THE TRUTH ABOUT PRIVATISATION: BLOG # 4

I blogged about Air New Zealand on 1 February.  My main point was that although Air New Zealand has been innovative operationally, it is not meeting its cost of capital (and it did not do so in at least some earlier years) and is hence a drag on the economy (GDP and GDP/head).

The Treasury has recently posted an interesting short paper on Air New Zealand on its website.

It is dated but nevertheless still relevant.  The author, experienced former Treasury official John Wilson, suggests the following lessons from the Air New Zealand experience:

It was private investors, rather than the government, who lost money as a result of Air New Zealand’s financial failure.

The Ansett purchase was a major strategic failure. It does not disprove the general principle that private ownership is more commercially adept than government ownership. But it reminds us it is a general principle rather than an iron law.

A New Zealand government is likely to find itself the only potential source of new capital in the event of financial failure of a New Zealand-based international airline.

One comment on my earlier post was that (some) other airlines are not making money either.  This is true.  John Wilson comments that “the record of airlines as investments is poor”.  Noted investor Warren Buffett once said that if someone had shot down The Flyer when the Wright brothers put it into the air at Kitty Hawk they would have done investors a favour.  The moral of the story is that governments should be wary of committing taxpayers’ money to such investments.

Advertisements

3 thoughts on “THE TRUTH ABOUT PRIVATISATION: BLOG # 4

  1. In early 1992 in a meeting I asked Selwyn Cushing what he did as chairman of Air New Zealand. As a self made businessman I wanted to know what he did on a daily basis to help build the companies wealth and ensure 1st class service. His answer surprised me. Nothing hands on just reading reports of what other managers send him.
    I think the lesson here is corporate heads need to have safety systems to overlook the key main frame systems of any business to identify posible weaknesses. The Ansett weaknesses were obvious; an old aircraft fleet, deregulation allowing new competition, union agreements etc.

  2. What about the unobservable second order benefits that investors of Air NZ don’t see directly. I am not sure that the true benefit of having a NZ airline can be measured by the bottom line only.
    What about making it easier for people in smaller NZ cities to travel to other places quickly. These are benefits to businesses and families that cannot be measured.

    So if Air NZ is privatised and fails due to its low return on capital (which is a feature of the airline market), then you would argue that this is overall a benefit to NZ. Aren’t we ignoring the other social benefits

  3. Not all privately owned businesses succeed. But in all privately owned failures, the losses are taken only by the owners and creditors who trusted them. Not all government enterprises fail (virtually all do)and the ones that don’t usually cost far more than they should.

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s