirit of innovation in meeting our customers’ needs in international markets. That will require a strong market and financial base as we confront the enormous competitive resources of carriers based in far larger markets and the natural competitive advantages of recently established “value based” airlines which do not suffer the high cost legacy of most traditional carriers.

This alliance is a one time opportunity for New Zealand and Australia to co-ordinate our major airline resources and create a competitive, international airline operation with the interests of this region at its heart.

We anticipate a Kiwi Shareholder decision on Qantas taking up a 4.99% shareholding before year end.

The other regulatory and shareholder approvals necessary to proceed are expected to be resolved in the first half of 2003, at which stage the alliance will come into being.

Until then, for Air New Zealand it will remain business as usual.

ANZMR003

The Strategic Alliance in Brief

The basis of the strategic alliance is the absolute commitment by both parties to Air New Zealand being New Zealand controlled, and managed autonomously under the oversight and direction of its own board.

Air New Zealand will have control of its own destiny and will retain its identity as the flag carrier airline for New Zealand. Majority ownership (some 70%) and control will stay in New Zealand hands.

The Air New Zealand and Qantas brands will continue to operate domestically in New Zealand and internationally from Australia. The two brands will complement each other.

The Crown will continue to be the Company’s’s majority shareholder, ensuring effective control of Air New Zealand by New Zealand nationals. The issue of new shares to Qantas will, if completed, dilute the Crown’s ownership to approximately 64%.

The combined resources of Air New Zealand and Qantas will be directed towards competing against airlines which operate into Australasia from most parts of the world and against new competition that will inevitably fly domestically in New Zealand and across the Tasman.

The bilateral arrangements New Zealand has with other countries will not be affected and Air New Zealand anticipates being better able to utilise those rights.

The alliance will not mean the elimination of affordable airfares in New Zealand or across the Tasman. In particular we are committed to continuing to offer the New Zealand public a price efficient, quality airline service on domestic routes through Express Class. Our trans Tasman services will continue to offer competitive fares as a traditional airline and low cost international travel through our “value based” airline, Freedom Air.

The move to our current service standards and pricing has been driven by our vision of the way airlines must operate in the future to respond to changing customer demands - not as a short-term response to competition.

Our research shows us that in the short time our new domestic pricing structure has been in place, more people are flying for the first time and people are flying more often than in any comparable period.

The travelling public recognises that travel on Air New Zealand and Freedom Air is good value for money and we have no intention of changing direction.

All Air New Zealand Airpoints membership benefits will be retained providing access to a global alliance network. It is our intention that in time, Airpoints will apply to travel on Qantas services.

The alliance will secure the feeder traffic from Australia and provide access to the domestic Australian network that Air New Zealand has always regarded as key to its long-term growth.

Air New Zealand and Qantas plan to code share on

 all New Zealand domestic flights and all of Air New Zealand’s international flights
 all Australian domestic and international flights which connect with Air New Zealand’s or Qantas’s trans Tasman flights.

Air New Zealand will also be able to code share other international flights with Qantas such as from New Zealand via Sydney and Singapore to London. It means the New Zealand travelling public will have better access to a significantly increased number of Australian and other international destinations.

Where existing Air New Zealand and Qantas scheduling creates excessive frequency at peak times, flights will be rescheduled to offer a more convenient range of alternative travel times.

The two airlines will co-operate to provide services to destinations which cannot be provided independently and to improve frequency and capacity on many routes.

Air New Zealand is a member of the Star Alliance. No decision will be made in the near future and it should not be assumed that Air New Zealand will leave the Star Alliance.

ANZMR003

25 November 2002

AIR NEW ZEALAND’S STRATEGIC ALLIANCE WITH QANTAS

Answers To Key Questions

How will you ensure consumers continue to be offered competitively priced airfares?

Our fare structures are based on the need to stimulate the market through affordable fares, higher loads and better aircraft utilisation. Our commitment to this approach is shown through initiatives such as Express Class and the enhanced trans Tasman services for Freedom Air.

Express Class and Freedom Air will continue and the current airfare structure is here to stay.

Can you assure consumers that fares will not go up?

Air New Zealand can confirm that its Express Class and Freedom Air fare structure will remain competitive. Fares will continue to be market competitive. Express Class and Freedom Air’s expansion are prime examples.

Why has Air New Zealand chosen to go with Qantas, particularly given the fact that many New Zealanders have expressed their lack of support for the move?

This alliance is a bold move that is good for the country as well as Air New Zealand. It will create wealth and employment.

Now that we have at last been able to tell New Zealanders the terms of the agreement they will be able to appreciate that this was too good an opportunity to miss. It will
- Allow continuation of affordable, convenient travel for New Zealanders using their own national airline carrier
- Provide economic benefits for New Zealand of close to NZ $1 billion over five years
- Ensure Air New Zealand has a successful future as a global, New Zealand owned and managed company
- Leave us in charge of our own destiny

How much control will Qantas have over Air New Zealand?

The basis of the strategic alliance is the absolute commitment of both parties to Air New Zealand being New Zealand controlled, and managed autonomously under the oversight and direction of its own Board.

Air New Zealand will control its own destiny and retain its identity as New Zealand’s airline. Some 70% of shareholding will remain in New Zealand hands and the Kiwi Share structure will remain. The commercial management of the combined operations of Air New Zealand and Qantas in New Zealand and across the Tasman will be Air New Zealand’s responsibility.

Will Qantas have board room control?

Qantas will have only two out of nine board positions, 22% is well short of control.

At one time British Airways had as much as a 25% shareholding in Qantas. That did not create control of Qantas.

What does the alliance mean for the travelling public?

An even stronger, growing Air New Zealand. This translates into
- The retention of affordable fares for Express Class and Freedom Air
- The extension of Airpoints, in time, to Qantas services
- Greater options and flexibility in the number of flights through code sharing with one of the world’s leading airlines. Choice will be increased threefold
- Code share access to routes from New Zealand, Sydney to Singapore, London and Europe.

What exactly has happened between Air New Zealand and Qantas?

We have formed a new regional airline grouping in this part of the world. Our focus will be on co-operating so that we do what is best for New Zealand and Australia, our respective customers and for Air New Zealand and Qantas.

We are co-operating so we have the size and strength to take on the rest of the world’s airlines.

How will the alliance operate?

Two of the more important operational aspects are
- Air New Zealand and Qantas continuing to operate their own services in New Zealand and trans Tasman, but commercial management of scheduling, pricing, routes and marketing will be the responsibility of Air New Zealand
- We will cooperate to develop new routes internationally and improve scheduling and frequency

Why didn’t Air New Zealand get New Zealanders to invest in the company rather than selling out to Qantas?

Continuing as a stand alone airline was an attractive notion. The stark reality of the international aviation market is however that it would be a high risk path for Air New Zealand.

This alliance is not about the short or medium term. Our vision is on the long term and we are determined to be a New Zealand owned, globally operating and sustainable airline of which every New Zealander will be proud. This is a strategic vision which capital alone could not fulfil.

This alliance is dependent on Commerce Commission and Government approval. What happens to Air New Zealand if they do not give that approval?

We believe that when the regulatory authorities examine the alliance in detail and the benefits that will accrue to the respective countries and airlines, we will get agreement to proceed. We have no doubt shareholders and the majority of New Zealanders will see the very real wealth creation benefits that will come from the alliance.

What is Air New Zealand giving Qantas in return?

We share a common vision of what is best for this region and the common realisation that we need to work together to compete against existing and future competition that comes from other carriers. Qantas also clearly value our outstanding reputation for service, safety and technical excellence.

What happens to airpoints and existing alliances?

The benefits of Air New Zealand airpoints members are fully protected. In time it is planned to extend airpoints to Qantas services. Air New Zealand is a member of the Star Alliance. No decision will be made in the near future and it should not be assumed that Air New Zealand will leave the Star Alliance.

Will Qantas still operate domestically in New Zealand?

Qantas will operate on domestic New Zealand routes and Qantas will be responsible for flight operations matters such as air crew, provision and maintenance of aircraft, and passenger services.

Monday, November 25, 2002

Air New Zealand’s Strategic Alliance With Qantas

John Palmer, Chairman of Air New Zealand

Slide One Foundation for Success

Ladies and Gentleman thank you all for coming here today to share in this special occasion. My name is John Palmer and as Chairman of Air New Zealand I welcome you on behalf of Qantas and Air New Zealand.

With me here are Margaret Jackson, Chairman of Qantas, Geoff Dixon, Chief Executive Officer of Qantas and Ralph Norris, Managing Director of Air New Zealand.

In addition to the audience at this venue we are being linked by video conference to Sydney and Wellington. We also have participants listening in by telephone from around New Zealand and Australia, and from Singapore and Hong Kong.

A welcome to you all, and our apologies to our overseas participants for the early hour.

The format for today is that shortly I will give a short presentation, and this will be followed by presentations from Margaret, Ralph and Geoff.

At the conclusion of those presentations we will take questions from the floor here in Auckland, and also from Sydney and Wellington.

Before we commence, could I ask that you check that your mobile phone is turned off.

Having done with the formalities, let us move on to why you are all here.

As was indicated in your invitation we have asked you here to announce a major decision that will shape the future of Air New Zealand. Most importantly, this is a decision that will lay a robust foundation for Air New Zealand, our national airline and ensure it will continue to carry the Koru proudly here and around the world.

It is not too dramatic to say that we are announcing today one of the most positive developments in Air New Zealand’s aviation history, an important milestone in aviation’s evolution in this part of the world, and an initiative that will bring tremendous economic gain to New Zealand.

This decision is a key part of the strategic framework that will allow us to continue to grow and develop without losing those elements that make Air New Zealand special and unique.

What we are announcing is bold and strategically smart.

The decision allows Air New Zealand to retain its autonomy and independence, and to focus on the next stage of the airline’s development as it builds on the considerable resilience, determination and innovation it has shown over the past 12 months.

But most importantly this decision is good news for the travelling public because it ensures a strong Air New Zealand can continue with a domestic and international network that is viable commercially, and affordable for the customer.

Earlier today the Boards of Air New Zealand and Qantas concluded a far-reaching agreement which will secure long term opportunities for both parties. It will bring substantial economic benefits to the companies, and public benefits to New Zealand and Australia.

Slide Two Vision Statement

What we are in fact establishing is a major airline grouping in the region.

The agreement specifically will see

 All the airline activities of Air New Zealand combining with those parts of Qantas that operate to, from or within New Zealand.

 Commercial management of the combined operations will be the responsibility of Air New Zealand.

 Qantas will, over time, take up to a 22.5% stake in Air New Zealand while investing some $550 million in Air New Zealand.

It would be wrong to think this is Qantas simply taking up a shareholding in Air New Zealand. The negotiations recognised that we both face similar problems and constraints, and that together we have a much better chance of meeting our challenges successfully.

Slide Three For The Record

It is also important to put on record that the Board and Management of Air New Zealand unanimously and fully endorse this decision to enter into a major strategic alliance with Qantas.

We have done so with no influence or pressure from the Crown. In signing the agreement and making our recommendations we are doing what the law requires us to do – act in the best interests of the Company.

Let me first put this decision in the context of what it means for Air New Zealand and for New Zealand.

For most of you the announcement of the relationship with Qantas will not come as a surprise.

The talk of an Air New Zealand and Qantas agreement has been around for many months and we clearly were cautious about our comments in relation to the rumours. Our responsibility to the market meant that until we reached an agreement, there was very little we could say.

I can assure you that reaching an agreement with Qantas was by no means a foregone conclusion.

We have negotiated in good faith, while ensuring other alternatives were properly considered. The negotiations have been tough and at times tetchy, but both sides have kept the end goal in sight – a strong Australasian airline grouping that can deal with the volatility of international aviation and capture the opportunities.

There will be some that say that Air New Zealand has sold out. Nothing could be further from the truth. Both parties have given something and in return have gained many advantages that would simply not have been possible without such a strategic alliance.

Slide Four Air New Zealand In The Future

A critical outcome is that it creates an environment that will enable us to move towards achieving our vision of what Air New Zealand must become.

And that is to be a special, successful, New Zealand company, operating a global aviation business with a sustainable future and significant growth opportunities.

In making our decision, foremost in the mind of the Board and Management of Air New Zealand was the question: will this alliance achieve this, and will it work.

The answer is unequivocally “yes”.

Slide Five What Are We Protecting

It was also imperative for us that we chose a path that protected the integrity and special characteristics of Air New Zealand.

 Air New Zealand is an award winning, world class airline, and we have every right to be proud of our achievements. We do rate among the best in the world and we intend to continue to do so in the future. For an airline of modest size in world terms, this is a notable achievement.

 We take New Zealand business and its trade and produce to world markets. To lose this infrastructure or to see its control in the hands of those who don’t fully appreciate its national importance could have had a serious affect on our economy.

 The symbol of the Koru and Air New Zealand as our national airline carrier is a matter of national pride. Throughout the recent turbulent months it has always been clear that Air New Zealand is an important part of New Zealand culture and we must protect this into the future. We are an icon New Zealand company and we intend to build on that, not take a path that could put it at risk.

 Our presence in international markets along with the many tourists we bring to New Zealand each year is worth billions of dollars to our tourism sector.

 At home we must continue to ensure that New Zealanders have access to affordable air travel. Continued market driven pricing will encourage more and more people to travel, delivering real benefits to all. In the month since the introduction of the new Express Class, for example, we have seen a 20% increase in travellers, many of whom are first timers. We want to continue this trend.

In making a decision on the future of Air New Zealand, foremost in our mind was the protection of such attributes.

Slide Six Key Aspects Of Alliance

Let me outline some of the key aspects of this alliance:

 Most importantly - Air New Zealand maintains it autonomy and independence

The name Air New Zealand will be protected and the Koru symbol will continue to fly proudly in the skies above New Zealand and represent us at major international destinations.

It was an absolute requirement of Air New Zealand’s Board that Air New Zealand would be New Zealand controlled, and managed autonomously under the oversight and direction of its own board. Qantas totally concurs with this position.

 Some 70% of our shareholding will continue to be held by New Zealanders, with 64% of the shareholding being held by the Crown. The airline remains firmly in Kiwi hands.

The Kiwi Share structure also remains firmly in place.

 Our focus can now move from the domestic scene, where we have made some dramatic changes, to the next most important task, that of continuing to build Air New Zealand’s long-haul routes. This will be much more value creating than putting valuable time and significant money into fighting off an extremely aggressive and challenging competitor in our home market.

Slide Seven Other Key Elements

Other key elements of the agreement will see

 The Board of Air New Zealand making an early decision on a rights issue to all shareholders that will raise a further $200 million in new capital. A final decision on this will be made early in 2003.

 To strengthen coordination between the companies, reciprocal board representation will be given. One Air New Zealand director will be invited to join the Qantas Board and, reflecting their equity interest, two directors will be nominated by Qantas to join the Air New Zealand Board.

There are those who will say that through having two directors, Qantas will control Air New Zealand. That is a total nonsense. In the presence of the chairman of Qantas I repeat what I said earlier. The Board of Qantas concurs with the Board of Air New Zealand that Air New Zealand must be controlled and managed autonomously under the oversight and direction of its own Board.

Slide Eight Next Steps

The next steps in progressing the alliance from New Zealand’s end are

 First, obtaining consent from the Kiwi Shareholder. Our expectation is that there will be a statement today from relevant ministers that will outline the process that the Crown will follow as a consequence of the Air New Zealand Board recommendation and the Qantas application for Kiwi Shareholder approval.

 Two of the key regulatory bodies that will examine what we propose are New Zealand’s Commerce Commission, and the Australian Competition and Consumer Commission. This will give the public the opportunity to have their say through the submission process.

If we successfully cross these hurdles, shareholders will have an opportunity to vote on the transaction.

 A reasonable time frame for all of this is

- Kiwi Shareholder conditional approval before Christmas
- Regulatory consent by early to mid 2003; and
- Shareholder consent mid to late 2003.

So, we are looking at a six to nine month process.

Slide Nine Shareholder Benefit

And finally a major benefit to our shareholders is the fact that this alliance will create significant shareholder value.

We are a tiny market at the end of the world’s airline routes and past losses of shareholder capital has had severe consequences for shareholders in this and other competitor airlines in New Zealand over the past decade. I think it is worthwhile pausing to think what that tells us.

Given that the Crown is the major shareholder in Air New Zealand, all New Zealanders have a very real interest in shareholder value.

In summary, this alliance is good news for everyone.

It certainly makes far more sense to work with our largest competitor than to continue to spend resources fighting against Qantas, when combined we could be taking on the world.

That’s what we intend to do.

I would like to invite Margaret Jackson, Chairman of the Qantas Board, to offer Qantas’ perspective on this exciting development.

Slide Ten Chair Qantas

Slide Eleven Ralph Norris Presentation

The agreement reached today between the Boards of Air New Zealand and Qantas marks the successful conclusion of a lengthy but productive period of negotiation.

As John Palmer remarked earlier, Qantas was a strong negotiator. They are equally a strong competitor.

In 2002 the business prospects for airlines are far from rosy. International and domestic travel in many regions is in decline and there is significant surplus capacity across all networks.

Yet we have a travelling public who, quite rightly, demand competitive pricing, a reduction in the time it takes them to undertake their journey and more flexibility. In other words they want high quality customer service and convenience.

Around the world, airlines are accepting that to meet their customers’ demands they need to complement each other’s services rather than follow the traditional model of competing against every other airline.

The issues facing Air New Zealand and Qantas are far from unique.

Slide Twelve Elements Of Vision

Air New Zealand has a very clear view of its future. It is:

 to take New Zealand business and its trade and produce to world markets, and New Zealand travellers to international destinations

 to substantially increase the extent and effectiveness of the marketing of New Zealand as a tourism destination, bringing increasing numbers of tourists and other visitors to New Zealand

 to provide domestic travellers with a world class and affordable service

 to retain our autonomy and identity

 to protect the commercial integrity of its Express Class, trans Tasman and long haul services, and critical customer benefits such as Airpoints and

 to achieve robust growth

Slide Thirteen Strategy For Future

We also have a clear strategy for achieving this future I have just outlined.

The first step was to revamp our domestic services to secure our home market.

The end result has been the launch of Express Class and the repositioning of Freedom Air as a no frills, low cost, trans Tasman carrier.

We have been delighted at the success of both these initiatives, both in terms of general public response and increased business.

While it is still early days since its launch, we will maintain the integrity of Express Class within the alliance we are creating with Qantas.

The second step in the strategy was to be part of a major airline grouping in the region that had the presence, size and ambition to assist us with passenger feed into our home market, and strengthen our global presence in overseas markets.

The Air Zealand / Qantas alliance achieves this strategy.

The third step in the strategy is to then revamp our long-haul services. I can assure you we have many exciting ideas and proposals we are working through, and there are also many new initiatives that will bear fruit as a result of our new strategic alliance.

Slide Fourteen How The Alliance Will Operate

Let me outline how the alliance will operate before moving on to the benefits that will come from the alliance in terms of the travelling public and the New Zealand economy.

John Palmer talked about all the airline activities of Air New Zealand combining with those of Qantas that operate to, from or within New Zealand. The commercial management of these operations will be the responsibility of Air New Zealand.

Within commercial management are scheduling, pricing, routes and marketing.

The combined operations will be supported by a small advisory group made up of three representatives from each airline.

Each airline will remain responsible for its own flight operations such as aircrew, provision and maintenance of aircraft, and passenger services.

Air New Zealand and Qantas will enter into a comprehensive code share agreement across each other’s networks.

Slide Fifteen The Benefits

The benefits arising from this are significant.

Air New Zealand will secure the feeder traffic from Australia it has always sought and access to the Australian domestic network for its trans Tasman customers. We have always regarded these as vital to our long-term viability.

Our customers will have greater options and flexibility in that the number of flights available to them through code sharing with one of the world’s leading airlines will immediately increase choice threefold.

We currently have more than 800,000 Air New Zealand Airpoints members world-wide, and Airpoints are an extremely important part of our customer offering. Under the alliance, Airpoints member benefits will be retained.

It is our intention in time that Airpoints will also apply to Qantas services.

As most of you will be aware, Air New Zealand is a member of the Star global alliance and Qantas is a member of the oneworld alliance.

In considering this we will work through the best options for the new airline grouping and the commitments each of us has to our current global alliance members. No decision will be made in the near future and it should not be assumed that Air New Zealand will leave the Star Alliance.

Qantas will, I’m sure, update you on its position in relation to oneworld.

Slide Sixteen Competition

Key questions we will be asked is how the alliance affects competition and Qantas’ domestic New Zealand intentions.

For my part, I will comment on the competition aspect.

Air New Zealand is moving to fare structures based on stimulating the market through affordable fares, higher load factors and better aircraft utilisation.

Initiatives such as Express Class and Freedom Air illustrate this approach and are not simply a defensive strategy against competition. Both Express Class and Freedom Air will stay in their current form.

So on this basis, airfares within New Zealand and across the Tasman will remain competitive.

In future, Air New Zealand and Qantas will not see each other as their fiercest rival domestically in New Zealand or across the Tasman. Our competitive focus will be on the many other existing competitors, and those competitors that are undoubtedly on their way.
Putting it simply, the current airfare structure is here to stay.

Slide Seventeen Concerns

Recent comments in the media have raised two public concerns around employment and keeping Air New Zealand’s initiatives confidential from Qantas.

No Air New Zealand jobs will be affected by the agreement to form this alliance. In fact the reverse is true. It will create job security, the ability for people to get more from their job through career development and promotion, and the creation of more jobs. I will touch on the issue of job creation again shortly.

Those of you who are conscious of what is happening in relation to employment in the airline industry internationally will find this information on job retention and creation most encouraging.

There are also those who are concerned that through Board representation Qantas will be privy to all our strategic thinking.

This ignores two key considerations.

First, we have a seat on the Qantas Board.

Second, under the alliance both parties will openly share their thinking on issues that affect the other, and will co-operate on implementing new initiatives. There will be nothing in an operational sense to keep confidential from each other.

Slide Eighteen Economic Benefits

The benefits to New Zealand as a whole from this alliance are also extensive.

We commissioned an independent analysis of the economic benefits flowing from this alliance over the next five years. This analysis assessed those economic benefits as being in the order of one billion dollars. These benefits will include:

 Up to 50,000 additional tourists arriving in New Zealand each year

 The more effective promotion of New Zealand in overseas markets.

 Enhanced air freight services to and from New Zealand, which is crucial to business

 And the creation of at least 200 additional highly skilled jobs within Air New Zealand. Let me repeat that point. The creation of at least 200 new, highly skilled jobs.

Slide Nineteen Value Of Air NZ

Nor should we forget how important Air New Zealand is to this country.

Air New Zealand employs some 10,000 people and it is likely that number will increase in coming years as we further develop our domestic, trans Tasman and international network.

We carry over 8 million people each year, and can be seen as a critical element in New Zealand’s infrastructure.

And each year we source over $1 billion in products and services from New Zealand suppliers.

While in recent years our shareholders have justifiably not felt that the return on their investment has been satisfactory, the company has in fact paid nearly $800 million in dividends in the last decade.

Each year Air New Zealand spends $60 million promoting New Zealand as a tourism destination. This more than matches the $55 million Tourism New Zealand spends overseas.

Slide Twenty New Opportunities
So how do we know we can make the alliance work?

Just look at what we have achieved in the last twelve months.

During this time the people of Air New Zealand have demonstrated considerable resilience, determination and innovation to dramatically turn around the airline and rapidly rebuild on the recapitalisation in February this year.

Our strategic shift in the New Zealand domestic market to Express Class has been a resounding success with the travelling public.

We now want to build on that spirit of innovation in meeting our customers’ needs both on the trans Tasman and international markets.

That will require a strong market and financial base as we confront the enormous competitive resources of carriers based in far larger markets and the natural competitive advantages of recently established “value based” airlines that lack the high cost legacy of most traditional carriers.

Having negotiated an excellent agreement with a strong partner from our own, now relatively strong position, we are not going to let the prize slip from our grasp.

Inevitably there will be areas of friction that will have to be resolved but the prize for us is being able to move now to better utilise the many bilateral arrangements New Zealand has with other countries.

In some instances we will do this alone, in others in co-operation with Qantas.

By being smart and bold we have opened up a whole new series of commercial opportunities for Air New Zealand and New Zealand.

We are very determined to succeed. I know Geoff Dixon, who I have developed a very good relationship with in past months, is equally committed to our joint success.

On that note I will now ask Geoff to provide some background as to how he sees this new alliance operating.

Slide Twenty One Geoff Dixon, CEO

Slide Twenty Two John Palmer’s Closing Comments, Aircraft

In closing, I want to emphasise that for all of us at Air New Zealand, it is an extremely exciting day as we can now begin taking the next steps in building Air New Zealand into an even greater national airline.

To conclude I would like to briefly recap on the key points of this briefing and then to open the floor to questions.

Only 12 months ago, Air New Zealand was faced with the very real prospect of bankruptcy. A brutal fact, but true.

By being bold and decisive in terms of our domestic services we have staged a simply magnificent recovery and returned the airline to profit.

Some would argue we should go it alone. This is a highly attractive notion for the company and for most of us around the Board table, who in various ways have been part of building other strong successful international New Zealand businesses.

The stark reality of the international aviation market suggests this would be a high risk path for Air New Zealand.

The facts tell us that even in alliance with Qantas, we account for less than 4% of the world’s commercial airline activity. By itself, Air New Zealand is a minnow. Scale isn’t everything, as American experiences tell us. But having financial resilience and flexibility is a prerequisite for being able to capture opportunity in this business and to get to that point Air New Zealand needs more certainty over its Australasian business.

This doesn’t mean taking advantage of consumers. What it does mean is a more rational use of resources to service those markets to ensure customers get affordable services, and that we have reasonable prospects of getting a fair return.

This alliance is not about the short term or even the medium term. Our focus is on the long term.

Reality is that if we stagnate we shrink, and then fail. That will not happen to Air New Zealand under this Board or Management. We plan to be bold and smart, and to convince our relevant regulators that this alliance is good for travellers and our respective countries. And finally we need to convince Air New Zealand’s shareholders and the public of New Zealand that in this alliance lies significant wealth creation.

Air New Zealand is saying to all these groups, let’s grasp a real opportunity to be in charge of our own destiny.

Do this and the prize will be a New Zealand owned, globally operating, and sustainable airline of which every New Zealander will be proud.

ENDS

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