Why small island states cling on to loss-making carriers

Wednesday October 3 2018

Air Mauritius

An Air Mauritius plane on the tarmac of Roissy-Charles de Gaulle Airport, north of Paris. Dr Arjoon Suddhoo, chairman of Air Mauritius, says national carriers have to reconcile their national mandate with shareholder demands for dividends. PHOTO | AFP 

By MICHAEL WAKABI
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Physically isolated and heavily dependent on tourism, air services form an important, if costly bridge for small island nations.

According to Andrew Matters, head of industry analysis at the International Air Transport Association (IATA), travel and tourism form a critical part of the economies of small island states, contributing 1.8 million jobs and $32.1 billion of GDP.

In the Seychelles, for instance, travel and tourism accounted for 65.3 per cent and 66 per cent of jobs in 2017. About all (97 per cent) arrivals to Mauritius are by air, making air connectivity critical to national development.

To support this function, some small island states have established national airlines.

But with stiff competition, high fuel prices and uncertainty over the global economy, national airlines everywhere have to make a compelling case for their continued existence.

“These challenges are not unique to airlines of small island developing states, but they are accentuated by remoteness, small populations and the difficulty of achieving economies of scale with long, thin routes,” said Alexandre de Juniac, IATA director-general.

The impact of scale and distance on competitiveness is best illustrated by Mauritius. Globally, the country was ranked 55th in the latest edition of the World Economic Forum’s Travel and Tourism Competitiveness report. But it slips to 116 when rated on price competitiveness; weighs in at 115 on the competitiveness of taxes on air tickets and airport charges; and 89th on fuel price levels.

“Policies to improve competitiveness in these areas would boost aviation’s ability to deliver its economic benefits,” said Mr de Juniac.

Dr Arjoon Suddhoo, chairman of Air Mauritius, said that besides adding value to states and being ambassadors, national carriers have to reconcile their national mandate with shareholder demands for dividends.

Integral part

Competition dilutes yields while the high cost of infrastructure eats into profitability.

Governments also have to make hard choices since the cost of one aircraft could easily equal the national budget for health or education.

However, Kapil Kaul, chief executive for South Asia at the Centre for Asia Pacific Aviation, argued that national carriers are an integral part of small island states and to appreciate their value, it is necessary to look at their balance sheets.

“It is important to take a holistic view of the impact of air connectivity because the total economic contribution of aviation is rarely understood and fully accounted for,” he said adding, “the indirect, induced and catalytic impact of aviation can be significant and countries that recognise that opportunity can drive growth and employment.”

Without competitive air transport, tourism would suffer. In the case of a country like Mauritius, that would threaten a quarter of GDP. The major challenges such destinations have to contend with are a small home market, remote geographical locations and long distances from key source markets.

Yet the losses posted by national carriers in such instances can be bearable when looked at against the overall value-added to the economy.

Using the example of a national carrier that has five narrow body aircraft with a seating capacity of 180, Mr Kaul projected that the fleet could add 262,800 visitors to the destination annually when operating at a load factor of 80 per cent. Based on a per capita spend of $2,000 including the airfare, the economy would earn $526 million.

“Even if the airline were to make a loss of $100 per passenger, that would translate into a loss of $26 million at the airline level. At the level of the national balance sheet, however, you have earned $526 million, which easily underwrites the airline’s loss,” Mr Kaul argued.

Future prospects

While intra-Africa connectivity has improved over the past decade, the continent has above-average costs in key areas. Passengers and airlines pay 5 per cent above industry average for use of airport facilities and about three per cent higher than average for fuel and aircraft overhaul and maintenance.

Ticketing, sales and flight equipment rentals also cost African airlines about 2.8 per cent more than average.

Africa is, however, cheaper on station expenses, which are 4 per cent lower than world averages, flight crew salaries (2.7 per cent), operations, passenger services and depreciation and amortisation.

Air transport creates 6.8 million jobs on the continent and delivers $72.5 billion of its GDP. While the future remains positive, and a few airlines remain profitable, at the industry level, Africa remains in the negative. The global airline industry posted a profit of $35 billion, with Africa only managing to narrow its losses to about $250 million.

IATA advocates policy stimulus and market liberalisation to boost African air transport. According to IATA, 135 million travelled by air in Africa during 2017.

That number will more than double to 321 million by 2017 if the policy environment remains unchanged.

The numbers would be close to 350 million, however, if policies improved and the market opened up further while an increase in protectionism would limit growth to around 220 million passengers by 2037.