Three Tales of Island Airlines
As Air Vanuatu enters voluntary liquidation, how do other small-island-focused carriers survive?
Air travel makes travel to and from islands so much easier. Hopping on a plane and jumping over the water is much easier and faster than sailing across it.
Many of the world’s great airlines serve island countries. Singapore Airlines and Gulf Air of Bahrain are perhaps the two most famous examples. British Airways and Japan Airlines would count as island airlines, although their island countries are “big” islands. Qantas would not count as Australia is a continent.
Not all island airlines are as big and famous as that lot though. Small island economies need an airline for essential air services. But making it work can be tough as the necessary scale simply does not exist.
A tale of Air Vanuatu
A few weeks ago Air Vanuatu was put into voluntary liquidation. I actually went to see them with my friends from Airbus in 2019. The government had ordered four A220 single-aisles that were never delivered. We went to figure out how the airline could make the most of them.
Unfortunately Air Vanuatu had none of the three ingredients necessary for an airline serving a small island economy.
1. Access to a reliable market of sufficient size to sustain the airline
The Vanuatu market is tiny. Only just over 300 thousand people live there and GDP per capita is around USD 3,000. Just one A220 at list price costs around 5% of GDP and say 3% or 4% with a discount. That will not include the aircraft’s assets like engines, avionics and wheels and brakes.
Jobs are scare and many citizens have little to do. One family business like a travel agent or supermarket often supports a large number of dependant relatives.
2. Operational flexibility, ideally from outsourcing of the risk of aircraft ownership
Countries like Vanuatu buy and operate their own aircraft. Outsourcing the risk of aircraft ownership is off the table.
While costly, they have no other politically acceptable option. Full service ACMI aircraft leases are not always affordable and the people will not accept a government who allow air services to be cut off, even for a short time.
Operational flexibility is tough for Vanuatu as well, for both economic and geographic reasons.
At the micro level, tourism makes an over-sized contribution to the economy. According to the. Pacific Private Sector Development Initiative, Vanuatu has 473 hotels and hostels (1.6 per thousand people) and the average visitor in 2019 spent USD 1,416 per person.
Many come from Australia, but not all arrive by air.
Cruise ship visits are important, but exactly when the cruse is arriving makes a big difference. When I was there a cruise ship arrived towards the end of it’s voyage. Passengers had already seen many islands and stayed onboard.
The next day the newspapers were grumbling that local traders and restaurants had done a poor day’s business.
As a result the government is constrained in the flying schedule it requires Air Vanuatu to maintain. Tourism is not sustainable without the flexibility that regular flights to Australia offer. But not all flights go full.
This leads to an externality as the cost of Air Vanuatu’s schedule is borne entirely by the airline but the benefits are enjoyed by resorts and other businesses.
Macroeconomics also imposes constraints on Air Vanuatu.
The local currency regularly depreciates, pushing up the airline’s costs, most of which are in either Australian or US Dollars.
Vanuatu is a country of many islands. 65 are inhabited and all desire air services.
Many voters live on these islands and desire services to the capital Port Vila. Air Vanuatu maintained a fleet of Twin Otters deployed as required to serve them. Unfortunately inflation bites Air Vanuatu.
The government is politically unable to increase domestic fares even by general annual price increases. Over time the losses mount up.
3. Committed support from the government
At a superficial level the Vanuatu government supports it’s airline.
The Prime Minister regularly popped in to see the CEO when I was there, giving the CEO a tough time of it by the looks of things. The government also supported the purchase (eventually unfulfilled) of four A220s.
Yet in reality the government meddles in the airline rather than supporting it. Price controls and a lack of investment in building the necessary skills in local people leaves the airline vulnerable to international developments like COVID.
Yet despite Air Vanuatu’s experience airlines serving small island economies can survive. Let’s take a look at two…
A tale of Nauru Airlines – the “island hopper”
The Pacific island country of Nauru has a fascinating economic history. It had large deposits of Phosphates, used for fertilisers, which were mined in the 1970s and 80s. During this time Nauru enjoyed boomtown-style prosperity. Nauru Airlines flew longhaul to a wide range of Asia-Pacific destinations.
These days the mining is over and the country relies on fishing deals, tax haven status and aid from the Aussies.
The population is much smaller than Vanuatu (10 thousand versus 300 thousand) but GDP per capita is much higher (USD 10,000 versus USD 3,000).
Nevertheless the airline seems to be doing well in it’s own terms. Financial statements to the end of Jun-22 state a profit of USD 8.5m on USD 66.9m gross revenue. That is a profit of USD 850 for each person who lives in the country.
Examining the schedule and the notes to the statements explains why…
Flights are underwritten by a government body called RPC Canstruct, who have “a block space arrangement for passenger and freight services”. Essentially, the government is the seat and cargo buyer of last resort.
An economy like Nauru cannot sustain an airline under conditions that most airline executives. Government support is mandatory otherwise the carrier will not survive.
However that does not mean the airline cannot do the best it can, with smart network design and a well thought through commercial product. I am quite impressed with what Nauru Airlines have done with the limited resources at their disposal.
The network is based on an “island hopping’ principle. The airline operates flights from Brisbane direct to Palau and Nauru and Fiji. Then there is the long flight around from Brisbane (BNE) to Palau (ROR) via Kiribati (TRW), Marshall Islands (MAJ) and Pohnpei (PNI) in the Federated States of Micronesia.
(Map generated by the excellent Great Circle Mapper)
Notice that there are not many flights per week, unlike Air Vanuatu’s frequent services to Australia.
Fares also sensibly designed, with “Pacific Saver”, “Flexi Saver” and “Fully Flexi” fare families. They are also sensibly priced. Here are some that I was quoted on their site for travel in June this southern winter:
Nauru <> Brisbane = AUD 2,006.04 (USD 1,332) economy, AUD 4,845.80 business
Nauru <> Pohnpei = AUD 1,362.10 economy, AUD 4,094.90 business
Bag allowance is quote high, with 23kg minimum and 45k maximum in economy and 45kg in business. Fares are not cheap, nor are they outrageous. The airline extracts it’s fair share of value from consumers.
In summary, Nauru Airlines achieves the necessary two of the three ingredients required for an airline serving small island economies to survive:
1. Access to a reliable market of sufficient size to sustain the airline – no
2. Operational flexibility, ideally from outsourcing of the risk of aircraft ownership – check
3. Committed support from the government – check
A tale of Rhein Neckar Air – the “mainlander”
Heading 8,828 west to Germany, Rhein Neckar Air is a very different species of island airline. They could not be any more different to Air Vanuatu. Based in Mannheim in mainland Germany, they fly TO rather than from three islands – Elba (EBA), Sylt (GWT) and Usedom (HDF).
Heading 8,828 west to Germany, Rhein Neckar Air is a very different species of island airline. could not be any more different to Air Vanuatu. They are based in Mannheim in mainland Germany and fly TO rather than from three islands – Elba (EBA), Sylt (GWT) and Usedom (HDF).
(Map generated by the excellent Great Circle Mapper)
Rhein Neckar is a privately owned airline, so it lacks government support. It does however enjoy access to the enormous Germany travel market and tremendous operational flexibility.
Rhein Neckar is a particularly special airline because it does not actually hold it’s own Air Operator Certificate (AOC). All the flights are operated by aircraft under MHS Aviation’s AOC. As a result Rhein Neckar has incredible flexibility.
They use what they need, when they need it. If any of their island markets needed to shut down, perhaps because some of the hotels were being refurbished, the aircraft could easily fly somewhere else.
As a result, Rhein Neckar also achieves the necessary two of three ingredients required for an airline serving small island economies to survive:
1. Access to a reliable market of sufficient size to sustain the airline – check, Germany is a HUGE travel market
2. Operational flexibility, ideally from outsourcing of the risk of aircraft ownership – check
3. Committed support from the government – no
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