Air Mauritius seems to have seen off the threat of liquidation after an agreement with its creditors to restructure its debt through a massive Rs12 billion government bailout. Out of this, Rs 9.5 billion is just to pay off the debt the airline had struggled with before heading into voluntary administration in April last year. What went so wrong with Air Mauritius?
- The real roots of the bailout
AIR Mauritius has headed off a liquidation, coming to a deal to restructure the air- line’s debts after a massive Rs12 billion bailout from the government. “This is a compromise agreement with the airline’s creditors. In fact, to make such an agreement, they had to get money from the government, which is not a grant, but a big shareholder’s loan,” explains economist Pierre Dinan to l’express. The government directly or indirectly controls over 50 percent of the voting rights in Air Mauritius. “What has not been disclosed yet is what are the terms of this loan, or how long the airline has to pay it back,” Dinan points out.
The report from the administrators points out on page 24 that Rs9.5 billion out of this Rs12 billion, “concerns only the amounts due to creditors as at the appointment date (i.e. April 22, 2020)”. That is to say, at the time the airline entered into voluntary administration, just as Covid-19 was getting into full swing. The report says that the remaining Rs2.5 billion is to keep the airline going. “The administrators ran the company for over 16 months, so that’s Rs1.7 billion spent; I assume that they are asking for the additional Rs2.5 billion to absorb the costs since airline went into administration,” says Megh Pillay, ex-CEO of Air Mauritius, “that does not leave much in terms of working capital; in 2019 alone, the turnover of the airline was Rs22 billion, so that means the costs were higher than that. Rs2.5 billion won’t go very far.” What is missing, Dinan argues, “is anything about the future of the airline, will it be revamped? Is it a company that is solvent or will it make a profit?” Given that the bulk of the bailout is needed to just paper over the airline’s debts even before Covid-19 put it to a near stop, it is important to understand just what went wrong with Air Mauritius.
The roots of the problem date back to the days of Sir Harry Tirvengadum, who ran the airline as a fief insulated from the interference of politicians between 1978 and 1997. “I joined the airline in 1984, at the time we had just a couple of Boeing 707 planes,” recalls Raj Ramlugun, former manager at Air Mauritius and currently the secretary of the Listed Companies Minority Shareholders’ Association, “in those days Tirvengadum was all-powerful and so long as it turned a profit, no one was too keen to look too closely at what was going on inside.”
As the airline expanded, both in terms of buying planes and adding routes, this started changing. “That’s when politicians started seeing the airline as a potential cash cow, when it started expanding, buying more planes and hiring more people,” says Ramlugun. It was only in 2001, that the omerta surrounding Air Mauritius broke with the Caisse noire scandal and allegations that Tirvengadum and others within the company had been using the airline to run a slush fund out of a bank account in Geneva to pay off people within the company, politicians and some in the media. “That was a wake-up call for us,” recalls Ramlugun. The scandal, while revealing the inner-workings of the airline, also crippled the airline’s ability to resist direct government control.
- Hedging and buying
As the politicians stepped in and started opening up the airline from the self-contained fief it was previously, the airline swiftly became a place to hire political favourites. The danger of this readily became apparent when the airline lurched into its most long-lasting disaster. Following the 2008 economic crisis, the airline entered into a hedging exercise, to lock-in the price at which it bought its fuel. While other airlines at the time were looking at short-term hedging arrangements, Air Mauritius entered into a two-year arrangement and hedged its oil purchases at $105 a barrel for between 80 to 90 percent of its fuel until 2010.
The problem was that while Air Mauritius was expecting oil prices to rise further, major oil-producing states were signalling that they expected oil prices to fall, with some coming up with budgets expecting a price fall to as low as $45 a barrel. The result was a financial disaster that wiped off nearly Rs7 billion of Air Mauritius’ books. “Air Mauritius always had a lot of cash, despite the slush funds and the murky deals; the money was coming in and the airline had built up enough re- serves to keep it going,” says Ramlugun, “but with the hedging saga all of this was wiped out nearly overnight.” Dinan terms it a “turning point” for the airline, “it just made things worse for Air Mauritius going forward”.
How much worse? “After that, we just saw the airline go through a seesaw performance each year, it would post profits but how real were they? They were just circumstantial, when fuel costs were low,” insists Ramlugun, “rather than the financial strength of the airline itself”. Prior to the hedging exercise, Air Mauritius had its equity valued at 200million euros and a cash position at 82million euros. Posthedging, its cash position was reduced to 20million euros, and its equity never crossed the 100-million-euro mark.
