{"id":27367,"date":"2020-06-02T08:05:32","date_gmt":"2020-06-02T04:05:32","guid":{"rendered":"http:\/\/www.mauritiustimes.com\/mt\/?p=27367"},"modified":"2020-06-02T08:05:32","modified_gmt":"2020-06-02T04:05:32","slug":"burning-down-to-ashes-a-national-carrier-built-over-50-years-only-to-start-a-new-one-is-not-an-option","status":"publish","type":"post","link":"https:\/\/www.mauritiustimes.com\/mt\/burning-down-to-ashes-a-national-carrier-built-over-50-years-only-to-start-a-new-one-is-not-an-option\/","title":{"rendered":"\u2018Burning down to ashes a national carrier built over 50 years only to start a new one is not an option\u2019"},"content":{"rendered":"
Interview: Megh Pillay, Former CEO \u2013 Air Mauritius<\/u><\/span><\/h5>\n
\"\"<\/u><\/span><\/h5>\n

* \u2018The Joint Administrators are of the same firm that carried out due diligence on Air Mauritius and certified its level of solvency less than 10 months earlier\u2019<\/span><\/h3>\n

* \u2018<\/strong>This disaster is not of their making. Yet, employees are the very first to fall victim to a situation beyond their control\u2019<\/span><\/h3>\n
\n

Having served two full terms as CEO of Air Mauritius, during which the company showed comfortable profits, Megh Pillay is confident that despite the uncertainties associated with the Covid-19 pandemic, it is possible by addressing governance issues and a judicious restructuring to turn it around, although this may take some time. He exposes the damaging role played by Shadow Directors who hijacked both Board and Management and led to the debacle. He brings up the role of institutional memory in the attempt to salvage the airline, and stresses that although selling the airline with the right guarantees for the country may be an option, this is not inevitable, because having one\u2019s own national airline is not merely a matter of pride but is of vital, strategic importance when negotiating rights with other airlines on networks.<\/strong><\/span><\/p>\n

\n

Mauritius Times: It is known that Air Mauritius had ongoing financial difficulties and was already on the brink before the coronavirus pandemic outbreak served as the final nail in its coffin. What this could mean was that it was running out of cash to maintain its operations any longer, but was it necessary for the board of the company to go for voluntary administration in the first place? <\/strong><\/span><\/p>\n

Megh Pillay<\/strong>: Air Mauritius was indeed severely vulnerable to the pandemic. Apart from a few positive Key Performance Indicators, quite smartly packaged for the media, MK\u2019s successive Quarterly Reports since 2018 reveal it was on an accelerated dive into a state of financial distress, heading into bankruptcy.<\/span><\/p>\n

In just one year, MK\u2019s gearing ratio (debt to equity) jumped from 0.4 on to 1.4 in March 2019. A gearing ratio above 0.5 is considered risky because a drop in profits or an increase in charges would render it susceptible to loan default and\u00a0bankruptcy. The figures posted in its last Quarterly Report published on 13 February 2020 confirm it was already in that situation.<\/span><\/p>\n

By placing the airline under Voluntary Administration, the Board simply availed of protection under the law to salvage MK\u2019s business and ensure it could continue to trade as a going concern. Normally, Directors cannot turn a blind eye and allow a company to continue transacting business when they become aware of its inability to honour its debts. Given the earlier writings on the wall, one may wonder what took them so long.<\/span><\/p>\n

It was also announced that MK was taking delivery of four wide-bodied new aircrafts in the same year, two of which it decided to sub-lease to a South African Airways then surviving only with their government\u2019s financial support. These were major transactions of which Directors ought to have been fully aware of.<\/span><\/p>\n

* <\/strong>Couldn\u2019t the Board of Directors ask or wait for government\u2019s intervention to avoid its collapse?<\/strong><\/span><\/p>\n

It might have for all we know. With no less than its Financial Secretary as Chairman of the Board, it is unlikely that Government was not aware. The more so as the alarming gearing ratio in March 2019 did not actually reflect the full magnitude of the situation as MK had not yet adopted the mandatory IFRS 16 accounting standard, requiring that aircraft operational lease charges be recognized as current liabilities.<\/span><\/p>\n

With new aircrafts coming in 2019, the real gearing was likely to rise well above 2.0. Some signs were evident when at an Extraordinary General Meeting on 10 June 2019, MK sold Pointe Cotton Resort Hotel, and 27 million fully subscribed shares and 50 million of newly created Preference shares to AML, thereby diluting existing shareholders equity, including that of Government by 21%. Possibly the Board took time to seek advice on how to proceed or to seek Government bail-out assistance as South African Airways before it went under business rescue.<\/span><\/p>\n

* <\/strong>Were the early signs of the company\u2019s imminent collapse already visible when you served as CEO the last time round?<\/strong><\/span><\/p>\n

There was certainly no sign of an imminent collapse when I left as CEO on 28 October 2016 and anyway the actual collapse occurred in April 2020.<\/span><\/p>\n

For my first two Quarters in 2016\/17, MK posted a profit of Rs 632 million against a loss of Rs 155 million for the same period in 2015, a rare performance for a seasonal period of lower demand. On that basis we forecasted a net profit in excess of Rs 1.2 billion over the 3rd<\/sup> Quarter which is the December peak. We came close to it with Euro 27 million.<\/span><\/p>\n

If MK had not been locked-in by another unfortunate hedging, MK would have easily achieved an EBITDA (earnings before interest, taxes, depreciation and amortization) of more than Rs 1.5 billion. All KPIs were excellent: revenue grew, expenditure was down 6%, shareholders fund grew to Rs 4.1 billion and net asset per share grew 26% to Rs 40.83. Gearing ratio was only 0.3.<\/span><\/p>\n

However, management is about forecasting and planning. Looking ahead to five years down the road, we foresaw the clouds on the horizon. We therefore proposed to scrap the over-ambitious aircraft acquisition program while we still could, forecasting then that MK would find itself under growing financial stress as from 2019 unless something was done to better manage capital expenditure.<\/span><\/p>\n

* Did you then ring the alarm bell?<\/strong><\/span><\/p>\n

Of course, I did.<\/span><\/p>\n

But when the business is so good, bad news is never well received and it is the messenger that often gets shot. We all know that thereafter MK decided to acquire yet 2 more aircrafts, the A330-neo received in 2019, the same year that it was borrowing USD 320 million to pay for two A350-900 that were directly delivered to South African Airways in the latter\u2019s own livery.<\/span><\/p>\n

It was clear that MK had no plan to exploit the expensive aircraft that it had ordered, despite it being common knowledge that aircrafts must be flying to cover their costs.<\/span><\/p>\n

* <\/strong>A<\/strong>viation consultancies have been saying lately that even with government assistance to save the airline industry, many airlines across the world will nevertheless be bankrupt in the months to come. Do you consider that Air Mauritius would have fallen within this category despite any forthcoming government\u2019s assistance through the Mauritius Investment Corporation?<\/strong><\/span><\/p>\n

Out of the 290 airlines from 117 countries forming part of IATA, it is extremely hard to say how many will go bankrupt even with Government assistance. Even without the pandemic problem, there are always some already on that course every year for other reasons.<\/span><\/p>\n

With the closing of airspace and borders, and restrictions on domestic air travel, all airlines are facing cash flow problems of unprecedented magnitude. Air transport is a capital-intensive business with high fixed cost and low returns on investment. With no passengers to carry, they all are facing dried up revenue streams while having to keep paying high fixed costs. Staff costs which make less than 18% of costs can be addressed by voluntary leave and pay-cuts, early departures or massive lay-offs. All airlines are today busy restructuring their business, some under voluntary bankruptcy protection from creditors to adapt to the new situation.<\/span><\/p>\n

Air transport being an essential component of modern economies, airlines are deemed to be strategic assets that governments make their duty to support in the current context of survival. Air Mauritius deserves the same treatment. Burning down to ashes a national carrier built over 50 years only to start a new one is not an option.<\/span><\/p>\n

* But, i<\/strong>f it was a matter of national pride some 50 years ago for Mauritius to have its own national airline, which also served the strategic objective of connecting the country to the rest of the world for its trade and economic development, would you say that the connection objective could still be met today without Air Mauritius \u2013 and that at a lesser cost?<\/strong><\/span><\/p>\n

That decision to invest massively to set up a national airline goes way beyond national pride \u2013 it is a key component of long-term economic strategy. At its prime, MK held a historical strategic role and was mandated to overcome our insularity handicap for trade and economic development. MK is the main pillar of a sustainable tourism industry that capitalises essentially on natural resources of sea, sun and sand and on human resources with a unique cultural heritage rich in diversity and for whom hospitality is second nature.<\/span><\/p>\n

Several international airlines especially those exploiting Sixth Freedom traffic rights by transiting passengers through their home-base exploit the tourist market Mauritius has built for itself over four decades. They operate in competition with MK and other legacy carriers of Europe offering direct connectivity. Their main business routes are elsewhere, and their fixed costs are already covered. They offer cut-rate pricing on MK destinations but never elsewhere. Experience has shown that the day MK withdraws from any route, they double their fares on that route. That is how the bulk of Italian tourists was lost when MK withdrew from Rome and Milan.<\/span><\/p>\n

Without MK, there is no leverage left in the exploitation of air traffic rights and the economy dependent on air travel falls a prey into the hands of foreign carriers. It will then be a matter of time that the like of Dubai or Istanbul become the gateways into and out of Mauritius. Ironically, the critical importance of MK has never been so evident as during this period when it is the only lifeline capable of opening closed airspace and borders to operate vital mission flights.<\/span><\/p>\n

* In fact, m<\/strong>uch has been said about the Open Sky policy. Has the emergence of \u201cbig players\u201d in our skies contributed to the downfall of Air Mauritius?<\/strong><\/span><\/p>\n

There is a gross misconception prevailing in Mauritius that MK operates in monopoly. This is completely wrong.<\/span><\/p>\n

Air traffic rights between sovereign states are framed by the Chicago Convention of 1944, which advocates reciprocity in bilateral agreements, based on expected air traffic volume between these countries and the number of flights deemed reasonable with respect to that traffic. I am unaware of any country for which these rights have been denied by the Mauritian government. As long as there is reciprocity, Open Sky is a given. The rights that have been granted are not all exploited and some are only used for a short period. Singapore Airlines and Air India have such rights yet decide against landing in Mauritius. Their strategic decision is merely dictated by market realities.<\/span><\/p>\n

Big players such as British Airways, Air France, Qantas, Lufthansa and Alitalia have always operated transparently within the scope of bilateral agreements. However, Emirates and Turkish Airlines do not. They source their traffic primarily from countries other than their own. Nevertheless, they have not hurt MK as bad as they have some other big players <\/em>by poaching in their home markets for traffic to Mauritius.<\/em><\/span><\/p>\n

It is up to the Government to ensure that the negotiations with these airlines are carried out by professionals in the interest of the country and of MK. Their lobbying capacity being second to none, we risk ending up with the short end of the stick. In 2016, we helped to avert that risk and MK emerged relatively unscathed against Emirates. MK is a critical lever in any bilateral negotiations.<\/span><\/p>\n

* With a two-time tenure as CEO, we presume you would know what it will take to turn the company around, and what mistakes of the past should be avoided at all costs. Can you tell us more about that?<\/strong><\/span><\/p>\n

All airlines are confronting the Covid-19 induced problem of having to service fixed cost obligations against the backdrop of totally dried up revenue streams over the period starting mid-March through July.<\/span><\/p>\n

Across the world government bailouts lend bridging support until air travel bounces back. Even before considering the pandemic factor, MK was already crippled by unsustainable debts and liabilities towards lenders and aircraft lessors. This is a separate issue that must be resolved forthwith by the Joint-Administrators and Government. From there on, airline business is not rocket science. MK must readjust itself to the new order. Its route network must focus on high potential routes. It must operate a fit-for-purpose fleet to carry out missions projected in a 5-Year Business Plan taking full advantage of post-Covid highly favourable market conditions.<\/span><\/p>\n

In the period of business consolidation that is bound to follow, MK ought to lead a regional airline initiative to face the common threat and safeguard the common interests of sister airlines. For an early start, it is necessary to retain key experienced personnel with crucial institutional memory. Re-inventing the wheel is not a good idea. Legacy costs being far too high, all maintenance, operational, marketing and administrative resources can be refreshed at market rate or simply outsourced.<\/span><\/p>\n

Commercial agreements with big partner airlines and others must be reviewed to ensure that a streamlined network can operate profitably while still catering for the widest world market span and inter-island traffic. As a culture of laissez-faire laisser-aller<\/em> had of late become rampant in MK, most operational inefficiencies can be addressed in the process.<\/span><\/p>\n

The pandemic has provided a salutary opportunity to clean the household. A lean and nimble-footed Air Mauritius can emerge from administration. However, it will fail miserably unless Corporate Governance issues, the very root cause of MK\u2019s downfall are recognized as such and forcefully addressed by those responsible for it.<\/span><\/p>\n

* That begs the question of whether a national airline can be efficiently operated free of political interference?<\/strong><\/span><\/p>\n

Although a 100% government-owned company, Ethiopian is recognized as a huge commercial success, among the largest international airlines in the world and a model to emulate. Created 22 years before Air Mauritius, it has always been run by professionals shielded from politics and external interference by successive governments and we know how many changes of government they went through.<\/span><\/p>\n

No airline can survive for long if run by Shadow Directors, persons not on the Board but actually instructing one or two who then take over Management duties by delegating all executive powers to Board Committees that they control along with the 10 subsidiaries comprising the Air Mauritius Group. They control both Board and Management and are not subjected to the rules of accountability. This is the biggest mistake to not repeat should there be a genuine willingness to see MK flying high once again.<\/span><\/p>\n

*\u00a0The Joint Administrators appointed by Air Mauritius\u2019 Board of Directors have been saying lately that that have been assessing MK\u2019s financial situation and \u201clooking at all feasible options that will keep the Company afloat\u201d. Do you expect them to succeed and what conditions would be required for them to do what past management has failed?<\/strong><\/span><\/p>\n

Surely all Mauritians must earnestly hope they succeed. From the document circulated at the Extraordinary General Meeting of June 2019, we know the Joint Administrators are of the same firm that carried out due diligence on Air Mauritius and certified its level of solvency to enable shareholders to make informed decisions on the capital restructuring less than 10 months earlier. This must certainly give them a head start on their current mission.<\/span><\/p>\n

We cannot compare them with Management in any respect, especially a Management de facto<\/em> deprived of executive powers. While the Joint Administrators have more powers of decision than even the Board after taking control of the company, they are there to try redress the business to convince creditors there is a better deal for them than a liquidation, which is the last resort.<\/span><\/p>\n

Nevertheless, how can MK expect to generate a positive cash flow when there is so much uncertainty about the timing of a recovery of the air travel market? Time is therefore of the essence. It appears the Joint Administrators have sought and obtained a Court Order for more time but will it be sufficient?<\/span><\/p>\n

* Let\u2019s say there is a willing seller for Air Mauritius in the event that the two external administrators fail to turn around our national airline. Do you think a willing buyer will be forthcoming?<\/strong><\/span><\/p>\n

It does not take much to restructure MK and put it back on the rails as I explained earlier. But turning around the business will be dependent on how the market recovers and when.<\/span><\/p>\n

Selling Air Mauritius is certainly an option. Mauritius is an established tourist destination of high standing attracting big players. No doubt a number of investors might already be lining up to seize the opportunity. A judiciously conceived Shareholders Agreement can take on board all legitimate concerns and whatever is required to preserve and safeguard the elements of sovereignty and strategic needs that any government may reasonably need from a national carrier.<\/span><\/p>\n

The offer of direct flight to and from Mauritius by a home-based carrier cannot be matched by competition. It also explains why with all its weaknesses, Air Mauritius continued to carry more that 50% of our international air traffic. There is a strong business case for Air Mauritius.<\/span><\/p>\n

* <\/strong>Word is going around that dozens if not more long serving employees of MK, especially those having completed 33 years and 3 months of service irrespective of their age, are presently being given their marching orders. There are feelings of deep frustration and anger amongst those who are saying \u201cthey are not responsible for the hedging saga, the succession of CEOs appointed by all governments, the traffic rights granted to Emirates, Turkish Airlines, Saudi Arabian Airlines, Kenya Airways\u2026, successive government interference in the acquisition of aircraft, the latest one resulting in surplus capacity and in the loan of 2 brand new aircraft to SAA\u2026\u201d What’s your take on that?<\/strong><\/span><\/p>\n

This disaster is not of their making. Yet, employees are the very first to fall victim to a situation beyond their control. Those who tried to raise their head in protest over any of these legitimate concerns paid a high price in reprisal.<\/span><\/p>\n

With the rosy picture painted of the company\u2019s performance with each Quarterly Report and skillfully relayed by the media, most employees were not the least aware of the gravity of MK\u2019s deteriorating financial health. Their frustration and anger are therefore understandable. They reflect what has been just said about the Governance structure whereby Board and management were hijacked by Shadow Directors with little if any experience in Management and even less in airline business. Those employees built Air Mauritius over much of its 53 years of active operations.<\/span><\/p>\n

Emirates started retrenching a couple of days back but on the basis of \u2018last-in first-out\u2019 and doing it with much compassion. It is to be hoped that common sense prevails here too and that the sum of expertise and institutional memory of retrenched staff is valued and tapped by a healthier Air Mauritius emerging from Administration.<\/span><\/p>\n

When South African Airways went into a similar Administration, termed \u2018business rescue\u2019 in December last, economists estimated that each job created in aviation had a multiplier effect generating 34 jobs in the economy. In Mauritius, the tourism sector is proportionately higher.<\/span><\/p>\n

On that basis, it may be inferred that every job lost in MK may result in 35 to 40 jobs destroyed in the economy. The impact of layoffs at Air Mauritius and its cascading effect of massive job destruction may be devastating by year end.<\/span><\/p>\n

\n

* Published in print edition on 2 June 2020<\/span><\/p>\n","protected":false},"excerpt":{"rendered":"

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