Air Mauritius’ mayday: is there a silver bullet to avoid a nosedive ?

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In a series of three articles, Rama Sithanen sheds light on Air Mauritius’ precarious situation and proposes a “Bold Twelve-Action Turnaround Strategy” to rescue the national airline to profitability.

(Part 1)

An obligation to save the national carrier

On achieving independence, Mauritius bought an insurance policy with the valuable strategic asset of a national carrier to serve the country as a lifeline. Air Mauritius was founded with the specific mandate to provide air connectivity that links us to the world which is crucial for our economic and social development. It is an instrument for nation building, acting as a catalyst for tourism, businesses, international trade and foreign exchange earnings. It is also our brand to the world. There is therefore a compelling case to rescue Air Mauritius from its current precarious situation.

The objective of the three articles is to contribute towards attaining that specific goal by recommending a BOLD TWELVE–ACTION TURNAROUND STRATEGY aimed at restoring the national airline to profitability.

What explains Air Mauritius’ woes: blip, cyclical trend or structural ailment?

The national airline is flying into financial turbulence, bleeding profusely, depleting its cash reserves and impairing its balance sheet. It has posted a significant deficit of Euro 25.4 M for the nine months to December 2018 and the annual loss is likely to be higher at the end of March 2019. The three most important questions in relation to this financial predicament are arguably the following:

  1. is it a blip due to some exceptional expenses such as significant one-off down payments for its new A 350 and A 330 aircraft ? ; or
  2. is it a cyclical pattern aggravated by a combination of volatile fuel prices and unfavourable exchange rates ? ; or
  3. is it a structural challenge underpinned by multiple and varied factors? These range from brutal competition to an imbalanced air access policy, from ruthless price wars and declining yields to rising costs, from mismatched fleet to sub-optimal route network, from the lack of adequate ancillary revenues to its alliance strategy and from the reckless politicisation of the company to its ownership, operational, organisational and governance structure.

The problems besetting the airline are indeed structural. MK is in dire need of a turnaround roadmap as it faces an existential threat. It must build a resilient and sustainable economic model.

The solution to the long term viability and resilience of Air Mauritius hinges critically on the origin of its parlous financial performance. If it is a short term and temporary phenomenon, there is not much cause for concern as the airline must invest in new aircraft to remain competitive. Such fleet modernization should deliver dividends in the medium to long term. However, based on an informed analysis, the financial distress looks more than just a blip.

If it is sensitive to fuel prices and currency movements, then there are tried and tested mitigation measures than can be used to manage such risks. One must recognise that MK has made money in the past with high fuel costs and some airlines are currently profitable in spite of soaring fuel prices. Even if we should acknowledge that fuel accounts for around 30 % of its total costs and will thus affect performance. The acquisition of new technology and fuel efficient aircraft should lower costs while the imposition of fuel charges on air tickets helps to recoup some of the incremental fuel expenses. On the basis of its historical trend, the problems at MK appear more deep-seated than a cyclical phenomenon worsened by volatile fuel prices and an appreciation of US$ against its earning currencies.

The problems besetting the airline are indeed structural. MK is in dire need of a turnaround roadmap as it faces an existential threat. It must build a resilient and sustainable economic model. The question is whether it can rise to the challenge after some failed transformation plans in recent times.

 

Action 1: MK should rationalise its fleet: optimize on size, fuel efficiency and operating costs

Air Mauritius has already made its choice of aircraft on its long haul network. It is a combination of A350 and A330neo planes to operate mainly to Europe and China. It could use the same aircraft on some high density regional routes like Johannesburg, but they are probably too big for destinations like Mumbai, Singapore, Kuala Lumpur, Durban and Tana. An aircraft of around 175 passengers in two classes could, while also replacing the A 319, serve some regional routes better in terms of frequencies, fuel efficiency and operating costs. The ATR-72 has done its time and Air Mauritius should opt for small jet aircraft of around 80 to 90 seats to operate to Rodrigues, Reunion and also to destinations such as Durban, Tana, Nairobi and Seychelles. This will lead to more frequencies with lower operating costs. It would require the extension of the air strip in Rodrigues to allow the small jet to land.

It does not make sense for Air Mauritius to have 6 aircraft types for its size and scope of operations (A 340, A 350, A 330-200, A 330neo, A 319 and ATR 42). This is both expensive and sub–optimal. For cost, efficiency and utilisation considerations, it should have at most three aircraft types – even if it requires a transition period of around 5 years to reach that goal. Should it be a combination of A 350, A 330 and small jets such as Embraer? Or a mix of A 330, A 321 ER or its equivalent and small jets.

The A 330 would operate to Europe and China and some routes like Johannesburg and Perth while the new A 321 ER could fly to other regional destinations with more frequencies. And the small jets would serve Reunion and Rodrigues and some regional routes to Nairobi, Durban, Tana and Seychelles. That combination would likely be very efficient in terms of fitting the network and optimizing on seating capacity, range, frequencies, fuel, maintenance and operating costs.

The combination of A 350 and A 330neo appears fine in terms of fuel efficiency, maintenance costs, technology, comfort and inflight facilities. But does the mix between the two aircraft fit Air Mauritius’ economic model? The split of six A 350 and two A 330neo seems neither competitive nor viable on its network of long thin routes with non-stop flights and the need for frequencies. Would it not be better economically to have more A 330neo and fewer A 350?

There is some concern about the costs of the first two A 350 which are on operating leases. Their monthly rental appears high compared to what other airlines pay for similar aircraft and to market conditions. If not addressed, these higher lease costs would undermine the economics of the A 350 planes, if it is not doing so already. One hopes that MK will find the best financing package for the remaining four A 350 being acquired directly from Airbus. It should opt for competitive finance leases.

Action 2: MK has to streamline its route network: non-stop flights and frequencies matter

MK has no choice than to consolidate its non-stop services as it represents its unique competitive selling proposition against the Middle Eastern airlines’ hub strategy. It must also rationalize its route network by choosing between two strategies. Does it operate few services (one to two flights only per week) to many cities or should it have daily frequencies to some major hubs? In terms of market penetration, efficiency, unit cost improvement and alliance structures, the choice is obvious. Does it make economic sense for MK to fly to four cities in India with low frequencies or would it be better to have daily services to Mumbai and Delhi with a smaller aircraft of around 175 seats, supplemented by good marketing agreements with other airlines for onward carriage to other cities in India? Many business passengers prefer the double daily flights by Emirates over Dubai to travel to India because of convenience and frequencies rather than the four weekly services by MK to Mumbai. The same rationale should apply for flights to China and South East Asia. Should MK operate once a week to Beijing and Chengdu or is it better to have more frequencies to Hong Kong and Shanghai? South Africa would be an exception as there are double daily services to Johannesburg between MK and SAA and flights to Cape Town and Durban are warranted. The A 350 could operate to Johannesburg, the A 330 to Cape Town and the small jet to Durban.

Do two hubs next to each other in Europe (Amsterdam and Paris) best serve the interest of Air Mauritius or would it not be wiser to replace the Amsterdam hub with either Frankfurt (or Munich) in Germany or Milan in Italy? There are many more tourists from Germany and Italy than from Netherlands. The more so that London (and Paris) is as good a connecting platform for Northern Europe as Amsterdam. The competition is fierce on the Europe to Mauritius route with not only legacy carriers but also with Emirates and Turkish Airlines that have built excellent hubs at Dubai and Istanbul for onward travel. Frequency is key to compete as opposed to the number of points served. The strategy must be to fly daily to London and Paris and in the medium term to one point in Germany or Milan.

Rodrigues would be served by the small jet with many daily frequencies while Reunion would be operated by a mix of aircraft depending on traffic volume (both passengers and freight). The small jet could also serve Tana and Seychelles.

The planning, strategic and technical teams of MK are too smart not to realise that the Africa-Asia corridor was and remains a very silly idea. It simply cannot work for compelling reasons that should be obvious to any informed observer. Why would someone fly from Maputo to Mauritius in a small A 319 aircraft and then connect to Singapore and then beyond when there are daily nonstop frequencies between Johannesburg and many South East Asian cities in very comfortable flights with excellent services? Furthermore, most of the passengers on the Singapore flights are Mauritians and not Africans or people from South East Asia. Luckily, reason has prevailed over stubborn vanity and MK has ceased flights to Maputo and Harare. I wonder how long it can sustain services to Dar es Salaam, even on a marginal cost basis on one of its flights to Nairobi. Besides South Africa, MK must focus on two points in East Africa in terms of frequencies and hub opportunities for onward travel to other cities on the continent. Nairobi is a clear choice while Addis is very good for connecting flights.

(Part 2)

Action 3: Government must adopt a balanced air access policy

Let us be frank. The business environment is not benevolent to Air Mauritius. It’s most difficult challenge is probably the intensifying competition it faces from the many airlines that operate in Mauritius, especially mega sixth freedom carriers as Emirates and Turkish Airlines. An open air access policy is good for the country and it has resulted in an increasing number of airlines flying to Mauritius, (well over 20). This has opened up new markets which would otherwise not be tapped by MK. 

It has considerably helped the hotel and tourism industry to grow and invest in higher room capacity while providing significant cargo space to support the export of goods. The benefits of such enhanced connectivities are incontrovertible. Tourism and exports are two key pillars of the economy and their contribution to growth, employment, foreign exchange earnings and their catalytic effects are considerable. 

However there are tradeoffs. It makes life very difficult for MK as many of these airlines compete head on with the national carrier and other legacy airlines. This is not different in India, Kenya, Pakistan and South Africa. Empirical evidence shows a close correlation between the poor performance of national airlines in these countries and the grant of traffic rights to sixth freedom carriers, especially to the four super connectors which are Emirates, Etihad, Qatar Airways and Turkish Airlines. 

A Parliamentary Committee in India found that the grant of bilateral seats to foreign carriers hurts Air India’s prospects considerably. It recommended that in view of the significant funds provided by the Government to Air India, its decision to give additional bilateral rights to foreign carriers should take into consideration its impact on Air India. 

Similar observations have been made in Kenya, Pakistan and South Africa where the national airlines have to face very tough competition from these Middle Eastern carriers. Air access granted to sixth freedom carriers, low cost and seasonal charters has led to an intensification of competition on MK’s network with adverse impact on both its yields and its financial performance. 

In the absence of clear policy guidelines, we have adopted a very lopsided and lobby-driven approach that often results in contradictions. Emirates is granted double daily services with the mega A380 while its competitor Etihad is denied any traffic right. Turkish Airlines and Saudi Airlines operate many weekly services while Qatar Airways is refused landing rights. 

We allow some airlines to operate only during the high season when traffic and yields are high without any obligation to serve during the low period. And we accept charter flights that undercut scheduled operators. 

While there is traffic creation and market penetration there is also significant traffic diversion away from not only Air Mauritius but also from legacy airlines like Air France and British Airways. It undoubtedly affects the capacity of Air Mauritius to remain competitive, optimize its network and be viable. For sure, Air Mauritius would defend its corporate objectives, hoteliers would like more flights and more airlines to operate to Mauritius to fill their rooms while the travelling public and exporters would prefer more choices with their impact on competition, prices and services. 

So is life. But it is not without consequences. One cannot have the cake and eat it. It is no surprise that the share of MK’s seats has dropped to 40% as foreign carriers now account for almost 60% of total seats into Mauritius. 

We must fully comprehend the implications of each option, even if all stakeholders would argue that their position best defends the national interest! Government must skillfully manage this contradiction as there are important tradeoffs. It has a duty and a responsibility to arbitrate and propose a pathway that will provide predictability. We need to gravitate towards an intermediate path that strikes a good balance between what is good for our tourism strategy and whether we want to retain a national airline as a safety net and a lifeline. The policy must be spelt out clearly so that all stakeholders know the rules of the game. 

What would happen if Emirates and Turkish Airline were allowed 21 flights per week and Etihad, Qatar Airways and Saudi Airlines were granted similar rights? The economic model of MK would crash.

Action 4: MK must choose the best marketing alliances to sharpen competitiveness

Alliances, including code share, marketing agreements and joint ventures, are becoming increasingly important as they are powerful tools for airlines to stay competitive and increase growth by expanding their networks, enhancing revenue and reducing costs. They also benefit customers through more options and flexibility, convenience, improved satisfaction, lower travel cost, saving time and better frequent flyer programmers. MK must enter into such alliances with strong airlines in Africa, Europe, Asia, and Australia so as to improve connectivity between Mauritius and major hubs. 

At times, an airline has to partner even with its competitor. Such symbiotic relationships would help MK expand its presence to destinations it does not fly to. Does MK have the relevant partners for its customers in its main target areas to cut costs, raise revenue and offer convenience in a fiercely competitive market? For instance is the choice of entering into an alliance with some African airlines such as SAA, KQ and Rwandair the best one or should it also team up with the very successful Ethiopian airlines which has much better footprint in Africa?

Action 5: MK should consider enlisting a strong strategic equity partner for sustainability 

The industry is getting increasingly concentrated and alliances may not be enough to save Air Mauritius. For its long term survival, the question is whether the current ownership structure helps or hinders the progress of MK, its ability to scale new heights and transform the company, especially in the light of intensifying competition. The decision is a challenging one but it is critical. 

The benefits of such strategic partnership could range from cost efficiency through economies of scale to revenue enhancement from higher market share, from lowering the cost of capital to more favourable deals from suppliers through improved bargaining power, from better resilience to withstand the impact of volatility to stronger ability to finance modern fleet. It could increase the size and scope of the airline, thus improving MK’s operational and financial performance. 

The ownership of MK was dictated more by circumstances and historical factors than to help the airline meet the current and future challenges. Besides the share of small holders, is there not a compelling case to streamline the ownership structure around one or two key and active strategic partners as opposed to the current diffused pattern? While two airlines own shares in MK, their participation is very passive and hardly recognisable. 

The same applies to the other large private shareholders which do not contribute much in terms of thought leadership and strategic direction. Key decisions are made elsewhere. To balance the risks, we could grant a reviewable time-limited management contract with measurable performance indicators to ensure that key targets are met. 

Who would be the best strategic partner for Air Mauritius? Could it be managed on the basis of a Public Private Partnership? One pathway would be for the current Air Mauritius Holding Ltd that owns 51% of MK to remain and for Government, SIC and the existing private sector to dispose of their stand-alone shares and bring in a powerful strategic airline partner. Some would argue that MK does not need another airline to manage it but requires a restructuring of its equity with the participation of a consortium of private sector operators (such as the hotel industry, destination management companies and the export sector). 

Of course, ultimately Government could keep a golden share for strategic and security reasons and have a very short list of reserved matters that require its approval. The various options must be thoroughly evaluated to ensure that the current ownership pattern is not an obstacle to the turnaround plan of Air Mauritius.

Action 6: Shareholders must infuse new capital to shore up MK’s balance sheet

MK is investing massively in the modernisation and expansion of its long haul fleet with the acquisition of six A350 and two A330 Neo aircraft. It is upgrading its current A330-200 and A340 to improve the quality of its products. It also has to replace the A319 and the ATR 72. It is plain that the balance sheet of Air Mauritius is not strong enough to support such massive capital expenditures. The shareholders have not infused capital in the company for a very long time. They should inject some funds in order to help MK during the challenging transition period. 

The exact amount should be determined after a comprehensive exercise on the capital spending requirements of the airline for the next 10 years. The balance sheet of MK must be shored up to assist in the implementation of the turnaround roadmap. Once the balance sheet is strengthened, there will be less pressure for financial guarantees from the Government for MK’s future investments.

Action 7: MK should examine a delisting from the Stock Exchange to facilitate its restructuring

During tough times, there are costs and constraints in remaining public that could hinder the options available to MK to build a new economic model. The airline is at a critical crossroad, fighting for its survival. It needs flexibility to restructure itself and this necessitates more control during that crucial phase. It would be difficult for MK to raise money from the Stock Exchange in its current shape with low prospects for growth and profitability. The costs of remaining listed probably outweighs its benefits. 

Delisting MK from the Stock Exchange would provide considerable elbow room for decisive actions to be speedily made to reverse the declining trend. It would also help to bring in new investors such as a strategic equity partner or a consortium of local stakeholders. Even if it has to be re listed after successfully implementing its new economic model.

(Part 3)

Action 8: MK should better manage its high fuel costs

Air Mauritius (MK) must find a long-term solution to handle the volatility of fuel costs as they account for a significant share of its expenses. First, it should invest in efficient aircraft that will reduce fuel consumption. The replacement of the gas-guzzling A 340 by A 350 and A 330 Neo is a step in the right direction. The acquisition of A 321 ER will greatly help attain this objective as it is very fuel efficient. Second, it should adopt prudent risk mitigation strategies that are best in the breed to manage volatility in fuel prices. Third, MK must save on fuel consumption by making its aircraft lighter. Some airlines are replacing flight manuals with electronic tablets and inflight magazines with Ipads. They also use lighter seats, cargo containers, beverage carts and in-flight entertainment equipment to shed weight. Some are redesigning toilets and reviewing what they stock in the galley so as to burn less fuel.

Fourth, some carriers use big data and analytics technology to improve fuel efficiency by changing operational practices and giving flight crews the right information to make informed decisions without sacrificing safety. Fifth, Government must allow MK to purchase its jet fuel at the airport direct from the fuel suppliers and not through the STC, which does not add any value as MK has the in-house expertise to negotiate the best deals. It costs the airline around 10% more. As MK purchases around 60% of its total fuel requirement in Mauritius, the savings will be considerable. Sixth, MK should consider setting up a stabilisation fund that would iron out huge volatilities in fuel prices. Ideally, it should aim to pay a fixed price (with some acceptable variation) over a fairly long period and use the proceeds of the fund to smooth out wide price fluctuations.

The challenge would be to capitalise the fund in the initial phase and replenish it. Seventh, MK should look into the prospects of mixing renewable clean energy with conventional jet fuel. Many airlines are using a mix of 30% bio fuel and 70% traditional fuel to lower costs and reduce carbon footprint. In Mauritius, this would have the merit of supporting ethanol production as a domestic source of renewable energy.

Action 9: MK should look at the viability of a low-cost Subsidiary

Many complain of the high fares charged by legacy carriers. Some airlines have responded by creating their own low-cost subsidiary to compete in a growth segment where people travel more but are also very price-conscious. Such low-cost solution coexists with many legacy airlines such as Singapore Airlines, SAA, Emirates and Air France. Even if it is not without risks as many have failed, MK should examine the case for investing in a low cost subsidiary to fly to some regional destinations and to penetrate new markets, while maintaining its premium service on other routes. The aim is to achieve product differentiation and create additional value by attracting price-conscious travellers while saving on costs without cannibalizing the traffic of the full service carrier. Not an easy task.

Action 10: MK must generate more ancillary revenues and lower its non-fuel costs

MK should generate incremental revenues from ancillary activities linked to its core business of transporting passengers and cargo so as to enhance its resilience to shocks. The obvious ones are ground handling, maintenance and engineering services. It could also venture into catering, travel insurance, helicopter services, IT expertise, call centres, ground facilities for tourists and investment in hotels.

It can also derive revenues from personalised services offered before, during and after the flights. Some airlines are monetising their inflight portal as an ecommerce platform and are engaged in mobile application services, on board concierge and commission- based products. Passengers can use such apps to book hotels and cars, high speed rail, restaurants, excursions, theme park and theatre tickets. Some even order groceries for home delivery on board.

The airline industry is undergoing a technological revolution that will produce great efficiencies in many areas including distribution through digitalisation and disintermediation to contain competitive pressures and price wars. Embracing innovation and technology, including the Internet of things and blockchain, are key to deliver a much better customer experience, improve services and processes and lower unit costs. MK should have cost discipline as a top priority so as to reduce the cost per available seat kilometre to ensure better financial performance.

Action 11: Government must support MK in few areas in its turnaround strategy

MK has been denied some revenues that normally accrue to the national carriers at airports where they operate. The air bridges that were under the management of MK were withdrawn from the company even if it made the initial investment. Government should give it back to MK to generate some incremental revenue. MK was running the duty-free shop at the airport similar to what obtains at some other terminal buildings. Again, to broaden its revenue base, Government should restore these activities to MK. The same principle should apply for airport lounges. The terminal is too small for such services to be fragmented. In the past, MK generated good profit from its ground handling activities. It provided such services both for its own flights and for all other airlines.

With the decision to allow another company to offer such services, both are either losing money or making marginal profit. There is a case to rationalise these activities, either with a single operator which should be MK or a Joint Venture between MK and the other service provider.

Action 12: Government should cease political interference that impedes MK

MK is poorly governed as it is highly politicised. Government interference in the management of its affairs is deep and wide. This is best illustrated with the dramatic dismissal of a competent CEO in 2016. In a fiercely competitive environment, it would be far better if MK’s management were allowed to professionally run the company on the basis of their competencies and expertise. When ministers and political nominees with no knowledge in the domain make strategic and commercial decisions rather than the CEO and an independent board, the airline is bound to suffer. It should not be like that. Singapore Airlines, Emirates, Qatar and Ethiopian Airlines are all state owned, yet their Governments do not interfere and leave them to be run by competent managers.

MK needs a Board of Directors that is credible, smart and knowledgeable about the industry, its prospects and challenges. Not people who reach the Board on the basis of loyalty to political parties and close connections to benefit from travel privileges. The CEO must be appointed on the basis of experience, expertise and leadership. The Board and the CEO must be given the autonomy to recruit the best team to manage the airline. Promotions should not be under any political influence but be performance-based. A culture of efficiency and effectiveness must be instilled to succeed in a cut-throat environment. MK must be given the freedom to better leverage its resources and capabilities, manage its operating costs and revenues and deal with its overstaffing to have a chance to return on the path of viability. There is no need to reinvent the wheel as there are many state owned airlines that are professionally managed. Bringing in a reputable airline as a strategic partner could help to have independence from political intervention.

Concluding Remarks: The national airline should not be allowed to fail

The outlook for MK remains very challenging. Fuel prices and exchange rates will continue to be volatile. Competition from other carriers is sharper and will intensify. MK does not always have the clout and the lobby to influence the air access policy of Government. It has no choice than to live with these market realities, even if they are unpalatable.

However, it needs to do much better in what it controls in terms of its selection and mix of fleet, the prices it pays for its aircraft, its route network, its asset utilisation, its fuel saving policy, its choice of strategic partners and alliances, its containment of costs, its yield management and enhancement of ancillary revenues, its risks mitigation on fuel and currencies, its improvement of productivity, its operational and organisational efficiency, its management structure, and its adoption of innovative technology to stay ahead of competition.

This is primarily a people business and as such MK must improve the quality of its services and the customer experience both on the ground and in the air so as to satisfy its clients. It must also engage its staff in the turnaround strategy as success is impossible without employee commitment. It should also persistently focus on the implementation of the transformation programme as often the devil is in the execution. Above all, it must be agile and savvy to adapt to a constantly evolving environment.

Government should make some bold decisions to help the new economic model. There are inevitable trade-offs. It can adopt a balanced air access policy, review the ownership of the airline, shore up its balance sheet, help to delist MK from the Stock Exchange, support it in some specific areas, appoint the right competencies to the Board and at the helm of MK and give the autonomy to management to choose the best team to run the company. A newly recapitalized, reorganized and reengineered MK with the most suitable fleet, route network, product and cost structure could rise from the dust and be economically viable while boosting tourism and stimulating businesses and international trade.

It will put a national strategic asset back on a sustainable profitable flight path. The alternative of policy paralysis and thoughtless politicisation would be an inexorable descent to hell with the risks of the “Paille en Queue” crashing.

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