Future of Air Pacific hangs in a balance

Samisoni Pareti
One of the country’s best performing public companies, Air Pacific, will undergo a “comprehensive review” of its operations, the interim government has announced.

“This follows government’s concern about the airline’s operations stemming from increasing complaints from the tourism sector, Air Pacific employees and the travelling public regarding deteriorating standards and performance of the national airline,” a government statement announcing the review said on May 21st.

Members of the review team comprises the interim civil aviation minister who is also the regime’s foreign minister Ratu Epeli Nailatikau; minister responsible for public enterprises and attorney general Aiyaz Sayed-Khaiyum; tourism minister Tom Ricketts; and finance minister and leader of the Fiji Labour Party, Mahendra Chaudhry.

“Government is concerned at Air Pacific’s declining profit in recent years,” said the government statement.

“It has noted that the national airline was in a state of stagnation with no major new destination added to its network in a decade or so,” said the statement.

The cabinet decision on the review came just a before Air Pacific announced the result of its latest financial year.

Although the announcement came after the compilation of this magazine, the word was that the airline was ready to announce a healthy profit.

On Air Pacific’s alleged “state of stagnation,” the proposed government review is expected to reveal a basic truth about aviation business; new destinations are determined by economics, not politics.

The airline did introduce new routes over the last decade; new services to Vancouver in Canada and Christchurch in New Zealand for instance, as well as branching into the regional routes of Tarawa, Christmas Island and very soon Funafuti.

It has also invested heavily in domestic air travel with the creation of Pacific Sun, with planes it bought from Sun Air forming the backbone of the new sister airline.

Another justification for the cabinet review is the reference to “chronic delays to flight operations caused by mechanical problems to its aging fleet of aircraft.”

The cabinet reviewing team is expected to hear of the national airline’s fleet replacement programme with plans to buy five Dreamliner aircraft from Boeing.

“The 320-seat aircraft will operate in two-classes, business and economy,” this magazine wrote in its August 2006 edition.

"Five aircraft will commence service in 2011 and 2012. Air Pacific says the total cost of the five B787 will be in the vicinity of US$900 million, with each costing about US$180 million,” the magazine wrote.

At no fault of Air Pacific, the first of these aircraft won’t be delivered until 2013, mainly because of production delays at the Boeing factory in Seattle.

These delays are not unique to the US aircraft manufacturer as its French rival Airbus is also experiencing production delays with its A380, the world’s largest passenger aircraft with a seating capacity of 555 people, complete with its double-decker feature.

Early this year and in an attempt to prepare for future passenger demands, Air Pacific submitted orders for three more Dreamliners, taking its total purchase of new aircraft to eight Boeing 787 and a bill of F$2.4 billion.

Ministers will learn that due to aircraft demands, no airliner gets a plane straight away after handing over the cheque.

The length between submitting orders to delivery currently stands at around seven to eight years.

Aircraft leasing companies are no different. Because of the huge demand and now with skyrocketing jet fuel prices taking its toll, leasing companies are unable to meet the demand and they also have a long waiting list of customers.

As pointed out by Anthony Snelleman, the vice president of GE Capital Aviation Services, at last month’s conference in Nadi of the Association of South Pacific Airlines, some airlines around the world are prematurely retiring their B737-200 and for Singapore Airlines, its entire fleet of B747.

While these aircraft would be made available to leasing companies like GE, the trouble is, according to Snelleman, there would hardly be any takers as these aircraft are deemed “fuel gurglers.”

As to “staff grievances” concerning recruitment and related matters, the review would be a good opportunity for the Air Pacific management team to explain its position.

Perhaps, the ministers would have a better appreciation of the limitations smaller airlines like Air Pacific face when competing with cash rich competitors like Air Qatar and Emirates Airlines.

They may just get to understand too the need to entice expatriate pilots of Boeing 737-800 aircraft in light of the acute shortage of pilots of this popular aircraft.

Somewhere in the Ministry of Civil Aviation is a document that will provide good background reading for the review team.

The document was submitted by Air Pacific as its formal rebut to an AusAID-funded study on introducing a free sky policy in the Pacific through the Pacific Islands Forum sponsored Pacific Islands Air Services Agreement, PIASA, for short.

The study by McGregor Consultants of New Zealand had made the assertion that even if Air Pacific was to go out of business because of competition brought in by PIASA, Fiji would still benefit in the long run.

The McGregor Consultants report estimated a loss of US$31.5 million annually to Fiji if Air Pacific is closed, yet the benefits from other airlines flying into the island nation will bring US$32.3 million, a net benefit of US$0.8 million.

Air Pacific, however, rejected this notion, saying the report has conveniently forgotten that Air Pacific is Fiji’s biggest business and its closure will be a huge blow to the country’s economy with losses expected to accumulate into hundreds of millions of dollars.

“McGregor Consultants have got it wrong when they reported that the loss to Fiji would only be US$31.5 million—there is significant flow-on effects not taken into account and significant impacts at socio-economic and political levels not even considered,” said a formal rebuttal from Air Pacific.

“Air Pacific is Fiji’s biggest business (in terms of revenue) and it is unreasonable to assume that it is immediately replaceable, nor take into account the ramifications of a country losing its biggest generator of cash reserves and catalyst, and biggest supplier for its biggest industry, tourism.

“There is no mention of how the net liberalisation benefit of US$32.3 million is derived.

“In any case, if this and the derivation of the loss of Air Pacific (US$31.5 million) is plausible, McGregor Consultants are telling Fiji that it is worth allowing its aviation and tourism industry to go under in order to gain a mere US$0.8 million.

“The reality is that Fiji will lose substantially instead of gaining US$0.8 million.”

This rebuttal document outlined several items the McGregor Consultants report failed to identify as sources of huge losses to the Fiji economy if Air Pacific is closed for business.

These included the immediate loss of up to 22% of the country’s cash reserves and 17% to Fiji’s Gross Domestic Product.

Other losses the report excluded, according to the airline included:

• Loss of the Fiji Government’s share of its assets in Air Pacific amounting to F$240 million or 51% of the balance sheet
• Fiji Government will have to meet all outstanding liabilities not covered by the sale of Air Pacific assets, including the purchase of eight B787 aircraft valued at F$2.4 billion.
• Losing benefits of QANTAS partnership including its enormous marketing machine. Tourist numbers to Fiji should drop as a result.
• Fiji will become a costly and less convenient travel destination because new operators won’t take up all direct routes that were operated by Air Pacific and yet were not profitable. These included Japan, USA and Canada. Only rival destinations like Bali, Phuket and the Caribbean will benefit.
• Local suppliers to Air Pacific will be forced out of business. Major suppliers include Airports Fiji Limited, Air Terminal Services and JUHI fuel.
• No replacement to the full magnitude of marketing and sponsorship dollars spent by Air Pacific on promoting Fiji. The national carrier spends three times more than the Fiji Visitors Bureau.
• Fiji Government will lose out in taxes, dividends, FNPF and consumer spending (VAT) from Air Pacific’s 800 plus employees as well as the countless others in dependent businesses and suppliers.

Taxes and dividends to the Fiji Government averaged F$10 million per annum in the last five years.

Said the Air Pacific document: “If these significant impacts were taken into account, who would benefit from Fiji’s acceptance of open skies? Certainly not Fiji.

“The report admits that PIASA’s success is dependent on Fiji and French Polynesia becoming parties to it.

“In fact PIASA’s success is dependent on Fiji and French Polynesia subsidising other members’ ailing aviation industries and eroding our own for the benefit of the region.

“We suspect that French Polynesia understands this as well, hence their resistance to participate.”

PIASA is the acronym for Pacific Islands Air Services Agreement, an initiative for a free sky policy being advocated for the islands of the Pacific by the Pacific Islands Forum Secretariat.

Fiji’s national carrier says the McGregor Consultants report did not appreciate the economic benefits Air Pacific provides for Fiji.

It simply presents Air Pacific as a business entity that is expendable and can be replaced by some foreign airline or airlines immediately and very easily.

“This is actually far from reality as foreign airlines will not take over all Air Pacific routes nor will they do so at once.

“It appears the report did not fully discuss or take into account the real cost to Fiji of the demise of Air Pacific.

“It merely used a simplistic approach based on Air Pacific’s balance sheet figures to assess the loss to Fiji.

“This is not entirely surprising as McGregor were sponsored and funded by AusAID on behalf of the Forum, both of whom have been promoting and lobbying for Fiji to accede to PIASA.

“This (McGregor) report supported that lobby.”