Taking Stock

Read the latest Taking Stock

Taking Stock 16 July 2020

THE details and timing of Air New Zealand's capital raising may not yet be known or digested but the outcome of the raising should be obvious, even before it proceeds.

The result would and should be that the Crown ends up owning most, perhaps in effect, all, of the company that has been a victim of several concurring events, and is now doomed to mediocrity.

It lost its experienced, zealous, and highly successful chief executive Christopher Luxon, after he and his predecessor Rob Fyfe had restored a company that had been in tatters after being governed by the likes of Brierley, and later Ralph Norris, leading to an inglorious collapse, rescued by the Labour government.

Any skill Brierley had was in asset trading and arbitrage, not in managing. Norris was the head of CBA in Australia during a period that led to the Australian banking industry enquiry, and had been chairman of both Fletcher Building and Air New Zealand.

Norris does not have his name on a chair in any business hall of fame that might reside in my imagination. (Nor would any Brierley executive or past director.)

Fyfe brought empathy and intuitiveness to Air New Zealand, lifting its ambitions to achieve high standards, displayed on the world stage. Luxon, Fyfe's chief financial officer, took over after Fyfe's own life had become cluttered.

Luxon would by some margin be the most successful and admired business leader ever to lead the National Party if that were to happen. His time in Air NZ was notable for the many international gongs Air NZ was awarded, as a small airline with a culture and standards matched by very few. He is a genuine business builder and leader, not a smiling sales manager.

When Luxon retired, the highly-likeable and intelligent New Zealander Greg Foran returned from the USA, having led a huge retailing company there, a position also far more distinguished than sales management.

His knowledge of the airline sector was intended to be acquired on the job in 2020 and 2021, rounding out his proven excellence as an executive. He may well have been a great Air NZ leader, had he been given some space to learn the air travel secrets.

He arrived days before the airline was devastated by Covid.

His first tasks included farewell parties for several of his best and most experienced air industry specialists. They saw the future. They left.

Effectively Foran was the new All Black captain asked to lead a team of novices all complaining that the South African waitress had fed them bad oysters.

I have no criticism of Foran, nor would I hold him accountable for what must now be seen as the destruction of a fine airline, paying the penalty for an ownership structure that leaves the doors open to political drongos taking over.

The government commercial interference in dictating business tactics, such as cancelling flights for returning Kiwis, was prompted by other government failures, such as forgetting to contract sufficient accommodation for quarantined travelers.

Air New Zealand, with a new CEO, stripped of experienced executives, forced to negotiate the swirling hurricanes delivered by border closures, and dictated by well-meaning but gauche politicians, will not be restored.

Foran himself might have a photo of NAC and TEAL on his desk.

The new Air NZ will resemble NAC with a TEAL tinge, without the flying boats.

It will also have to deal with a growing, angry crowd, demanding that Air NZ and all airlines cease to commoditise travel and prioritise the planet, making air travel and cruise ships anti-social options for the rich. In times of misery their voice becomes powerful.

Foran has acted logically, laying off pilots and cabin crew.

Pilots are invited to join a furloughed group, recallable in 2024, rewarded until then with free ''staff'' travel, but no pay.

Cabin crew are also furloughed, each one numbered to join a queue who would receive an invitation in 2024, should Air NZ be recruiting cabin crew by then.

Given all of this, why would anyone want to join the government by taking up Air NZ rights to prolong a ''bus'' service that has no show of achieving a scale that produces surpluses and dividends, yet has the obligation to maintain the highest standards of safety, and the further obligation to meet the quality expectations of its regular users?

Furthermore, airlines will have many surplus aircraft that might need to be moved on by a discounting process that enables someone like Evan Wilson, at Kiwi Air, to buy good aircraft for very low prices, enabling such an opportunist to set up a main-trunk airline service that even further forages in Air New Zealand's pantry.

Air New Zealand's shares are not likely to justify any meaningful price for years, perhaps for decades, maybe for ever, its international landing rights being handed back, its inbound tourist numbers unlikely to reach 2019 figures, its domestic usage challenged by the climate change clamour.

Jarden research suggests the shares are worth at most 80 cents, the figure falling by the day as the border reopening is further delayed by social insistence.

A capital raising at 50 cents would be supported by the Crown and perhaps by those romanticists who foresee a return to the 2019 tourism environment.

In February the shares sold at around $3, anticipating a thickness of cream that came with 300,000 inbound tourists arriving each month.

In July the share price is set by nouveau punters. It is set at a level today that in theory gives Air NZ a significant percentage of the various sharemarket indices, meaning index funds must buy or hold, to meet the promise of replicating the index.

A capital raising, properly priced at say, 30-50 cents, might lead to a share price fall to a similar range of prices, resulting in a major lowering of its index relevance, in turn leading to index managers selling, in turn leading to yet more price falls, unless the Crown behaves with even less concern for value.

We need an air-based service, notwithstanding the burning of kerosene.

It might just have to be subsidised every year, as are all other public transport services in a small country no longer boosted by millions of tourists.

Perhaps we might conclude that Air New Zealand has had its best years, the victim of what might now be a flawed plan for NZ to put economic prosperity into the fickle hands of peripatetic foreigners.

International tourism is unlikely to fuel a restoration of Air New Zealand's highly successful model, built in the Fyfe/Luxon era.

_ _ _ _ _ _ _ _ _ _

IT has been a refrain for years but I now hear more people humming a tune of joy in thanks to our judges who preside over commercial misdeeds.

Many, including me, believe that if the laws, even those so wilfully mis-drafted as the Insolvency Practitioners Act, were constantly applied to commercial chicanery and misdeeds, then NZ might justify its status as a country with low levels of corruption.

Sadly, confidential out of court settlements, pragmatic and sometimes financially-beneficial to the injured parties, allow the errant parties to escape any consequence other than a money hand-out, the money usually supplied by other people, often insurance companies. The cases never get to court.

Imagine if we could murder the neighbour who destroys one's peace and quiet, and then escape the court by ''settling'' with the murdered person's family, with a satchel full of fivers.

One of the ugly commercial misdeeds, performed routinely, probably every day, has in the last fortnight been given daylight by the courts.

Every New Zealander should be cheering.

First a High Court Judge ruled that a private liquidator had grossly padded the bill and ruled that the liquidator must reduce the bill by around a third.

The liquidator was unknown (to me) but was playing the normal liquidator game of claiming excessively, thus depleting the money available to the pool of creditors.

A week later, another High Court Judge made a similar ruling but, importantly, this was not a misbehaviour of some private liquidator but involved Deloittes, a member of what the accounting firms, somewhat pretentiously, self-describe as The Big Four.

The other members of this dubious foundation club, better known as the Old Boys Network, are KPMG, Ernst & Young and PricewaterhouseCoopers, a group that so routinely over-charges that, like many law firms, it probably no longer realises the thinness of the line between over-charging and theft.

In Deloittes' case, the judge instructed a liquidator to slash its excessive bill, but went further, actually defining the sort of practices that, in my view, make that fine line between over-charge and theft reduce to the breadth of the emperor's fine silk.

Deloittes' bill was based on each task in six-minute lots, and then applied the indefensibly high hourly rates on the number of six-minute lots.

Opening the mail was measured in six minute lots, and charged out at silly rates.

Discussing a subject with a colleague was a six-minute charge-out. Answering an email or a phone call was a six-minute charge-out. Hourly rates are charged in hundreds of dollars. Mailer-openers are paid in low tens of dollars per hour.

The practice of padding legal, accounting and even trustee bills has long infuriated real business people, whose costs and prices have to be validated by customers CHOOSING to buy, not watching deductions made at absurd levels from money held by the ''professional''.

In my book, The Billion Dollar Bonfire, I recorded how some mindless ''professionals'' would charge $10 per page to scan or photocopy legal papers, a pricing ''tax'' that confiscates client money.

One lawyer rather cheekily responded to my book's discussion by noting that he charged only $3 per page, recording that if I gave him the name of the $10 per page law firm, he would write to them, offering to do the work and let them arbitrage his service.

Insolvency practitioners should be amongst the most disliked market professionals, given that by definition they are handling disasters, and given very few, Stephen Tubbs being a rare exception, have the street wisdom and business skills to discover the real value of the goods they flog off. Nor do they have the courage to sue other OBN participants.

The gutless laws, rewritten by the Ministry of Business, Innovation and Employment and re-enacted by Parliament last year, are just dreadful, serving the interests of the Old Boys Network and crassly discounting the rights of unsecured creditors and shareholders.

At a recent meeting with a just-retired chartered accountant, I heard of how receivers are just grossly overpaid servants of the banks, unofficial liquidators playing a game in which banks and liquidators find a way to scratch each other's backs while throwing away other people's money, by selling assets to ''selected'' buyers.

My book highlighted how the South Canterbury Finance receiver, McGrathNicol, paid itself and others $54 million in two years, while discounting assets by an amount that by 2019 was quantifiable at a billion dollars.

The tax payers paid this grossly exorbitant charge

McGrathNicol's receivership was undoubtedly the most incompetent and absurdly expensive receivership I have ever observed. Sadly, there has been no formal action taken against the firm.

For all these reasons I celebrated last week when I read that High Court Judges in recent days have processed complaints, exposed unacceptable behaviour, ruled that liquidators must reduce their bills and shown us that at least our courts, when consulted, are capable of enforcing higher standards.

It is a disgrace that MBIE, our Parliament, the accounting firms, the bankers and the lawyers who helped rig the laws with the Insolvency Practitioners Act, are not guided by standards that fit graciously with community standards. The OBN has a smell as offensive as it did last year, and every other year. Does no-one care?

One wonders whether the laws will improve only when miscreants are personally liable for their misdeeds, and then defined as unfit or improper people to put in charge of other people's money.

_ _ _ _ _ _ _ _ _ _ _

WHEN I wrote recently about the important issues being litigated imminently as a result of litigation funding, I left aside the juicy issue of bank responsibility for fraudulent usage of bank accounts.

This matter arises because the victims of the mining fraudster David Ross are alleging that the ANZ wilfully allowed Ross to misuse investor money in ANZ bank accounts over which Ross had control.

In effect the debate will be whether the bank should oversee a trust account and intervene when it is used to fund the trading company (Ross's personal company).

A bank certainly can observe recipients of trust account cheques and has the ability to question and stop a payment of trust account money that clearly is improper – for example to buy a car, pay for boozy Friday lunch club bills, or pay Ross's rent.

Further, the bank knows that no trust account should ever be in overdraft. Such an occasion must be instantly put right and would red flag either an inadvertent error, awful inefficiency, or misdoings.

The Ross case has really serious implications for bankers for it asks them to intervene at the top of the cliff whereas for years banks have just responded at the bottom, appointing liquidators, knowing that any bank debt is routinely prioritised by any liquidator.  

In this case, the defendant is the ANZ, our biggest bank, and in recent years our worst-governed bank, in my opinion the bank most in need of a different chairman and a board comprising people with a focus on standards, culture, strategy and fastidious execution of strategy.

Perhaps the court case alleging historical negligence and misuse of bank accounts will be the catalyst for a new, more assertive board, led by someone with values and strategic skills suited to the task.

Sadly, I suspect the outcome of the proposed case will result in a ''confidential'' settlement, with huge disincentives for any media leaks on its quantum, the bank denying responsibility or wrong-doing, but settling because of its ''good citizenship'' instincts.

This type of response ensures the circumvention of the law with subsequent lack of enforcement of law and standards, and avoidance of the need for new law, based on a court ruling.

As was the case with the judge mentioned earlier, the judge who lashed Deloittes, the outcome should be newly-established law, public condemnation, and serious disruption to lazy, stupid corporate behaviour.

Real justice will occur when governors or executives who clearly fail in their duty of care are required to dip into their personal funds, wherever those funds may be hidden, and are struck off the list of people who are deemed to be suitable to be in charge of other people's money.

The responding bleat, that such harsh justice would discourage lawyers, politicians, and tired knights from accepting directorships roles, should draw a one-word response – diddums.

 _ _ _ _ _ _ _ _ _ _ _ _

OUR seminars are now all but finalised. Please check dates and times, as some have changed.

Any client or investor wishing to attend is asked to email us with their numbers attending. There is no charge. We need to know approximate numbers to ensure we have an appropriate-sized venue.

Kapiti – Southwards Car Museum – Tuesday, August 4at 11am

Wellington – Wilton Bowling Club – Wednesday, August 5 at 11.30am

Christchurch – Burnside Bowling Club – Monday, August 10at 11.30am

Timaru – Sopheze on the Bay, Caroline Bay – Wednesday, August 12 at 1.30pm

Albany – Albany Executive Motor Lodge, Corinthian Way – Tuesday, August 18at 11:30am

Auckland – Mt Richmond Hotel, Mt Wellington Highway – Wednesday, August 19 at 11.30am

Tauranga – Hotel Armitage - Monday, August 24 at 11.30am

Palmerston North – Distinction Coachman – Monday, August 31 at 11.30am

Napier – Napier Sailing Club, Ahuriri – Tuesday, September 1 at 1.30pm

Nelson - Beachcomber Motel, Tahunanui – Monday, September 7at 11.30am


David Colman will be in Palmerston North on July 22.

Edward will be in the Wairarapa on 6 August and Napier 13 August.

Kevin will be in Christchurch on 6 August and in Ashburton on 19 August.

Please let us know now if you would like an appointment in your town.


Chris Lee

Managing Director

Chris Lee & Partners Limited

This emailed client newsletter is confidential and is sent only to those clients who have requested it. In requesting it, you have accepted that it will not be reproduced in part, or in total, without the expressed permission of Chris Lee & Partners Ltd. The email, as a client newsletter, has some legal privileges because it is a client newsletter.

Any member of the media receiving this newsletter is agreeing to the specific terms of it, that is not to copy, publish or distribute these pages or the content of it, without permission from the copyright owner. This work is Copyright © 2020 by Chris Lee & Partners Ltd. To enquire about copyright clearances contact: copyrightclearance@chrislee.co.nz