Economist and ex-Finance minister Rama Sithanen gives us his views on the current situation of our national carrier, Air Mauritius, which is in voluntary administration since April 22. He discusses several bailout options and sets the tone for either a Government bailout or the creation of a new company.

(Part 1)

A. Being frank and direct

Let me be very candid. Without massive and timely support from Government through an urgent, comprehensive and multi-layered financial rescue package conditioned on a structural transformation of the national carrier, Air Mauritius will collapse. The government must decide whether it should salvage MK from liquidation in view of its critical importance to and its vital function in the tourism and travel industry and the export sector, in addition to its considerable indirect, induced and catalytic effects to the national economy. Of course, creditors and MK should also share the burden of comprehensive restructuring. 

Unless Government intent is to liquidate MK and then create a new airline with new planes, new operating pattern, far fewer employees with new conditions in terms of reduced salaries and fringe benefits. And with much lower liabilities as the unsecured portion of the debt would disappear while secured creditors would likely receive a fraction of what they are due. As Government thinks the company is not rescuable in its present shape and form. This is what South Africa is attempting after having placed SAA into liquidation following the failure of the Administrator to produce an acceptable rescue plan to all stakeholders (government, creditors, banks, other suppliers and employees)

B. Time is of the essence

Time is fast running out for the Government to step in to help. It is my considered view that Government should do it now instead of procrastinating the decision by at least 70 days (likely to be more given the complexity and complications of the quagmire) waiting for the roadmap of the Administrator. The rot will simply get worse. As cash reserves are running down quickly and with negative equity, experts are predicting that many airlines will be bankrupt by the end of June if governments do not intervene. Unless the purpose is to force some very painful and drastic decisions on MK creditors and suppliers in terms of haircuts and on the staff through a reduced number of employees, lower salaries and other benefits. It would be presented as either these sacrifices or liquidation! The government must be transparent in its choice. 

Unfortunately, the bailout from Government will be substantial, as is the case in many countries (US$ 50 b in the USA to salvage many carriers, US$ 13 b to rescue Singapore Airlines and US$ 11 b to save AF/ KLM, amongst others). Lufthansa, one of the world’s most powerful airlines, is preparing to file for bankruptcy unless it obtains a rescue package of US$ 9 b from the German government. Air Canada, a very well run airline, is also at risk of bankruptcy without a State bailout. All these airlines are burning cash to fund aircraft leases and loans, employee salaries, maintenance and airport rent while their revenue has collapsed to almost zero. At this rate, they will deplete their cash reserves and short term investments in a few months and will have to file for bankruptcy. Unless there is a massive bailout by the Government for them to stay afloat. 

All these countries have acted promptly and diligently to douse the economic and financial flame engulfing their airlines. South Africa has followed a different path and SAA is now in liquidation after having been under administration for three months since Dec 2019. Similarly, Virgin Australia, the second biggest airline of the country, has gone into voluntary administration after the government rejected its plea for around a US$1 b loan.

C. Expect no wizardry after waiting for 70 days, if not more

There will be neither sleight of hands nor a magical wand from the Administrator. If such incantation existed, smart treasury, legal officials and seasoned airline specialists in the USA, France and Singapore would certainly have found them. The delay will simply worsen the carnage. 70 days will cost MK well over Rs 2 b in inescapable costs. South Africa procrastinated and SAA is in liquidation. There is no escape from Government intervention or Government as the main shareholder picking up the wreckage of a planned or unintended bankruptcy. I admit it is a very painful and drastic choice between the devil and the deep sea. But it has to be made. Dubai has pledged financial assistance to Emirates and Hong Kong to Cathay Pacific. IATA has urged governments to provide direct financial support, extend lines of credit, give loan guarantees, reduce infrastructure costs and ease taxes temporarily to help airlines meet these unprecedented cash flow problems. The three global airline alliances, Oneworld, SkyTeam and Star Alliance, which represent close to 60 carriers accounting for half the world’s capacity, have called on governments and airports to help the industry.

All these specialists cannot be wrong. Without Government massive support, Air Mauritius will simply go under. At best, the Administrator will package the roadmap differently and could resort to highly questionable concoctions akin to the disastrous financial transaction between AML and MK in June 2019 with considerable loss of public funds. And impose tough conditions on both creditors and Air Mauritius. But the core elements cannot and will not change. Anyway, conditions are being included in Government packages in several countries. Many airlines have already shrunk their fleet, curtailed their operating network and slashed the number of employees. BA has announced plans to cut 12,000 jobs, almost a third of its workforce. SAS has laid off 5,000 of its staff in Scandinavia, almost 50% of its employees while those staying are taking temporary pay cuts. Singapore Airlines has furloughed thousands of its staff while others are on compulsory unpaid leave for 7 days per month and 40% of its employees are impacted by cost-cutting measures. Other countries have insisted on no dividends payout, no buyback of shares, equity for cash and major reduction of executive salaries and benefits.

D. Three possible but not probable alternative options: no white knights

There is considerable doubt on three other likely options to a significant Government bailout or a new airline rising from the ashes of MK. 

i) Will Government take the risk of allowing Air Mauritius to go under and then to completely open up the air access in a desperate attempt to try to replace the air seats and cargo space of the national carrier? Welcome Qatar Airways, Etihad and Ethiopian Airline and more flights per week for Emirates, Turkish Airlines, Saudi, Air France, etc. It is a very risky proposition. MK accounts for around 50% of seats into and from Mauritius and 40% of cargo capacity. It would be very difficult to convince many airlines to step in from many countries during these very turbulent times. If voluntary administration happens, the existing ownership stakes would be worthless while the unsecured portion of MK’s existing debt would almost certainly disappear. However, there may be Government guarantees, assets, collateral and floating charges given to secured creditors who would likely seek to recover most of what is owed to them. A shell company will be open to protracted court litigations. What happens to the Euro 51 m of pension liabilities for MK employees? What will be the fate of the 3,000 current employees in terms of severance allowance and other benefits? And the 12,000 small shareholders who trusted MK? There will be huge supply chain ripple effects throughout the economy. How will the Government justify the liquidation of a ‘crown jewel’ while it is saving many companies that contribute considerably less to our wealth creation and GDP? It would destroy a strategic asset of the country which also acts as insurance in tough times. The impact on the travel and tourism industry could be devastating. The cure might be worse than the disease; 

ii) The likelihood of a strong strategic partner injecting significant equity into the current MK with its huge level of indebtedness and operating losses appears extremely remote. Even in normal conditions, Air Mauritius could not find a strategic partner. The best airlines in the world are in financial turmoil, running to their Governments for funds. Singapore Airlines has requested massive support from its Government. Likewise for Emirates which is seeking a bailout from the Dubai government. Both Singapore Airlines and Etihad are shareholders in Virgin Australia and have refused to inject capital to save the airline which has gone into administration. Air France has just been bailed out by the French and Dutch governments. No airline or private equity firms will tip money into a distressed airline with the level of debt that MK carries; 

iii) A straightforward buy out of MK by another airline or a private equity fund would equally be extremely difficult in the current circumstances. For exactly the same reasons as in the case of a strategic partner. Investing in a distressed airline with such indebtedness in the middle of a global pandemic is very high-risk. Their objective is to lower costs, preserve cash and restructure their own company to remain competitive and prepare for the recovery in travel and tourism. Even if there were some marginal interest, what would be the price paid for a comatose Air Mauritius either by a strategic partner or a buy out party? Negative. The sticking point will be the very high level of debt of the airline. The bidder will insist that the debt and large liabilities are removed from the transaction and placed in a shell company to be dealt with by the current shareholders. Otherwise, it would not make financial and economic sense. The new owner will also radically transform the company in terms of aircraft type, operating network, governance, cost structure, and completely new working conditions for its employees. The problem of pension liabilities and small shareholders would remain. Even if it would spell the end of our sovereignty in the airline industry, it is highly unlikely to materialise in the present context. 

For the sake of completeness, I am also ruling out the far fetched option of a regional airline with other countries of the Indian Ocean. It is an extremely long shot and certainly not in the current circumstances.

E. Be realistic and no pipe dream

A voluntary administration is not necessarily a panacea for MK as many airlines have failed to successfully exit from it. And they have had to file for bankruptcy. This explains why countries like France and Singapore have intervened in a timely and effective manner to save their airlines without going through a voluntary administration. 

We need to face the grim reality, however unpalatable it is. Air Mauritius was already in financial throes before Covid-19 struck. The pandemic is the gravest crisis the airline industry has ever known and it has put MK on the ventilator in the ICU. 

If we use a robust financial and economic framework to evaluate the conditions under which an airline heads towards bankruptcy, Air Mauritius ticks all the boxes. The five variables to predict bankruptcy are liquidity, solvency, profitability, level of debt and recent performance. MK is illiquid as it has no money to meet its obligations. It is insolvent with negative equity. It has not been profitable for some time. Its level of indebtedness in December 2019 is staggering. It has worsened in April 2020. It's recent April-Dec 2019 performance is parlous. And it has considerably deteriorated in the first quarter of 2020.

F. What will rise from the ashes? A radically transformed MK or a new airline

MK is in dire straits. To further complicate matters, Airbus, Boeing and BA believe airlines may not recover from Covid-19 crisis for around five years. We face a new and unprecedented reality with contagious effects for years to come. Normality is not yet on the horizon. 

Many countries are doing four things simultaneously to save their airlines. Massive Government bailout, substantial fleet and network restructure significant cost reductions and a completely new business model. It seems to me that we have no choice than to embrace this four-pronged strategy to rescue Air Mauritius. With haircuts from creditors and suppliers. 

However, as saving MK could be very costly, there may be a temptation to opt for bankruptcy of the company, followed by the creation of a new airline. South Africa’s desperate strategy. But very different from what France, Germany, Singapore and the likes of Dubai and Malaysia are doing. They are bailing out their existing airlines without going under administration as timing is key. 

Either way, better start now than in 70 days, if not more. MK is worse off by this procrastination. 

I shall next consider the restructuring of MK and the setting up of a new carrier as two competing options.

(Part 2)

A. The unvarnished truth

One can discuss for months the reasons behind the financial collapse of Air Mauritius (MK). As aptly put by an astute political observer: “MK a été asphyxiée par étouffement politique par l’Hôtel du gouvernement et par ses délégués paillassons au conseil d’administration mais par uniquement sous ce gouvernement.” Except that the blame should also be shared by Board representatives of non-state companies and independent directors who are equally guilty of a serious dereliction of duties. They did not exercise their duty of care and diligence, thus becoming complicit in the financial turmoil of MK. 

However, in addition to the stifling and reckless politicisation of the airline, there are other factors that account for its dire financial straits which have been amplified by the economic lockdown resulting from the pandemic as its revenue has collapsed while its inescapable costs are very high. There are structural, specific, competitiveness and regulatory problems that beset the airline. There is brutal competition arising from an imbalanced air access policy to ruthless price wars, declining yields and rising costs, from mismatched fleet to the lack of adequate ancillary revenues and its alliance strategy and from its operational and organisational dysfunctional structure to its very flawed governance framework. MK’s costs per aircraft are too high for its relatively small fleet and it has far too many managers and senior executives per staff. It leases too many overpaid aircraft and often the wrong ones while its operating pattern is not optimal.

B. Government must decide whether it considers MK as a strategic economic asset

The French Government that owns only 14% of the shares of AF/KLM has promptly intervened on the basis of the strategic role played by the airline in the economy. The French Minister of Finance has unequivocally stated: “Cette intervention de l’État français en faveur d’Air France est tout sauf une surprise. Dès le mois de mars, le gouvernement a clamé qu’il soutiendrait sa compagnie étendard. Il a mis les points sur les i. Ce n’est pas un coup de pouce dont va avoir besoin Air France, c’est un soutien massif et historique de la part de l’État et Air France aura ce soutien massif et historique de la part de l’État. Nous voulons à tout prix préserver la compagnie aérienne qui est un fleuron industriel français.” 

A massive and historical bail out to rescue a strategic asset. In spite of a very difficult budgetary predicament, the French Government has provided an exceptionally high Euro 7 b assistance to AF/KLM while the Dutch Government is contributing between Euro 2 to 4 b. The state has given a shareholder’s loan of Euro 4 b and a very significant bank guarantee of 90% for Euro 3 b of loans from commercial banks. And it will likely capitalise the direct government loan into equity in order to shore up the company’s balance sheet. In return the airline has committed to a financial viability and an environmental sustainability roadmap. It has to restructure its operating pattern and its fleet and better manage its costs. 

Singapore Airlines is one of the best run airlines in the world. Yet, with no revenue as a result of the closure of international borders, it is facing a huge financial crisis. The Singapore Government has quickly intervened through its investment company Temasek Holdings, which owns 55% of the airline, to provide a massive bailout in view of its strategic contribution to the economy. It is a mammoth US$ 13.3 b funding package. The airline will raise $10.5 billion in equity through issuing 10-year mandatory convertible bonds and new shares to its shareholders at a deep 54% discount. The issue is fully underwritten by Temasek. And there is a $2.8 billion commercial loan. 

The US government that does not have any equity in the major US airlines has put together a bailout package of US$ 50 b to rescue its airlines because of their strategic importance to the economy. It consists of 50 % grant and 50 % loans at low interest rates. The same government bailout is happening in many other countries. From Germany to Dubai to Hong Kong, New Zealand, Sweden and China, amongst others. Italy has taken the unprecedented decision of renationalising Alitalia and has injected funds into the embattled airline.

C.The Government must show clear and decisive leadership to save a crown jewel

Such a fundamental issue as the fate of our national airline cannot be left to an Administrator. Neither France, nor Singapore, UAE, Qatar and Hong Kong has treaded this path. All the cards are in the hands of Government who should dictate the course of events, including with the creditors, suppliers and MK. Government has been loudly silent on this key matter and gives the impression that it is a simple administration like it happens to many small companies round the corner. This is not a technical problem that can be handled by an Accountant. It is a key political economy issue of strategic national importance that can only be tackled by Government. Airlines that are able to rely on state-backed funding packages are likely to ride out the storm with their balance sheets being shored up. Those that do not will simply wither. 

It seems to me that creditors, especially the secured ones and the leasing companies, will call for a financially viable rescue plan before accepting to take significant haircuts on their debts and advancing new facilities to MK during the current administration phase. 

The road map has to state clearly the: 

i) contribution from shareholders to finance the rescue; 
ii) support from Government in terms of grants, loans and guarantees to fund the turnaround strategy; 
iii) reduction in operating and administrative costs; 
iv) new business model with a different aircraft mix, a new operating network, reduced labour force and a new financing scheme.

D. The multiple responsibilities of Government

Government has an obligation to lead the rescue package for four key reasons: 

i) All governments across the world (even when they are not shareholders of the airline) are implementing financial packages to support their airlines in view of their contribution to the economy and to avoid a social crisis; 

ii) The government is the major shareholder of MK. If we include SIC and AML, the public sector is by very far the pilot, the co-pilot, the cabin crew and engineers of the airline. It is therefore incumbent upon Government to help MK ride this “tsunamic” turbulence; 

iii) The Government has a large responsibility in the financial collapse of the company as a result of its reckless politicisation of the decision making process and its disastrous governance structure; 

iv) It is the decision of government to close borders, albeit for good health reasons, that has grounded airlines and precipitated their financial distress.

E. Is liquidating MK and creating a new airline an informed choice?

The rescue of MK will necessitate “un soutien massif et historique”. As a result there might be the temptation to put MK into bankruptcy and create a new airline to replace it in the hope of mitigating the financial costs to Government. Similar to what South Africa is trying after the liquidation of SAA. The new airline would start on a totally fresh slate with a different fleet of aircraft at cheaper lease rates, a better adapted operating network of flights and much fewer staff with reduced pay and less fringe benefits. 

The existing ownership stakes would be worthless while the unsecured portion of MK’s existing debt would likely disappear. There could be some Government guarantees, assets and collateral and floating charges given to secured creditors who would likely recover a fraction of what is owed to them. The distressed balance sheet would be sorted out as the company would be liquidated. 

It is not without problems and challenges. The disposal of the assets of MK will take a long time and will not generate much money. We have the experience of the catastrophic bankruptcy of BAI. It is still ongoing with substantial sums being made available by Government to alleviate the hardships caused by the distress. This is chicken feed compared to what could happen to the liquidation of MK as there are international banks, leasing companies and suppliers involved. The proceedings could be complicated, lengthy and costly. There will be protracted court litigations for years. There are also reputational risks at stake. 

MK liabilities are close to Euro 1 b and it has negative equity. The aircraft and other assets will be seized by creditors. What happens to the pension liabilities of Euro 51 M for employees? What will be the fate of the 3000 staff of MK (less those who will be reemployed by the new entity)? Who will look after the interests of 12000 small shareholders who have been taken for a big ride through no fault of theirs? And will lease operators and banks that have lost out through this liquidation be willing to do business with the same company under a different cloak? There may be a serious problem of trust and moral hazard. Will the traffic rights be transferred automatically to the new airline? Will it keep its slots at Heathrow and CDG and other important stations or will it have to fly to other airports? 

The transition from a defunct MK to a new carrier will also take time. The new company must be well capitalised and it will also require working capital to commence operations. Who else than Government will inject such capital to kick-start operations. Private sector money, if any, may take time to materialise.

F. The fog of South Africa, the costs from Switzerland and the disaster of Italy

South Africa is seeking to create a new flag carrier from the ashes of SAA which is dead after government refused to bail it out. However, it is very unclear how this will shape up as Minister Gordhan has called it a very complex issue. There is considerable uncertainty as to the fleet, the routes to be operated, the number of employees, the governance structure and who will be the equity partners besides Govt itself. The huge liabilities of SAA will likely be placed in a separate company as creditors will sue the defunct company. It will be tricky even if South Africa has other airlines that can be leveraged to replace SAA. Besides being costly, there is no blueprint yet to establish whether the new carrier will be competitive and financially viable. 

The emergence of a new airline from the bankruptcy of Swissair was not straightforward as it needed significant capital and a large loan from the Swiss government. Together, the federal authorities and the banks injected more than SFr 3 billion into the complicated restructuring of the enterprise, including SFr 1.7 billion of taxpayers’ money. The new airline continued to lose money and it was acquired by Lufthansa after three years for a paltry SFr 340 M only. The Italian government is still searching for a financial solution to save Alitalia which has been under administration since May 2017. There has been many failed take overs and attempts to create a new airline. And after three years, Italy has had no choice than to renationalise Alitalia and inject massive funds into it. It will try again to sell Alitalia. Or create a new airline entirely controlled by the Italian treasury. Govt will also transfer Alitalia’s debts and liabilities to another company for tax payers to take care of. 

In short, there is hardly any robust example where a national airline, supported by the government, technically goes out of business, and then a new, successful national carrier emerges, presumably still backed by the government. It explains why most Governments have not chosen the route of Mauritius to place its national airline on the path to bankruptcy. Except South Africa.

G. A transformed MK to ensure competitiveness and financial viability

I have examined four options for MK to exit from the voluntary administration. I have argued that a simple bankruptcy will not work. Equally, I have posited that it would be extremely difficult to entice either a strategic partner or an outright buyer in the current distressed airline context. The solution of liquidating MK and launching a new airline could be littered with obstacles. It could be long, costly, complicated with a loss of trust and moral hazard amplifying the challenges. 

In the next article, I shall make the case for a transformed MK that could potentially become both competitive and financially viable in the medium term. Of course, a series of conditions must be met for the reborn MK to have a chance of turning the corner.

(Part 3)

1. The writings were on the wall for a transformation of MK

I wrote three articles on Air Mauritius in March 2019 presciently entitled ‘Air Mauritius’ mayday: is there a silver bullet to avoid a nosedive? ‘We have the answer now! 

The national airline was flying into financial turbulence, bleeding profusely, depleting its cash reserves and impairing its balance sheet. Now it is basically insolvent and illiquid and cannot meet its contractual obligations. 

I emphatically stated then that ‘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’ and concluded that ‘Government should make some bold decisions to help the new economic model. There are inevitable trade-offs. The alternative of policy paralysis and thoughtless politicisation would be an inexorable descent to hell with the risks of the Paille en Queue crashing’. 

Sadly, one year on, Air Mauritius has indeed collapsed and is navigating between a costly rescue package and a bankruptcy.

2. Recommendations then for a turnaround airline

I had proposed a strategy to rescue Air Mauritius and avoid a crash landing in the medium term. The Coronavirus has simply precipitated its financial disintegration.

The recommendations were as follows
i) MK should rationalise its fleet;
ii) MK must streamline its route network;
iii) MK must lower its high operating and administrative costs;
iv) Shareholders must inject equity to shore up MK’s balance sheet;
v) Government must support MK in few areas in its turnaround strategy;
vi) Government should cease its mindless political interference that impedes Air Mauritius;
vii) Government must adopt a balanced air access policy;
viii) MK must generate more ancillary revenues;
ix) MK must choose the best marketing alliances to enhance connectivities;
x) MK should assess a delisting from the Stock Exchange to facilitate its restructuring;
xi) MK should consider a strong strategic equity partner;
xii) MK should better manage its high fuel costs;
xiii) MK should look at the viability of a low cost subsidiary.

It is plain that any rescue package will necessarily contain a combination of the first ten measures listed above. The choice of a strategic partner is very unlikely in the current context while the prices of fuel has plummeted. MK itself may have to become a low cost carrier as it must decrease its operational and administrative costs. The one additional factor would be the effort by leasing companies and banks to take a ‘significant hair cut’ on debts owed by Air Mauritius. The staggering level of MK’s indebtedness requires that its balance sheet be shored up. There are not many ways of achieving that goal besides a substantial write off by creditors and an infusion of capital by its shareholders.

3. Beware of the unintended consequences of an intransigent position

The rescue package from Govt must be conditional on a set of key deliverables and performance criteria . A business as usual scenario is the surest road to bankruptcy. Air Mauritius must be transformed by a fundamental review of its fleet, its network of operations, its high operating and administrative costs and its balance sheet. Banks, leasing companies and other creditors must take a huge hair cut to lower the indebtedness of MK. Otherwise it would become a bottomless pit. 

The choice will be a painful one as it attempts to address an existential crisis. It is difficult to turn around years of mismanagement, reckless political intervention and wrong strategic decisions. The clear option is between saving a crown jewel and losing everything. We should learn from the recent experience of SAA. During the difficult and protracted negotiations, neither the banks and other creditors, nor the employees and the Government accepted to make sacrifices. All took a very inflexible negotiating stand. A typical prisoners’ dilemma in a game theory mindset. Now, all of them will lose almost everything as the company has gone into liquidation. We should avoid such a terrifying ‘loselose’ outcome because of an unbecoming rigidity at the negotiating table. We would imperil the rescue!

4. The main ingredients of the transformation blueprint

The turnaround roadmap should focus on 6 key areas.
a) New fleet of aircraft
b) New operating network
c) Incremental ancillary revenue
d) Lower indebtedness through creditors’ haircuts
e) Costs reductions
f) Government bail out

5. New fleet of aircraft

MK must be quickly rightsized. It simply does not make sense for Air Mauritius to have 6 aircraft types for its size and scope of operations. For cost, efficiency and utilisation considerations, it should have at most three aircraft types (two would be better). There are also too many aircraft and two A 350 have to be leased to SAA which is now in liquidation. Some aircraft are not the right one with the A 330 Neo operating with payload restriction on some routes. The A 319 is commercially very unattractive and should be withdrawn. Some planes are very expensive at US$ 1.2 m to US 1.4 m per A 350 against a market price of US$ 900000 to US$ 1 m per month. These crippling costs are unsustainable for the airline and should be tackled forthwith. 

Immediately all the lease charges must be renegotiated to bring them down substantially. Then MK will have to get rid of few aircraft as they are in excess of its requirements. Finally it will have to restructure its entire fleet completely in the medium term based on its new business model and operating pattern. Its fleet costs would come down significantly.

6. New operating network

MK cannot continue to fly to many loss-making routes. These must be culled. I see two broad options and they ought to be assessed in greater depth. First, MK becomes a niche player and operates to the broader region only. Essentially an arc starting from Perth to Malaysia/Singapore, India, Kenya and South Africa. Plus flights to the Indian Ocean islands and Rodrigues. In that scenario, it will not need wide body aircraft to perform this mission. There are ultra-efficient, comfortable and long range single aisle aircraft that are much lower in terms of lease charges, fuel consumption and maintenance costs that can do a good job and generate profit for Air Mauritius. This would lower operating costs substantially. 

MK must then choose the best marketing alliances to enhance connectivities to some key markets. It could complement this niche approach with a strong partnership through Joint Ventures and/or code share agreements with other airlines to serve Europe (France, UK, Germany and Italy) , China and Hong Kong and the Middle East (as it does with Emirates). It will continue to promote, market and sell Mauritius from these countries as they are key for our tourism sector while not operating its own aircraft. 

The advantage of this model is its competitiveness and its financial viability while keeping a visible presence in Europe, Asia and the Middle East. We would considerably derisk the business model while MK continues to play its role as a strategic asset for the country. It would require only two aircraft types in its fleet. A long range and efficient narrow body aircraft ( such as the A 321 LR) for the medium haul routes and a small jet (like Embraer) to operate the inter-island services and that could also fly to the near region (Seychelles, Madagascar, Nairobi, Durban in addition to Reunion and Rodrigues). 

Some may want to operate to Europe with MK colours. While we all love it, there are too many downside risks. There is cut throat competition on the route. It is extremely difficult for MK to compete with few frequencies to few cities compared to many daily and weekly flights between Mauritius and Europe and North East Asia by super connectors such as Emirates and Turkish Airways over their powerful hubs (Dubai and Istanbul). In addition to Saudi Airlines, BA, AF and other European carriers that also compete with MK head on. For instance, how does MK compete in the UK with only three weekly services to London while Emirates has double dailies with the massive A 340 from Mauritius to Dubai and serves 8 UK cities several times per day? Emirates flies to three London airports (Heathrow, Gatwick and Stanstead), two cities in Scotland (Glasgow and Edinburgh) in addition to Birmingham, Manchester and Newcastle many times per day. Very tough to compete. Especially as there will be a fierce price war after Covid-19 for airlines to capture market share in a depressed air travel environment. So much so that the major US airlines have, in the wake of Covid-19, requested the US Government to drastically cut the number of services by the middle eastern airlines (Emirates, Etihad, Qatar and Turkish airways) into the US as they cannot compete in a completely deregulated air space with these mega sixth freedom carriers that suck traffic over their powerful hubs. 

The only exception for Europe could be daily services to Paris in view of the critical importance of France for our tourism industry. Coupled with marketing alliances to carry passengers to/ from other cities in Europe. It could be evaluated and a decision made that is based on the risk appetite of the reborn MK. The risks are however considerable , the more so that the fleet composition will have to change as MK will need expensive wide body aircraft (say A 330 neo without payload restriction) to accomplish this long haul mission. The challenge is that the loss on Paris could wipe out the profit generated on the regional and inter island network. And turn MK from profit to losses again.

7. Incremental ancillary revenue

Air Mauritius 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, IT expertise, call centres and ground facilities for tourists. 

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 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, Air Mauritius 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 Air Mauritius or a Joint Venture between MK and the other service provider. 

It can also derive revenues from personalised services offered before, during and after the flights. Some airlines are monetising their inflight portal as an e-commerce 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 last article will complete the transformation strategy to make MK competitive and financially viable.

(Part 4) 

8. Lower indebtedness through creditors’ haircuts

The level of MK’s liabilities is staggering and unsustainable. It is around Euro 1 b, made up mostly of interest bearing loans and borrowings for the operating and finance leases of its aircraft, suppliers’ trade payables, short term working capital and employee pension liabilities. Its equity is negative while it has some cash in bank and some short term and long term deposits, which will be quickly exhausted during the lockdown. Its assets cannot meet its liabilities. There is little it can sell besides its building in Port-Louis. 

Based on a robust business model that must pass the double test of being competitive and financially viable, Government, directly or indirectly, should negotiate the financial reengineering with leasing companies, banks, and suppliers. Dialogue and consultation are crucial to reach a compromise to save MK without reputational damage and protracted litigations. The creditors should be called upon to make sizeable haircuts in order to reduce the huge level of debts and prevent a liquidation of MK. If the transformation plan is viable, they would be keen to participate in the rescue package as the alternative is to risk losing almost everything. 

Is a haircut of 30 % to 40 % on the debt achievable? Different creditors will act differently depending on whether they are unsecured or have some collaterals besides the aircraft itself and/or on their judgement about future recovery. Will some accept to swap some debt for equity? Or agree to haircuts with conditions such as a long extension of the existing lease. How much of these debts are secured by assets, government guarantees or letter of comfort? MK will be in default. Will Govt renege on some of its commitments or on its ‘gentlemen’ letter of comfort to banks and other creditors? There could be reputational risks at play.

9. Costs reductions

I feel very sorry for the 3000 staff and the 12000 small shareholders of MK. I know many employees personally as I have been a very frequent traveller on MK for the last 38 years. It is extremely tough for them and their families. I both sympathise and empathise with them in these trying times. They are collateral victims of the reckless politicisation of MK , its strategic mistakes and the pandemic. They face a grim choice between a rock and a hard place. Sadly, they will have to make some sacrifices to turnaround Air Mauritius. The operating and administrative costs of MK are simply too high for the transformed airline to survive. These costs will have to come down . Even very strong airlines such as BA, Singapore Airlines, Lufthansa, United , are being compelled to drastically lower their employee costs through various measures. 

Staff and their representatives should constructively and intensively engage with Government and MK management to identify solutions so that as few people as possible are affected. We all know what is on the agenda in other countries. Many staff have been furloughed or laid off . One third of BA employees will lose their job and 50 % at SAS . Those on contracts will exit. For remaining employees, there will be salary cuts and fewer fringe benefits. We should look into the possibilities of work sharing and redeployment in the broader public sector to mitigate the burden of adjustment. The proposed new activities of MK to generate incremental ancillary revenues should create some jobs. A voluntary retirement scheme should be part of the rescue package while Government should assist with the pension liabilities and severance allowances. 

The burden sharing should first come from the bloated executive while the excessive fringe benefits to past Board Directors must be abolished immediately and those of current ones curtailed significantly. As the fish has rotten from the head, the example must come from the top management and Board directors who have a large responsibility in the collapse of the company. 

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 embrace cost discipline as a top priority to reduce the cost per available seat kilometre to ensure better financial performance.

10. Government bail out

The greatest effort will have to come from Government after having finalised the new business model, secured the agreement of creditors for significant haircuts and reached a compromise with staff and management on cost reduction. Government should engage with other institutional and industry shareholders to see whether they will make an equity infusion. It will have to use a combination of several measures to shore up the balance sheet of MK and help it in its new business model. 

The costs to rescue MK could be ‘massif et historique’. Similar to what other governments are facing. US$ 50 b in the US to save few major airlines, US$ 13 b to rescue Singapore Airlines, US$ 11 b to save AF/KLM and US$ 9 b for Lufthansa. 

If the rescue of MK were to cost only 5 % of these bail outs, it would range between US$ 450 m (Lufthansa) and US$ 650 m (Singapore Airlines) with a mid-figure of US$ 550 m (Air France). In short between Rs 18 b to Rs 26 b. Not far from my estimates. Unless the haircuts from creditors are very significant.

11. Air Mauritius needs three pots of money

First, MK desperately needs funds to survive the economic virus as its planes are grounded. It has no revenue and its monthly fixed costs are around Euro 20 m. If we assume that it will not start flying before August, it will require immediate financial resources for three months (May to July). This is around Euro 60 m. MK’s existing reserves would have been used to meet its losses since Jan 2020 and the payment of inescapable costs between mid March and April 2020. 

Second it requires financial support to meet its operational deficit for at least 6 to 9 months, if not more, as it starts flying in August but with low load factors as the tourist and travel industry will take time to recover. There will also be a price war to gain market share and yield will suffer. During that period it will have to carry many fixed costs linked to unutilised assets and resources. The financial requirement may exceed Euro 150 m as many flights will be with few passengers at low fares. 

Third and more importantly, it must meet the transformation costs of a right sized company. Its balance sheet must be shored up through a massive capital injection. As the transformation will take time, there will also be significant transition costs to be incurred. 

With liabilities close to Euro 1 b, the debt to equity is much too high even if the industry is usually highly geared. Depending on what we consider a reasonable gearing, the injection of equity (and/or convertible bond) could be very high indeed. Even with a huge hair cut from creditors. There is also a huge impairment on the old A 340 and A 319. 

Air Mauritius may require well in excess of Euro 500 m if it is to be well capitalised, have enough working capital to meet its inescapable costs for three months, cover its operational deficit for at least six to nine months and face the costs of shifting from an unworkable business model to a competitive and viable roadmap. 

Singapore has used a combination of equity injection, convertible bonds and Government guarantees to fix the problem. France has resorted to a shareholder’s loan than can be converted into equity subsequently and a Government guarantee of 90 % to ensure commercial loans to AF. 

Of course there are other financial engineering that can be crafted. But all will work only with the direct support and guarantees of Government.

12. The paradox of Government: how to stop the one who pays the piper to call the tunes?

This is the greatest paradox. Government is the only institution that can rescue MK. However it is also the one that can destroy it. The irony is that we will have more of Government as it will have to inject considerable amount of money to save the airline. Its share of equity could rise and it will have to provide direct loans and guarantees for MK to access commercial facilities. 

So how do we have less government (reckless political intervention) with more government (financial rescue)? A real Hobson’s choice. How do we ask the one who pays the piper not to call the tunes? A tall order indeed. 

Air Mauritius is poorly governed as it is highly politicised. Government interference in the management of its affairs is deep and wide. 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 Airline 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 workforce 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. Let us hope that common sense will prevail and that in return for operational and organisational autonomy, MK will be held accountable for some key deliverables and performance criteria.

13. Concluding remarks

Air Mauritius faces a stark choice between survival and bankruptcy. There are some painful and drastic choices to make if Government believes the airline is a strategic asset for the economic development of our country. I have tried to reconcile the imperative of a national strategic asset with the requirements of competitiveness and financial viability. Not an easy task to achieve such a balanced outcome. 

I believe that without its excessive indebtedness, and with a corporate restructure and a new business model, MK could be profitable again. 

Not all is lost. A newly recapitalized, reorganized and reengineered MK could emerge. The process will be lengthy, complicated, painful and costly. But we should do it. And we can do it with imagination, creativity and innovation. Reason, informed judgement and realism should prevail. 

Now it is up to Government to act. To step in, fine tune and adjust the blue print that has been suggested. Everyone must make some sacrifices to save a jewel in our crown.