Airline Profile — Air Pacific

With the Government owned airline close to bankruptcy, Air Pacific’s weak results were the catalyst for a major turnaround, and the beginning of the profitable period that continues to this day. Consequently, in 1984 the Fijian Government called for tenders for a three year support agreement to reverse the carrier’s fortunes, and “stop the bleeding.” Qantas, Ansett, Air New Zealand, Continental and Canadian Pacific Airlines all bid for the contract. Qantas’ bid was successful, and Air Pacific and Qantas signed a three year Management Support Agreement in January 1985. The Fijian Government also invited Qantas to take up an equity share in the airline, which it did.

Under the agreement Qantas provided management support for the airline, rather than merely taking over all the functions of the existing management. Qantas’ John Schaap became the airline’s new Chief Executive, and the rejuvenated, Qantas led management turned around Air Pacific’s financial fortunes within a year. According to Air Pacific’s current Chief Executive and Managing Director, Andrew Drysdale, the Qantas led team did “an absolutely brilliant job.”

Also during 1985 Air Pacific was given a precise definition of its long term objectives, which clearly laid out the airline’s role, and set the scene for its future development. The set objectives were:

1. To provide the necessary air transport requirements for Fiji and its tourist industry.
2. To be profitable.
3. To provide an efficient and safe airline operation.
4. To provide a meaningful contribution to the Fiji economy.
5. To provide (A) International services, that is Australia, New Zealand, North America and Japan (B) Regional services, that is, Tonga, Samoa, Vanuatu, Solomon Islands, New Caledonia (C) Domestic services Suva/Nadi, Suva/Labasa.

Additionally, the objectives state “all routes must make a substantial contribution to the Company’s activities, and all non profitable activities must be terminated or other financial arrangements agreed upon in order that the Company ation with other international, regional and domestic carriers to achieve these objectives will be continued.”

During John Schaap’s reign, Air Pacific took delivery of the first leased Qantas 747-200 for use primarily on services to Australia, and replaced the domestically operated Embraer Bandeirantes with two significantly larger ATR 42 turboprops. Within 12 months of the Management Support Agreement being signed, the airline’s day to day operations were largely profitable (despite four cyclones, a political coup and a 20% fall in the value of the Australian dollar when it was floated in 1985), and Air Pacific was able to post a small net profit for the year ending March 31 1987. The management Support Agreement was initially extended for two years, and then until March 1995.

Since 1986 Air Pacific has been consistently profitable. Earnings grew markedly through to 1990, and plateaued in the year ending March 31 1991. That year Air Pacific made a record net profit $F17.4m. The effects of the Gulf War and global recession meant that in comparison the financial year ending March 31 1992 was comparatively poor, but Air Pacific did remain profitable, at a time when many of the world’s airlines were experiencing their worst losses ever. The 1995 financial year’s doubling of net profit also shows that the airline’s good results were definitely not just the result of good luck. And this from a low yield tourist carrier.

Andrew Drysdale attributes the airlines continued profitability almost entirely to “extremely tight cost controls, and no aspirations of grandeur.” The airline’s costs are low, it is in sound financial condition, and all the “bad years” debt has been paid off. Air Pacific employs only 24 managers, and prior to the launch of the weekly return flights to LA in July 1994, the airline’s staff numbers were the same as they were a decade ago. Despite this, Air Pacific recognises that its margins are slim, and it aims to achieve a minimum net profit of $F20m. The 1995 result shows the carrier to be well on track for this figure.

An important part of Air Pacific’s efforts to keep its costs down is its ongoing close relationship with Qantas. In the past few months a number of key changes and decisions have been made that have strengthened the two airlines’ relationship considerably. In late June, Qantas increased its shareholding in Air Pacific to 17.5%, through the purchase of the 7.5% stake previously held by Sea-Com of Japan. Most recently announced was the decision that Qantas’ General Sales Agency division would now represent the sales and marketing interests of Air Pacific alone. The new agreement sees Qantas’ GSA offices in Sydney, Melbourne and Brisbane relocated and fitted out as Air Pacific Travel Centres. More importantly though from the point of view of profit maximisation and cost reduction for both carriers is the recent reorganisation and consolidation of the two carriers trans Pacific services through Nadi. Subject to government approval, from January 1996 Air Pacific will fly a second weekly Nadi/Los Angeles service, while Qantas will transfer its twice weekly Sydney/Nadi/LA services to Sydney/LA nonstops. Qantas will then purchase and market 50% of the seats on both Air Pacific LA services.

Other changes agreed upon will see Air Pacific operate all six weekly codeshare services between Sydney and Nadi, taking over the two weekly services operated by Qantas aircraft, while Qantas will now operate one of the two Melbourne/Nadi weekly services.

Air Pacific also hopes to use Qantas’ strong connections with British Airways and other international carriers to expand its presence in the European and North American markets, which are both regarded as important growth areas. However, despite the close and growing relationship with Qantas, Air Pacific remains quite independent in the areas of where it places its maintenance and crew training work. When contracting out work to third parties in such areas, Air Pacific is always hunting for the best deal it can secure, be that with Qantas, Air New Zealand, Ansett, or somebody else. The same applies to aircraft leases. Air Pacific will lease the aircraft from the company from which it can get the best deal.

One such lease that is coming up for renewal soon is Air Pacific’s Boeing 747-200, which is currently leased from Air New Zealand. In July 1993 Air Pacific switched from leasing a Qantas 747-200 to a similar aircraft from Air New Zealand. This had a number of benefits for all three carriers. Qantas, who itself had leased the Air Pacific 747 from Potomac in the USA, could return it without having to lease a new or even buy a 747 for onward lease to the Fijian airline. Air New Zealand meanwhile had just taken delivery of its third 747-400, and had spare 747 capacity. Finally the exchange rate between the Fijian and New Zealand dollars was more favourable to Air Pacific than the exchange rate between the Australian and Fijian currencies.

However Andrew Drysdale has hinted that this arrangement could end. The 747 lease is due for renewal next year, and “there are plenty of second hand 747-200s around” that Air Pacific would be able to lease at very competitive rates. While Air Pacific’s small size makes it difficult to get the best, lowest cost aircraft lease deals that would be possible for much larger airlines, it does shop around — the 767-300 is leased from ILFC and the 737-500 from GPA. Air Pacific also spreads out its heavy maintenance work on these aircraft — the 767 is handled by Air New Zealand, the 737-500 by Qantas in Melbourne. Likewise crew training for different aircraft types is spread around.

Seemingly at odds with the low cost strategy was the construction of brand new maintenance and administrative facilities at Nadi, as part of the airline’s relocation from Suva to Nadi. The new $F18m hangar and support facilities were opened in 1993 and represent a significant investment for an airline of Air Pacific’s small size, however its establishment was seen as necessary to give the airline complete control over its operations.

When Air Pacific leased its 747-200 from Qantas, the Australian airline performed all maintenance other than line work on the aircraft in Sydney. This left Air Pacific with some problems in terms of fitting in with Qantas’ own maintenance schedule, and keeping its hard won slot times at Tokyo. Air Pacific’s Engineering and Maintenance Department’s new abilities give the airline scheduling flexibility in order to get maximum fleet utilisation. At the moment Air Pacific can handle A and B level maintenance checks, while in due course it would like to be able to handle C checks.

The new maintenance facility is planned to play an increasingly important role in Air Pacific’s future. The airline is actively seeking out third party maintenance work, particularly from other South Pacific and Asian region carriers, who will be attracted by Fiji’s relatively low labour costs. Although the maintenance hangar was commissioned in 1993 it has only been in the last few months that Air Pacific can offer its facilities for third party work, as there were industrial problems in the relocation of staff from Suva, and consequently the airline could only handle its own maintenance requirements.

In the medium term, the Nadi facility is being promoted as capable of handling low and medium technology labour intensive maintenance work such as painting and work on aircraft undercarriages. One such recently awarded contract was the repainting of Air Marshall Island’s HS.748 to feature the colours of Royal Tongan Airlines on one side (the result of a new cooperative venture between those two carriers). Air Pacific will also carry out maintenance on the HS.748, with help from Air New Zealand and Mount Cook Airline. To handle the promotion and expansion of its newfound maintenance capabilities, Air Pacific has secured the services of Barry Geedes to head engineering activities. Geedes was a senior engineering executive with Air New Zealand, and was responsible for the establishment of Air New Zealand’s Christchurch maintenance base.

Air Pacific’s relocation of all of its maintenance and administrative facilities and 600 plus staff from Suva (Fiji’s largest city) to Nadi did not come easily. There were significant costs involved with the relocation, and industrial problems with some staff unwilling to make the move. Nevertheless the move was more than justified. Suva’s Nausori airport is only capable of handling aircraft up to 737 size, and it cannot be expanded due to geographical constraints, whereas there are no such restrictions at Nadi. Nadi airport was originally constructed by the American military during WW2, and has no space restrictions on expansion. Nadi is also on the western side of the main island of Viti Levu, near where most of Fiji’s famous resorts and islands are situated. While there was some resistance from staff to the move, most have settled in well, and Nadi’s better weather and significantly lower rainfall has been an added benefit. The relocation to Nadi has also boosted the local economy by around $F1m per month.

Not surprisingly Air Pacific is an integral part of the Fijian tourism based economy. With a staff of over 600 (almost all of which are Fijian nationals) Air Pacific is one of Fiji’s largest employers. The company also has an employ Fijian policy, and a very active staff training programme. The Airline also enjoys a close relationship with its major shareholder, the Fijian Government. The Government is obviously keen that Air Pacific develop to its full potential, consequently recognising that Air Pacific is a commercial operation that needs to be profitable to be effective, and thus the airline is left to manage its own affairs.

More important to the economy than the number of staff employed though is the thousands of tourists Air Pacific flies in each month. Air Pacific and the Fijian tourism industry are closely linked, with the operations of one affecting the operations and fortunes of others. Air Pacific’s raison d’etre is as a carrier of tourists, and while yields in this market are low, Air Pacific’s recent consistent run of profitability demonstrates that you can get a return, albeit small, from this market.

Australia historically is Fiji’s largest source of tourists. This remains the case today, although tourist numbers have dropped off somewhat in the past five years. Australian visitor numbers to Fiji peaked in the wake of the 1989 domestic pilots’ dispute. Since then, with the deregulation of the Australian airline industry, which has resulted in much lower fares and very attractive domestic holiday package deals, traffic has fallen. Ernie Dutta, Air Pacific’s Director of Marketing, acknowledges that one of the airline’s “major competitors is the Australian domestic market.” Conversely though the popularity of Australian package holidays is now beginning to work in Air Pacific’s favour. As accommodation occupancy rates at popular Australian holiday destinations (mainly in Queensland) increase, prices begin to rise, making Fiji an increasingly attractive holiday destination in comparison.

Also working to Fiji’s advantage is that many Australian tourists are rediscovering the country. People who had visited Fiji in the 1980s are now returning after holidaying elsewhere. The satisfaction rate of visitors to Fiji is very high. Air Pacific has also mounted effective press and TV advertising programmes in Australia in recent times to maintain Fiji’s prominent position as a holiday destination and is spending more money in this area than ever before. The airline is presently carrying out a research programme within Australia to discern specifically what Australian holidaymakers want (such as action and excitement, or simply relaxing on a beach), and what their overall image is of Fiji.

Next to Australia in importance as a source market of tourists to Fiji is New Zealand. New Zealanders are nowadays travelling to Fiji in record numbers, although the most recent yearly visitor figure of 50,000 is acknowledged as the saturation point (the most recent figure for Australia was 70,000, the high point over 100,000). However, as Air Pacific Manager Commercial, Narendra Kumar, acknowledges, “we can’t expect that rate of growth to continue from a population of just three million.”

The large number of New Zealand visitors is attributed to a number of factors, including increased interest and awareness. Also though, new flights and increased flight frequencies with better departure times and days, both by Air Pacific and Air New Zealand, have made significant contributions. “Frequency has done it” says Ernie Dutta. New services include direct links to Wellington, making Air Pacific only the third international airline to serve the capital outside Air New Zealand and Qantas, plus 737 flights between Suva and Christchurch and Auckland.

Air New Zealand is easily Air Pacific’s biggest and most direct competitor, not only on New Zealand/Fiji routes, but also on flights to Japan and the USA. Through their respective governments the two carriers are locked into a battle over air service rights through Fiji. The roots of the conflict trace back to the 1950s when Fiji’s government signed air service agreements with a number of Pacific rim countries, including Australia, New Zealand and the US, that gave free ranging fifth freedom rights through Fiji. In those pre Air Pacific days when Fiji did not have an international airline of its own, the intention was to stimulate air traffic.

In recent times though Air New Zealand has been able to use these rights to its full advantage, with several US and Japan flights routed through Nadi. And while Andrew Drysdale acknowledges that “if my back was to the Antarctic I’d be doing the same thing,” Air Pacific’s concern is that Air New Zealand is dumping capacity to Fiji. There are currently 114,000 airline seats per year between Japan and Fiji, of which only about 45,000 get filled.

A temporary air service agreement between New Zealand and Fiji was signed in November last year, however in July the Fiji Government temporarily withheld an application from Air New Zealand to fly via Nadi to Seoul, and at least one report has suggested that the Fijian government has threatened to rip up the November agreement unless a balanced air rights agreement was settled upon.

Andrew Drysdale laments the battles with Air New Zealand, he would prefer to have a cooperative agreement similar to the one with Qantas in place. Regardless, Air New Zealand has had a major role in stimulating visitor numbers from Japan to Fiji. It operates two services a week between Nagoya and Auckland via Nadi, while Air Pacific has four weekly 747 flights to Tokyo and two weekly 767 services to Osaka. Air Pacific inaugurated the first direct Japan/Fiji links in 1988 with a once weekly 747 service to Tokyo. The Osaka services began in October 1994 with the opening of Kansai Airport.

In the last two years though the strong traffic growth from Japan has begun to level off, largely as a result of a lack of premium quality accommodation in Fiji. Air Pacific’s marketing efforts in Japan have been focussed specifically on honeymooners and young women, who demand high quality hotel accommodation. Because of this Nadi’s five star hotels are now consistently booked out.

In the near term Air Pacific is placing greater importance on marketing Fiji to Japanese families, who would be satisfied with a lower standard of accommodation. In the longer term though the airline is looking at building its own five star hotel. Andrew Drysdale stresses though that the airline does not want to become a hotel operator and is only looking at this option with some reluctance. Instead the plan is that the construction of another five star hotel with Air Pacific’s backing would act as a catalyst for other hotel operators to look at building similar new hotels. Once the Air Pacific backed hotel is up and running (prospective sites have already been examined) it would be sold.

One of Air Pacific’s newest destinations is Los Angeles, to where a weekly 747 flight began in July last year. While the route has the lowest yield of any that Air Pacific flies, “we’re by and large pretty well on track to cover costs,” says Drysdale. Air Pacific has waited to return to the potentially vast US market for some time and the withdrawal of services by Canadian Airlines and Continental provided the window of opportunity the Fijian carrier needed.

The new joint marketing and seat share arrangement with Qantas should only serve to considerably strengthen Air Pacific’s presence and marketing efforts in North America, and encourage significant passenger growth. The flights are timed to arrive in LA to allow convenient onward connections to the US east coast and Europe.

Within the South Pacific, Air Pacific regards its regional network as its domestic feed. The carrier now has a reduced presence on regional and domestic routes than it did at the start of the decade, as part of its focus on becoming an international tourist carrier serving Fiji. The airline has now shed many of the regional and domestic routes it served with its two ATR 42s, which were replaced by the lone 737-500 in 1992. The 737-200 operated since 1981 was sold in 1990 and replaced by a 767-200ER (itself replaced by the 767-300ER last year) for services to Australia and New Zealand. Currently Air Pacific flies to Apia, Nuku’alofa (the capital of Tonga), Honiara and Port Vila, while the twice weekly Nadi/Suva service is to position the 737 near Suva. Air Pacific leaves other regional and domestic routes to the region’s smaller airlines, one of the goals of a five year strategic plan implemented in 1990.

One recent example of the long hoped for cooperation between the various South Pacific airlines coming to fruition is Air Pacific’s joint lease of a new 737-300 with Royal Tongan Airlines, which began last November. The Boeing wears the livery of Air Pacific on its left side and Royal Tongan on its right, and Air Pacific promotes it as a good example of the scope of cooperation possible between regional airlines.

While Air Pacific is primarily a tourist carrier, freight makes an increasingly important contribution to the airline’s revenue. The airline’s freight operations contributed almost 20% of revenues in the financial year ended March 31. Consignments include fresh fish to Japan, fresh fruit and vegetables from Australia and New Zealand, and textiles from Fiji to Australia. This revenue is a very useful supplement to the low yields of carrying tourists.

Looking to the future Air Pacific’s next planned destination is Seoul, and after that possibly Taipei. The airline has an additional 767-300ER on firm order (which it is financing itself) for delivery in 1998 (deferred from ’96) which will allow it to operate these new services, plus additional flights to Japan and Australia. Other provisional plans include two additional services a week to LA and more frequencies to Australia.

Through a cautious strategy of steady and considered expansion, while keeping a tight rein on costs, Air Pacific has remained profitable and grown through the Gulf War downturn and international recession, a feat mirrored by few, even though it is a low yield tourist carrier. Careful management obviously pays.