Continued Turbulence Ahead

If one thing unites the diverse aviation sector across the island nations of the Pacific, it is the pace of change. Recent months have seen the introduction of low cost carriers, the impact of sky-rocketing fuel prices, a number of new start-ups and shutdowns and regional aviation governance initiatives.

New operator Palau Micronesia Air has begun service, with Chief Executive Officer Alan Seid saying his vision is for an airline that "would focus on convenient times and reasonable air fares between the various Micronesian main islands and also identify foreign gateways that were underserved or not served at all from and to Palau."

In tiny Wallis and Futuna, there are reports of a planned airline, "Air Wallis." Oceania Flash reports the joint venture hopes to launch its inaugural flight in January 2005 between Wallis and New Caledonia, and then to French Polynesia later in the year.

Low-cost operators Pacific Blue (in Australia) and Freedom Air (in New Zealand) are now servicing a number of South Pacific countries, and established national airlines have been forced to respond with their own fare cuts. Air Caledonie Internationale has responded to the imminent commencement of Virgin Blue flights to Noumea by reducing fares to destinations in Australia, New Zealand and around the Pacific. As with most established airlines, Aircalin denies its new fares are solely the result of new competition.

Pacific Blue will have begun flights to Port Vila by the time Pacific Magazine goes to press. Chief Executive Brett Godfrey says, "We believe there will be a fantastic economic impact for Vanuatu that will go beyond Port Vila and ripple down throughout the nation's entire economy."

Of low-cost competition, the Chief Executive of the South Pacific Tourism Organization Lisiate 'Akolo says, "I believe it is a good thing, but some countries will may lose out to others. Air Pacific (and others) won't lie down and accept competition being imposed upon them. They'll come up with some creative response."

An Air Pacific Boeing 747 awaits passengers in Nadi, one of a number of international destinations served by the Fiji carrier. Photo: Giff Johnson

'Akolo says the South Pacific is a difficult destination because of high costs and robust competition, and the market is small, which means only airlines truly committed to the region will last.

Air Pacific Managing Director and Chief Executive Officer John Campbell, says while the Fiji-based carrier has made a series of adjustments, every airline is under pressure to maintain costs, and it is not all motivated by the entry of low cost carriers.

"The most dramatic impact has been on fares," Campbell says, although he states Air Pacific was already offering in some case lower air fares to tour operators. He says the difference now is the method of display and transparency in those fares, and their wider availability in the community.

Campbell says after the threats posed by 9/11, SARS, and the Bali bombing, the demand on Air Pacific from visitors from Australia and New Zealand greatly increased. He says it was "quite a scramble to add additional flights and seats to meet that demand," but it has meant, "we were achieving very efficient use of the aircraft, and that's continued until today."

An on-going discussion is regional cooperation and sector reform. The recent Pacific Islands Forum meeting in Apia heard the results of an Australian-funded Pacific Regional Transport Study. 'Akolo says of that study and process, "It is hard to figure out what is really going on, they have kept it close to their chest."

That study discourages government financing of national airlines in the region.

But 'Akolo says, "It is not just about the profit and loss statements." He says governments look to the multiplier effects on the economy such as the economic benefits to farmers, fishermen and handicraft makers.

Air Pacific's Campbell says the airline was involved in one consultation, and an initial interview with the study team, but had the impression that a "conclusion had already been reached." Campbell says it didn't strike Air Pacific as a "particularly original piece of work," but its recommendations were a positive endorsement of how the airline already runs its business in terms of good governance, proper separation of the board and management, and proper and accurate presentation of accounts.

As for issues of greater regional cooperation, Campbell says Air Pacific closely cooperates with other airlines on every route it flies, and that they are working with two governments in the region at the moment to share additional flights.

Campbell declined to say whether Polynesian Airlines was one of those airlines. As reported previously in Pacific Magazine, Polynesian Airlines has been looking for joint venture partners for some time, speaking to representatives from Qantas, Air New Zealand and Virgin in recent months. (That decision could be announced as early as this month.)

Samoa Finance Minister Misa Telefoni has told local media that even if Polynesian succeeds in landing a joint venture with a major airline, other competitors would be allowed to provide service to Samoa. "Samoa's main client base is our own people, who always must travel whether it's for funerals or weddings or whatever," Misa told SBC television. "We don't want them to be exploited so we need to ensure that there are competitive airfares."

One island nation with much bigger troubles is Tonga. 'Akolo says the operation of low cost carriers will provide further challenges for the island kingdom, which is already reeling from the collapse of Royal Tongan Air in April this year, causing losses of up to US$20 million and placing a great deal of pressure on the national budget.

Two airlines fairly quickly filled the void; however the government then controversially introduced a one-airline policy. Peau Vava'u, an airline partly owned by Crown Prince Tupouto'a, was issued with the only license to operate. The second company, Fly Niu, had to close down in September under a ruling of the Supreme Court. The controversy is rumored to have contributed to the decision by Prime Minister Crown Prince Ulukalala Lavaka Ata to fire three cabinet ministers.

In an official statement after the cabinet reshuffle, the prime minister said, "Government is currently holding talks with the World Bank to fund establishing a Ministry of Transportation…and to look into the commercialization of Fua'amotu Airport. Our current policies have not shown any significant changes. Some of the policies have not worked."

South Pacific Tourism Organization Chief 'Akolo believes the government ruling that only one airline can operate "will have some negative impact on travel from Tonga, especially to Vava'u." 'Akolo believes recovery of the Tongan tourism sector will depend on the international carriers serving Tonga-Air New Zealand and Polynesian Air-but that the Tongan industry will "have to work extra hard."

In Nauru, things are marginally better, despite the implosion of the Nauruan economy. Early September saw the announcement that Air Nauru and Solomon Airlines have signed a new General Sales Agency Agreement. Air Nauru's Commercial Manager John Goulding, says the agreement "is a further example of how the small airlines of the Pacific are working together in a cooperative spirit to develop their businesses."

Just days later however, came the news that former Nauruan President Kinza Clodumar, had been sacked as chairman of the airline. Clodumar is accused of backing a company that is claiming Nauru owes it twenty three million Australian dollars. Air Nauru declined to comment on the sacking of Clodumar to Pacific Magazine early September.

Passengers board Air Nauru’s Boeing 737 at Tarawa, Kiribati International Airport. Photo: Giff Johnson

However, at the Apia Pacific Islands Forum, Air Nauru was at pains to stress to Pacific Magazine that the airline was a separate entity from the government, and that while they suffer some wariness from the market as a result of Nauru's general troubles, Air Nauru is focussed on stabilizing its financial situation. Air Nauru is looking to other partners around the Pacific.

So where are the Pacific Island success stories? Air Niugini is one. In 2003, its operating revenue rose by 18.7 percent to K421.7 million (US $134 million), and net profit after tax rose to K51.2 million (US$ 16 million). Management attributes the gains to "rationalizing its services," including a new code share agreement with Qantas on Australian services, and increasing domestic fares to recover rising fuel prices and offset some of the costs suffered because of the depressed value of the kina.

Air Tahiti Nui reported its first annual profit of US$3.8 million for 2003. It had suffered a loss of $700,000 in 2002, and attributes the improvement to fleet expansion and a growth in capacity of 69 percent.

And Air Pacific made a milestone profit of F$24.5 million (US$12.7 million) after tax in the year ending 31 March 2004. Revenue increased to F$421.7 million (US$236.3 million-an increase of 3.5 percent) while costs increased by 2.5 percent.

Air Pacific Chairman Gerald Barrack says the financial performance was greatly assisted by gains in the Australian and Kiwi dollars, and a weaker U.S. dollar. The airline pays most of its aircraft lease and purchase costs, fuel, insurance and air navigation charges in U.S. dollars.

Air Pacific CEO Campbell says the main limitation to the tourist industry, and Air Pacific's growth, is room capacity in Fiji. "Fiji is running very tight for accommodation, right now and up until October 2005," he says. Air Pacific has invested millions in an F$74 million (US$41.5 million) Sofitel hotel project on Denarau Island - an investment that will go some way to alleviating the shortage of hotel rooms.

A difficulty affecting all airlines, regardless of whether they are owned and operated in the Pacific or elsewhere, is the cost of fuel. Director General and CEO of the International Air Transport Association, Giovanni Bisignani, says "the extraordinarily high levels of oil prices points to yet another year of significant airline losses…Positive traffic results have been overtaken by fuel costs. They are our biggest nightmare."

Air Niugini for example, added a fuel surcharge to its international flights in June in response to spiraling fuel charges, which it said, "have added over K1.6 million (US$512 thousand) monthly to the airline's fuel bill."

John Campbell of Air Pacific says it is an issue that "has emerged full blown…it's having quite a dramatic effect on our bottom line." Air Pacific is doing all it can, down to counting the number of blankets on board, to maximize its fuel efficiency.

It's the airlines paying this sort of attention to not only the bottom line, but every aspect of their business, which will increase their chances of survival, and indeed thrive, in these tumultuous times in the sector.