Being Smart Helps Airline Notch Record Profits

In announcing its record profit for the financial year ending March 31, Air Pacific's managing director John Campbell has two main briefs for the current financial year:

• Maintain profitability; and
• Not turn into a no-frills service airline like those budget, low cost competitors that include New Zealand's Freedom Air and Trans-Tasman successful operator Virgin Blue.

Campbell said Air Pacific had studied the question of going into no-frills service and decided against it.

"We're a very small airline in terms of the total fleet and the only way in which a no-frills airline can successfully operate is if there's a group of employees who can be absolutely isolated to that company and who have contracts of salaries much less than all of the other employees.

"We couldn't see that accomplished in Fiji in an airline as small as Air Pacific.

"There's also a couple of major differences on the aircraft. Typically, they are quite spartan in their interior, they don't have galleries, for example, for the provision of meals, they don't have a great deal of storage area for passengers' bags, coats and things of that nature, so it costs a lot of money to put those things in an aircraft.

"So on balance we believe it's better that we remain a full service airline because we believe that's actually what the market in Fiji wants." Campbell and Air Pacific chairman Gerald Barrack said it is the arrival of these no-frills airlines in its lucrative routes of Australia and New Zealand that makes a repeat of its high profitability not an impossibility but challenging.

Although two budget airlines have begun flying into Fiji from New Zealand by late May, Campbell felt it was too early to gauge an impact on his airline's forward bookings.

He is certain though of two things. First, due to accommodation constraints in Fiji's peak periods, Air Pacific doubts additional airlines will bring extra volume. The second point is that a price war may be counter-productive.

Because of this, Campbell said Fiji and its national airline may have to position itself as value for money and not as a cheap destination. Barracks

agreed: "We've had this experience in 1987 after the first political event in Fiji. In order to bring tourists back, Air Pacific launched prices from New Zealand to Nadi $299 return and Australia to Nadi $399 return and the industry found it was a different market.

"Many of them who came didn't stay in hotels, didn't spend money in hotels and other places." Come March 2005, Air Pacific is still projecting a profit, but more competition together with rising fuel costs and foreign currency fluctuations will make flying in the next few months everything but smooth.

Late May, fuel prices reached a 21-year high, jet fuel in particular, rising to $50 a barrel. Fuel comprises 20% of the total expenditure for the national airline.

Campbell and his management team know the way out is constant vigilance on fuel purchase. One way Air Pacific does this is to control fuel uplifted by each aircraft daily.

"We're managing very, very closely our fuel purchase and also the amount of fuel that we uplift because it actually takes a lot of fuel to lift the plane off the ground.

"So without prejudicing safety in any way, shape or form, we're managing our fuel uplifts quite carefully.

"We also manage airports at which we buy fuel because some places are less expensive and some places are more expensive." All these processes, including the purchase of fuel from the world market, Campbell explained, are done with the aim to hedge forward.

"We hedge forward on fuel purchase to try and protect or lock it in a fixed position and last year we were successful in being able to hedge forward up to about half of our total fuel purchases. That played a very material benefit to our bottom line." What also impacted that bottom line is currency fluctuations particularly so for Air Pacific in that bulk of its payments are in United States dollars.

Currency hedging is disallowed, but the carrier is permitted to hold money offshore for bill payments. Campbell said the amount is "small but helpful." Air Pacific is most probably the only regional-based airline that has been flying into profits and much of it can be attributed to being smart in the way it does its business.

Campbell puts it down to constant monitoring of operations and cost management.

"We're tuning our flying and our capacity very, very closely to what the market demands and services that are required.

"So in the peak periods we are mounting additional services and during trough periods, we're typically consolidating larger to smaller aircraft.

"So there's no loss of service or loss of quality but we're certainly pulling some costs out." Staffing looms large in airline costs and for Air Pacific, the challenge is to strike the right number.

"If someone resigns, we look very carefully before we replace that job but we're certainly not pushing people away from here.

"We're asking our staff to be very careful in expenditure of monies and their demand for pay and allowances, for instance.

"So again, we're not trying to take anything away from people but we are saying to them, please think carefully before very big demands come forward.

"I have to say we have a very responsible group of employees and I think they are very well aware that when times are tough, it's time to tighten everyone's belt. So again I appreciate the efforts that employees put in." For 2004/2005, Campbell hopes to have its Novotel Hotel, a joint venture with Fiji-based financial and insurance conglomerate Colonial, commissioned.

By early June, 25% of the hotel has been built on Denarau Island, adjacent to Sheraton Royal and Sheraton Fiji resorts. Marketwise, Air Pacific has identified North America as the route with the greatest growth potential.

"It's been a little bit soft ever since the Iraq War and we did put an extra Boeing 747 into there last year.

"That has not been fully absorbed by the market, so it's got quite a bit of growth to go and we see that as an opportunity.

"It's also a market that is slightly counter-cyclical in the sense that they have a very busy period of travel during February which is the deep trough period for our traditional Australian and New Zealand markets, so that's a market we're working very hard on to try and bring it into maturity.

"We do have the opportunity to put further flights into that market as demand progresses.

"We're confident that our bread and butter will always be Australia and New Zealand with more than 50% of the total market in those countries.

"We're not going to lose focus on that and we're not going to give up any of those markets without a pretty good fight."