[Blog] Air Mauritius: The WHYs, the HOWs and the WHAT NEXT?

Let us start with a quick review of the performance of Air Mauritius Ltd for the financial year ended 31 March 2019.  At that time, there was no confinement, no virus and no social distancing.  But our national airline was already infected and was maintaining a distancing from the profit zone! The company reported a loss of €29 million in 2019 as compared to a profit of around €5 million in 2018.  Liquidity ratios were below one, cash balances decreased substantially by around 55 per cent and the debt to equity ratio attained 137 percent indicating the significant increase in financial risk (measured by both short-term and long-term interest-bearing borrowings and debts).  Let us be frank, Air Mauritius was already under ‘respiration artificielle’ at that time and COVID19 just switched off the ventilator causing the ‘complete’ collapse of the national airline.

The WHYs and the HOWs

Amazingly, for the last year ended, Air Mauritius carried over 1.7 million passengers for the very first time, refurnished the cabins of two Airbus A330-200 aircraft and were busy preparing for the entry into service of the brand-new Airbus A330 neo, which everybody was eager waiting to see in the sky of Mauritius!  Despite all these, profitability, liquidity and solvency were in red!  I would focus on three main reasons to explain the problems of Air Mauritius.

Firstly, some of the employees apparently went on strike requesting an improvement in their working conditions and of course their salaries.  And supported by trade unions, their requests were accepted by management and this led to a huge increase in the wage bill of the national airline company.  Could Air Mauritius afford that increase in wages and salaries? Weren’t the trade unions and some employees too greedy? Wasn’t it better not to have any increase in salaries just to give some breathing space to the company?  The focus was just on the short-term and ignoring the long-term survival of our national airline.

Secondly, the acquisition of new aircraft definitely impacted and will continue to impact on the gearing/borrowings of the company, including leasing.  A higher financial risk meant that shareholders and debt holders would expect a higher return increasing the cost of capital of the company.  Couldn’t Air Mauritius delay the renovation and renewal of its fleet? Maybe it would have been preferable to open up the air access temporarily to other airline companies so that they could serve some destinations until Air Mauritius has sufficient capital base, including profits, to proceed with the acquisition of new aircraft.  Once again, short-termism decisions!

Thirdly, and let us be frank, Air Mauritius was a cash cow for some people including board members, higher level employees and some other personnel. They were enjoying huge salaries together with amazing and substantial fringe benefits. And all these represented a ‘manque a gagner’ for the national airline company and weighted a lot on the profitability and liquidity of the company.  Once again, the focus was on the short-term.

There are obviously other connected and external factors to the ‘crash’ of Air Mauritius like hikes in fuel prices, not really controllable by the company except maybe through proper hedging techniques, and poor governance which I prefer not to go further on for various reasons.

WHAT NEXT?

The solutions are quite simple but the implementation of the solutions is extremely complex. Most importantly, at present, the revenue of Air Mauritius is NIL while the huge fixed costs in terms of operating lease payments, wages and salaries, rental costs, maintenance amongst others are huge.  So, profitability will continue to be negatively impacted but the scale of the losses can be significantly reduced by cutting down on those fixed costs.  And this is what the administrators are excellently doing by reducing the personnel to reduce salaries and other staff costs which represent more than 20 per cent of total cost.  Let us be practical and objective, there are no other ways!

Secondly, Air Mauritius needs a significant amount of capital injection and funding will come from investors, be it the state, institutional investors, venture capitalists or individual investors.  Just think about it, will you invest in a company without expecting some form of returns, be it in the form of dividends or capital gains.  Nobody will invest billions in a company without expecting a decent return on their investment, be it the state or other investors.  And the situation is in such a way that the systematic risk of Air Mauritius is extremely high and the expected returns of investors will be extremely high as well to compensate for the risks.  And this makes the tasks of the administrators even more difficult to find capital providers. 

Thirdly, existing debt holders and other creditors of Air Mauritius have also an important part to play.  The administrators are negotiating to extend the repayments of principal and interests through a ‘moratoire’ period. Remember that any default of payments will lead to bankruptcy and assets of Air Mauritius will be seized and sold off where possible.  The lessors will take back the aircraft and what will they do with that? No airline companies in the world are buying aircraft right now! So, it’s useless.  They have to accept to ‘lose some’ rather than ‘lose all’!

Everybody is to be blamed! The management, the Board and even the trade unions.  They all have to accept their share of responsibilities.  There is absolutely no further room for negotiation but only compromise and acceptance are required from all of the stakeholders! Unfortunately, the biggest victims are the lower level employees, the minority shareholders and OUR country!

Seeing those red wings and red tail with the white logo of Air Mauritius, especially when you are in some other countries make you feel safe and proud, isn’t it?  This is Mauritius, our country, our home and our pride! Air Mauritius cannot file for bankruptcy.  We have to keep our national airline.  Let us be ‘solidaire’ with our Air Mauritius just like we are ‘solidaire’ with our masks and sanitizers.  It will be an awful tasting medicine but I guess the patient needs it!

Long live Mauritius! Long live Air Mauritius!

Yuven Peechen

Lecturer in Finance