Open skies policy: Air Mauritius needs a new business model

The national carrier Air Mauritius has renewed with profits after a steep dive which threatened its very existence. Former CEO Megh Pillay, along with former Chairman Arjoon Suddhoo, was ushered back into the cockpit to steer the airline away from turbulence. Big question: Does the airline need a new business model to soar?

Air Mauritius is out of the red with profits of around Rs 660 million for the financial year ended 31 March 2016, following losses of around Rs 944 million the previous year. This turnaround rides on the back of lower oil prices and increase in passenger numbers. On the negative side, depreciation of the Euro, pay-outs associated with a previous hedging exercise, and decrease in yield have dampened the comeback of MK.

“Our last financial results have been very eloquent. During the last financial year, there were four new entrants on the Mauritian market while existing competitors have kept on increasing capacity. This has not prevented Air Mauritius from increasing the number of passengers it has carried during the year by 10% to reach a record high of 1.5 million,” says the company’s Chairman, Arjoon Suddhoo.

The airline has extended its activities with new destinations and increased hope that its China strategy will pay off. The nascent air-corridor between Africa and Asia, through Mauritius and Singapore as connecting hubs, is another bet the company is taking to improve its fate over the long-run.

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However, challenges abound. The country has an open-skies policy which has resulted in an increasing number of airlines coming to Mauritius. Is there is an increasing number of players getting an ever shrinking slice of the pie? On the other hand, one could argue that the coming of new carriers is opening up new markets which would otherwise not be tapped by the national carrier.

The Board of Air Mauritius stated in its filing that it is witnessing an intensification of competition across its network as the result of further air access granted to new sixth freedom carriers, low cost and seasonal charter carriers. “This is resulting into an oversupply of seat/cargo capacity in an already price sensitive market entailing further yield dilution.”

Faced with this situation, some quarters within the industry call for Air Mauritius to reinvent its business model while others call for more protectionism. Arjoon Suddhoo says that competition has been intensifying since 2006 and Air Mauritius is open to fair competition as long as there is a level playing field. The arrival of new entrants represents an opportunity for new partnerships, he adds.

“The operating environment for global aviation has evolved drastically over the last decade and there is an ever-present need for airlines to constantly adapt their business models.” Agility, he says, is the most important capability an airline should develop given the constantly evolving environment.

Asia-Africa air corridor: A lifeline for Air Mauritius

“Going forward we need to yet again to reinvent ourselves and find new niches and avenues for growth. The potential is there. We have the capabilities and 4-hours away from Mauritius lies a continent [Africa] with so much untapped potentials. Africa and Asia have both registered higher growth rates than the world average. This is a significant investment for our future,” reveals Mr Suddhoo.

The Air Corridor forms part of the airline’s new business model which revolves around internal capabilities, know-how, geopolitical advantages of Mauritius, and access to untapped markets. The air corridor is the materialisation of this strategy.

“The launch of two new destinations in Africa is but the first step in improving our connectivity to the continent. During the last financial year, we have recorded a 12% growth rate on India and 13% growth rate on China. Asia will therefore continue to remain a key focus area. These two poles of development are consistent with the air corridor project. We are also exploring new opportunities to reinforce our operations in Europe. These are the pillars of our new business model.”

When quizzed about the need for more planes, he replies: “since the new Board was set up, Air Mauritius has embarked on a growth trajectory. We have done so with the full support of management and the hard work and dedication of all Air Mauritius staff. As a national airline, our line of action has also been consistent with national policies and national strategic economic targets. We have had the full support of Government, as the Prime Minister himself stated when he announced the launch of the Air Corridor project.

He further adds: “If the current levels of growth are maintained during the current financial year, it is clear that the company will need to grow its fleet. We are taking delivery of a new ATR 72 at the end of the month [June 2016], and this will enable us reinforce our inter island operations. In September 2017, we will also be taking delivery of our first Airbus A350 which will mark a significant improvement in our in-flight product.”

[[{"type":"media","view_mode":"media_large","fid":"19716","attributes":{"class":"media-image size-full wp-image-34044 alignleft","typeof":"foaf:Image","style":"","width":"350","height":"302","alt":"Kishore Beegoo"}}]]Kishore Beegoo: “The government should buy out other shareholders”

Kishore Beegoo is the managing director of freight forwarding company Cargotech and ex-Board Director of Air Mauritius. According to him, the increased air access granted to foreign airlines is down to Bilateral Agreements in place. Through these agreements, countries such as Spain, Malaysia, Thailand and Pakistan have the rights to operate over 4,000 flights per year.

The problem at the moment for Air Mauritius, he says, is to identify which party it wants to serve better. “MK should define whether it wants to bring value to its shareholders or to the country. It cannot definitely bring value to both. By operating to less profitable or unprofitable routes like China, MK is bringing value to the country by bringing in more tourists but at the detriment of its shareholders,” says the former Board Director. He proposes that Air Mauritius buys back all of its equity held by small shareholders at the issue price plus interest. This will enable the airline to put all its weight behind the country’s economic development. “Most, if not all, small islands’ airlines are subsidised by their governments. In Mauritius, the government cannot subsidise a company which has private shareholders. So, the sooner the government buys out other shareholders, the better it is for MK and the country.”

Political interference has always plagued the airline, on this issue he states: “MK would do far better if its management was allowed to have a free hand based on their capabilities and expertise and not have to twist their line of thinking based on pressures from political cronies.” Another tricky issue is manpower. Kishore Beegoo believes the high labour costs have to be tackled, as there is a big mismatch between some categories of employees who are highly paid and not productive and others who are highly productive but not well paid.

He cannot understand why so much pressure is being put on turning Mauritius into a hub between Africa and Asia. An example is someone travelling to China from Dar Es Salaam in Tanzania. “Why would a passenger want to start in Dar Es Salaam, transit in Nairobi, then re-transit in Mauritius and then re-re-transit in Singapore to Asia when he has direct connections from Dar Es Salaam itself or via Nairobi, Dubai or Johannesburg?”

According to Kishore Beegoo, the Air Corridor will be a flop. “It will not be a surprise very soon to hear that the MK management will cancel the Air Corridor flights to Singapore. This Air Corridor is a double wham for Air Mauritius,” he says.

The second European hub Air Mauritius wants to create in Amsterdam is another issue he raises. “Why would MK want to create a second hub at Amsterdam which is only one hour’s flight from Paris and three hours by road? That is, unless the Amsterdam hub is being imposed by Air France which has a direct shareholding in KLM of the Netherlands! If MK wants to develop traffic from Europe, it should do what it does best, that is, propose direct flights from the tourists reservoirs in Europe like Germany, Italy, UK,” says the former Board Director.

[[{"type":"media","view_mode":"media_large","fid":"19717","attributes":{"class":"media-image size-full wp-image-34045 alignleft","typeof":"foaf:Image","style":"","width":"350","height":"549","alt":"Sen Ramsamy"}}]]Sen Ramsamy: “Air Mauritius should have its own low-cost”

Airline business models are primarily meant at offering choices to air travellers. So says Sen Ramsamy, managing director of Tourism Business Intelligence and former director of the Mauritius Tourism Promotion Authority, and AHRIM. “The type of air services offered is largely determined by demand and the market specifics. Main factors influencing passenger preference are: location, price, safety and security, and travel experience. A business model should take these into account,” he says.

The new generation of travellers is more price sensitive while the more affluent segment is sensitive to the travel experience. For him, the most model most suitable to Air Mauritius should adapt to prevailing market conditions. Low cost carriers have been flourishing over the past years in Europe irrespective of customer profile. “If we are to service air routes within Africa, where the market conditions are not as affluent as in Europe, the business model should be tailored to suit this particular market,” he says.

Implementing a single model which is unaffordable to regional travellers will mean stifling the market, according to him. “Other successful carriers have intelligently adapted to this new market reality by creating their own low cost subsidiaries alongside their premium offers. Singapore Airlines and Emirates Airline are two examples of a successful creation of hybrids,” he says.

The open sky policy calls for a new business strategy. “In my view, our national airline should maintain its premium service model on long haul routes and create its own low cost model but in partnership with the regional players,” says Sen Ramsamy.

The Air Corridor is an interesting challenge for Air Mauritius. “The business model will have to focus on price whilst still offering a service which adds value to customer experience. The competitive edge for Air Mauritius will play along these fine lines. Demand remains the determining factor. I never believe in merely following market trends. New markets should be created and demand stimulated.” To make these new markets profitable, wide consultations are required. The Air Corridor will have teething problems but there is no quick win. It is an investment in the future.

“A business model will work if it takes into account the following elements: good product offers, reasonable pricing policy, excellent service, sound management and a visionary leadership. Air Mauritius now has the required leadership qualities to address these key success factors,” says Sen Ramsamy. Fleet expansion will have to follow the regional low-cost airline. Air Mauritius plays in the same league as big players and the rule of the game is quality and innovation.

“Whilst we should invest in fleet renewal, our USP is our people. This is what can give Air Mauritius its competitive edge to stand out as a winning model. The best recipes to improve its performance are not only fleet modernisation, new product offers (wifi, baggage allowances etc.), competitive airfare, but also and above all, high quality services, attention to details, genuine hospitality and true non-stop caring. The signs are already good and the prospects for Air Mauritius are looking bright. A new Air Mauritius is in the making. It all starts in the mind…