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

(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.