… and the other financial steps
on flight back to profitability
Fiji Airways chief financial officer, Nick Caine. Photo: LINKEDIN
Source: Airfinance Journal
(Airfinance Journal is described as the leading financial intelligence source for the global aviation industry. The following is from an Airfinance Journal interview with Fiji Airways chief financial officer Nick Caine).
Air Pacific recently rebranded itself as Fiji Airways. The carrier has changed its business strategy, has returned to profitability and has accessed the air finance market for the first time in more than a decade.
For an airline, being found after an air conditioning company on certain search results is not effective online marketing.
Fiji Airways chief financial officer, Nick Caine, says: “Air Pacific is actually the name of a Chinese air conditioning company.
“So to break into the Hong Kong market or the Chinese market the first thing potential passengers would find on Google if they searched Air Pacific would be how to air condition their home, which isn’t ideal.”
Changing back to its original, historic name of Fiji Airways from June 27 was no mere marketing ploy for Air Pacific.
In fact, it is just the latest step in a restructuring effort at the carrier since 2010 that has seen the airline start to claw its way back to profitability.
This was after making losses for three years since 2008/09, refresh its fleet and come back to the aircraft financing market after more than a decade’s absence.
A conspiracy of external events hit the carrier’s bottom line from 2008 to 2010.
“In 2008/2009 and 2009/2010 we made losses. Before that, for almost a decade, with a small exception in 2001, we had been a profitable airline,” Mr Caine said.
“The profit decrease was down to external factors mostly. As new LCCs [low-cost carriers] like Virgin Blue and Jetstar entered the Fijian market, the tremors of the financial crisis tightened purse strings and fuel price volatility adversely affected a pricing position we had taken.”
Mr Caine and a new management team – including recently departed chief executive officer Dave Pflieger – arrived in 2010. Since then the carrier has started to turn the situation around.
Growing revenue has come from re-examining the carrier’s business strategy and taking a more confident stance in the market – both in marketing and by refreshing the carrier’s three strong long-haul fleet.
Cutting out middle men
During his interview with Airfinance Journal, Mr Caine often used the word “prudent” to describe a lot of activities undertaken to strengthen and restore areas of the business.
Certainly one of the first steps taken was the definition of prudent – seeing where savings were at all possible.
“In 2010 we put every contract on the table. Every single contract. Any that had materiality we re-addressed with the supplier as long-term partners,” he said.
Some said ‘we’d rather not’, others said ‘yes’ and others gave us a better deal and product by taking the middle men out.”
He adds the carrier has essentially stemmed the flow of any unnecessary spend. For example, Air Pacific used to go to the insurance market through middle men.
The airline now approaches the insurance firms directly, and by doing so has secured better contracts, Mr Caine said.
While rationalising costs has played its part in turning the carrier’s fortunes around, ultimately an airline’s business is to fly as many as possible, as much as possible.
Refreshing the fleet
One part of the new management’s first jobs was to look at refreshing its fleet. This was part of setting out a five-year plan to turn the carrier around.
The airline had been running an ageing long-haul fleet of one Boeing 767 and two Boeing 747s that needed replacing.
An order for Boeing 787s had been intended to replace those antiquated Boeing widebodies.
But Mr Caine says the delays to the Dreamliner programme were beyond the time frame the carrier could accept. “The Boeing 787s were not coming in time.”
Air Pacific needed new long-haul aircraft. More importantly, it needed to place an order for the right-sized aircraft in the absence of Boeing’s delayed Dreamliner
Ultimately, the decision boiled down to between the Boeing 767, Boeing 777 and Airbus A330. In the end, the A330-200 was the right sized and best economically suited aircraft for the carrier’s longest routes – Los Angeles and Hong Kong.
However, the three A330s ordered were not due to arrive until March through to November 2013.
The B767 was returned before the first A330 was delivered. This left the airline with just two B747s –set to be phased out by the end of this year – for its long-haul routes.
Remarkably, despite flying fewer aircraft while refleeting, the airline has grown its revenues by FJ$140 million for this year up until March 31 compared with 2009/10.
“In effect, over the recent years with larger aircraft going back off lease, we have created more flying with a smaller fleet due to higher utilisation,” Mr Caine said.
Reversing losses and growing revenues with a decreased fleet is also in part down to the carrier being more confident in revenue management and pricing strategies.
Air Pacific has been more proactive in its marketing by spending more and not being afraid of “provoking” the market, says Mr Caine.
However, Mr Caine is cautious about over-talking the carrier’s upswing in fortunes.
“Right now we are only two-thirds into the acquisition phase and in real terms only a fraction into understanding how that will fully play out,” he says, adding that the carrier will consider further expansion “prudently”.
Acquiring those A330s during a period of change meant coming back to the air finance market for the first time in more than a decade.
Long time away
“Going into the financing market was a rewarding experience given our somewhat unknown position having not bought an aircraft for some 10 years or so,” Mr Caine said.
“The last aircraft we physically bought were 737s, around 12 years ago.”
The airline started to work closely with adviser Skyworks Capital, which introduced the airline to banks.
Air Pacific started to attend conferences as part of “selling our story”, Mr Caine said.
The carrier issued a request for proposals at the end of 2012, getting about 10 to 12 offers.
In the end, the carrier selected Helaba and KfW Ipex to supply UK Export Finance-backed financing on all three A330s, with the Fijian National Providence Fund funding predelivery payments.
Financial support
Choosing export finance meant the carrier was also one of the first airlines to face the increased premiums under the Aircraft Sector Understanding 2011.
Support from the UK export credit agency (ECA) and the financial partners helped the airline with the cutting-edge deals.
Export credit agencies have their own internal ratings systems for airlines that decide how heavy premiums are going to be. Fiji going on to the Cape Town Register also helped the deal because it allowed the carrier to obtain a more favourable rating.
“Actually our rating is something of an industry first, I believe, as we as a company have a more favourable internal ECA credit rating than the country itself,” he added.
While UK Export Finance has backed the first two jets, the ECA cannot officially offer support until six months before delivery.
However, the third A330 – due to deliver in November – is expected to receive the ECA’s support.
Being able to secure a deal with established industry names after more than a decade away, is testament to the airline’s ability to convince long-term partners that it is back on the right track after the 2008/09 profit blip.
The new A330s – once they are delivered by November – will mean an increase in routes. Los Angeles International Airport will be served daily rather than four or five times a week. Hong Kong is also moving back up to three times a week. If the airline can grow revenues with fewer jets, the carrier’s ideal three-strong A330 fleet should see revenues grow further.
The airline also plans to tap more into the Chinese market since entering in 2009 in order to embrace the country’s growing propensity for travel, as well as seeing it as great gateway into Europe and the Indian subcontinent.
Smaller routes
The next step for the airline is to look at freeing up routes flown by its four B737s.
“For us, widebody, narrowbody and turboprop capacity expansion may have to go hand in hand due to how we feed our hub given that there are over 300 islands in Fiji alone,” Mr Caine said.
“So we need to support travel domestically and regionally as people can’t just stop at Nadi.”
However, being prudent is again a theme at the airline.
While Mr Caine says the carrier may look at freeing up B737 routes by introducing more ATR aircraft and that the airline is considering more aircraft, he says the company is “nowhere near the commitment stage”.
After a successful return to the air finance market, the carrier has options because it is a known name again. Considering the airline will own six out of seven of its larger aircraft, Mr Caine says leasing will be considered once the next phase of growth is decided.
For now, the carrier looks likely to focus on utilising its refreshed fleet.