Islands Business - Cover Story: HARD TIMES FOR PACIFIC AIRLINES

Aggressive competition and high fuel costs too taxing.

Robert Keith-Reid

Healthy flying... Fiji’s Air Pacific and Papua New Guinea’s Air Niugini are two big regional airlines doing well. But the state of the region’s aviation industry is not healthy.

The state of the Pacific Islands' aviation industry generally isn't healthy. With a few exceptions such as two of the region's largest national airlines, Fiji's Air Pacific and the now profitable Papua New Guinea's Air Niugini, it never really has been.

Higher costs for fuel, only being partly recovered by fare surcharges, are burdening airlines everywhere. This burden is particularly hard on Pacific Islands routes on which operational costs are high and passenger and cargo traffic business is frequently lean.

Air Pacific, Air Vanuatu and Polynesian Airlines, until Samoa's government entered into an airline deal with Australia's Virgin Blue, have been forced to cut their fares by margins of around 30% just as fuel costs began to rise. They had to match the competition of lower fares offered by the Australian budget airline. This has been great for tourism and tourists crying for cheaper fares, but painful for the airlines' bottom lines.

Air Pacific also had to match the competition from Freedom Air, a budget subsidiary of Air New Zealand.

STATE OF THE AIRLINES

DOING WELL
Air Pacific
Air Niugini

STRUGGLING
Air Nauru
Aircalin
Air Tahiti Nui
Air Vanuatu
Air Marshalls

REBUILDING
Solomon Airlines

The impact of competition from the aggressive Virgin Blue, operating as Pacific Blue, has had on Air Pacific and Air Vanuatu is debatable. The islands' airlines say that business on their Australian routes is not only holding up but increasing since fares are cheaper.

The buoyant business could also be the repercussion of alarm caused by terrorism incidents in Asia, the SARS flu outbreak and now the chicken flu threat, and perhaps the 2004 Asian tsunami disaster. All of these could have steered tourists to the Pacific Islands who may instead have gone to Asia or other regions.

The Pacific Islands exploited those events by selling themselves as being safe places to visit. But now the frightening impact of some of those events is wearing off.

Pacific Blue, which didn't reply to an inquiry from ISLANDS BUSINESS about current trends shown by its Pacific Islands services, claims it is creating new business for the region's tourism industry and not poaching it from older islands' airlines.

In December, it issued the bald claim that the Brisbane/Nadi (Fiji) business had jumped by a “staggering” 58%, Melbourne/Nadi business by 39% and Sydney/Nadi business by 16% in the first three months of beginning the services. As percentages of what?

Pacific Blue operates also to Vanuatu, the Cook Islands, Tonga and to Samoa as Polynesian Blue, a joint venture with the Samoan government.

It has New Caledonia on its list of other ports but delayed the opening of a service because of what it complained were discriminatory airport charges it would be hit with at Tontouta Airport compared with the partly government-owned Air Caledonie International.

It ran into other problems about New Caledonia that remain unsolved.

George Faktaufon... not optimistic about the future of regional airlines.

Freedom Air weekly loads up with New Zealanders to carry them in Boeing 737 jets el cheapo to Fiji and Australia from Wellington, Christchurch, Palmerston North and Hamilton.

Rachel Gardiner, Freedom Air's sales and marketing manager, told ISLANDS BUSINESS that there were no plans at present to operate to other Pacific Islands holiday destinations but there could be at some later time.

Some industry observers believe the growth of fresh business into the islands generated by budget airlines may be beginning to tail off and that newcomers will begin to bite into the business of Air Pacific and other regionally headquartered airlines.

Within a year or so, lack of growth may cause hard-bitten Pac Pacific Blue to rethink its position in the region and withdraw from some routes, particularly, if the views of Patrick Corporation, the major shareholder, prevail, ISLANDS BUSINESS was told.

Patrick Corporation is said to prefer to see the parent Virgin Blue concentrate on Australian domestic services rather than the main Pacific flights at the expense of the Australian domestic market.

The financial collapse of Tonga's international government-owned carrier Royal Tongan Airlines in May 2004 was followed in 2005 by the partial demise of Samoa's government-owned Polynesian Airlines. This has been relegated from international to sub-regional and domestic business.

The extraordinary topsy-turvy history of the government-owned Air Nauru, launched in the 1970s, in January was on survival mode.

Its only aircraft, a Boeing 737-400, was seized by the United States Government at the end of 2005 because of arrears of repayments of a loan for buying it.

In January, Air Nauru was struggling to carry on its day-to-day services with aircraft hired from Air Pacific and Air Vanuatu while it scrapes around for money needed to lease a replacement.

New Caledonia and French Polynesia's two airlines, Air Caledonie International and Air Tahiti Nui continue to subsidise their national tourism industries with mounting losses.

The government-owned Air Vanuatu, with a history of being plagued by political interference, reckons it is doing all right despite competition from Pacific Blue.

Solomon Airlines is rebuilding a domestic route network disrupted by the small civil war on Guadalcanal. It would like to be able to lease its own jet as a replacement for the Air Vanuatu Boeing 737 it operates to Australia and Vanuatu.

Air Marshall Islands, ever short of cash, struggles to keep going internally and with flights to Kiribati and Nauru with a small Dornier 228.

In Fiji, Air Fiji, a domestic operator for more than 30 years but controlled by foreign investors including the Tuvalu Government and a Chinese aircraft builder, is reappraising its future now that Air Pacific has decided to return to domestic services it abandoned years ago to concentrate on international and regional trunk route services. The domestic airline service scene is less gloomy than the regional one, with most of Papua New Guinea's dozen or so internal airlines making reasonable money.

The two strongest domestic carriers are Airlines PNG, which has inquired about buying into other small airlines in the region, and the busy Cook Islands airline, Air Rarotonga.

Air Tahiti, the main internal airline in French Polynesia, continues to steadily enlarge its fleet of ATR prop-jets and the New Caledonia internal airline, Air Caledonie, is confident enough about the future to have placed a US$50 million order for three ATR aircraft (an ATR-42 and two ATR-72s) as replacements for older aircraft of the same type.

For airline bosses, a contentious issue is the Pacific Islands Air Services Agreement (PIASA), approved at government level by most governments, except Fiji.

It would open Pacific Islands airline routes to one and all islands airlines instead of flights conditionally restricted by bilateral agreements negotiated by governments. Australia is pressing islands governments to accept PIASA and so create a common market allowing airlines to fly where they like.

Fiji's opposition is influenced by its desire to protect Air Pacific from competition.
PIASA is also opposed by the Association of South Pacific Airlines (ASPA), a representative of most of the region's airlines.

ASPA thinks the agreement would open the region to being swamped by foreign airlines, particularly Australian ones, which would “cherry pick” all the profitable routes, thus leaving government-owned regional airlines to run unprofitable social services routes required by their governments.

While PIASA exists, none of the countries that have signed it have yet implemented it, according to the Pacific Islands Forum Secretariat, which had a big part in devising it.

ASPA's secretary-general, George Faktaufon, says a PIASA impact study-an assessment of what influences PIASA-is about to be conducted by an Australian aid-funded consultancy, MacGregor Consultants.

Faktaufon isn't optimistic about the future of some of the Pacific's battling airlines. Too much is stacked up against them; political interference, fuel price worries, the heavy cost of obligatory security measures forced on them by people like the Americans and Australians due to terrorism paranoia, the difficult technical and financial environment of the region and the lack of resources and management expertise.

“There will be fewer and fewer airlines,” he forecasts.

Robert Keith-Reid is Publisher, Islands Business magazine.