## 1. Political Economy of National Airlines

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### Introduction and purpose
- Vulnerabilities of state-owned enterprises (SOEs) pose a substantial fiscal risk to governments; national airlines are among the SOEs with the highest stakes.
- Purpose of the chapter:
  - Analyze fiscal risks from national airlines in Pacific Island Countries (PICs) prior to and during the COVID-19 pandemic.
  - Benchmark current Public Financial Management (PFM) practices in the PICs against best practices.
  - Summarize diagnostic tools and capacity development options.
- Key diagnostic: a simple “SOE Health Check” can illustrate airline vulnerabilities; improving governance and transparency is the first step to mitigating risks.

### Role and commercial challenges of national airlines in PICs
- Connectivity and public-good role:
  - Airline connectivity is critical for tourism, education, employment, access to healthcare, and delivery of goods and services in geographically remote and dispersed PICs.
- Market share and provider concentration:
  - Over 60 percent of the seat capacity in Fiji, Vanuatu and PNG is provided by the national airline.
  - 100 percent of the routes in Nauru are provided by the national carrier.
- Commercial viability constraints:
  - Remoteness, geographical dispersion, and thin traffic and freight levels contribute to persistent financial losses for several Pacific airlines.
- Recent performance examples:
  - Fiji Airways is the only airline to have made consistent profits over the past six years.
  - Air Vanuatu restructured in 2016 following Tropical Cyclone Pam.
  - Samoa Airways has faced financial difficulties since its inception in 2017.
- Balance-sheet size relative to GDP:
  - Around twenty percent of GDP for Fiji (airline assets).
  - Over ten percent of GDP for Nauru (airline assets).
  - Kiribati and RMI also have relatively large balance sheets.
  - Samoa Airways had a negative equity position in 2019.
  - For comparison, Qantas and Air New Zealand have assets of around 1-2 percent of GDP.

### Financial impacts and COVID-19
- Pandemic shock and opportunity:
  - COVID-19 severely impacted the airline industry and presents an opportunity to overhaul fiscal risk management and strengthen governance.
- Ongoing cost pressures despite revenue collapse:
  - Fiji Airways reported monthly costs of F$38 million comprising aircraft loans and leases of F$20.2 million, employee costs, fixed payments for aircraft maintenance and other costs.
  - Reported reduced monthly payments to F$20 million through loan and payment deferrals.
- Employment and cost-cutting measures:
  - Fiji Airways laid off 51 percent of its workforce (758 people) and applied a 20 percent pay cut for remaining staff.
  - Solomon Airlines laid off 20 percent of its workforce.
- Recovery outlook:
  - Travel and tourism recovery is uncertain and could be protracted; levels of travel unlikely to reach pre-COVID-19 levels prior to 2023.
  - Airlines are likely to hold excess capacity well after the pandemic recedes, particularly where carriers had been expanding pre-crisis.
- Pre-crisis purchase agreements increasing future obligations:
  - Air Vanuatu has agreements to purchase four A220s starting in 2020; official figures and current status not yet available.
  - Cabinet-approved purchase of two Embraer E190-E2 jets in 2018, with A$44m (15.7 percent of GDP) recorded in the 2019 recurrent budget for one plane.

### Government support, fiscal exposure, and oversight gaps
- Direct fiscal exposure and pre-pandemic support:
  - Governments are directly exposed to airlines through state ownership and were providing financial support even before the pandemic, diverting resources from other development needs.
  - The government of Fiji has guaranteed loans of around 5 percent of GDP for the national airline, adding to fiscal contingent liabilities.
- Government transfers and stimulus allocations:
  - Charted government support during 2018-2021 shows Nauru Airlines received the most government support over this period; Nauru also demonstrated higher levels of transparency (Table 1).
  - In some countries, a significant part of the fiscal stimulus response to COVID-19 has been allocated to national airlines.
- Hidden or under-reported exposures:
  - Purchases recorded directly on the government balance sheet (e.g., aircraft purchases recorded in recurrent budget).
  - Implicit government guarantees over loans from development banks may be omitted.
- Governance and information gaps:
  - Weak governance, limited oversight capacity, and sparse information availability undermine governments’ ability to assess and contain fiscal risks from national airlines.
- Restructuring episodes as reform opportunities:
  - Government takeover of Air Vanuatu, board dismissal, new CEO appointment, and a commission of inquiry into prior purchase decisions.
  - Air Niugini undergoing restructuring.
  - Tonga launched state-owned Lulutai Airlines after private Real Tonga shut down.

### Political economy considerations
- Control over connectivity:
  - Governments view ownership of national airlines as critical for maintaining international connectivity, pricing, and frequency of flights important for tourism and growth.
  - Air Vanuatu is the only direct provider between New Zealand and Vanuatu, accounting for 12 percent of annual visitors.
  - Fiji Airways is the sole direct connector from the US to Fiji, representing 11 percent of annual visitors.
  - Concerns about loss of control limit enthusiasm for development of regional airlines.
- National prestige and politics:
  - National carriers can be linked to prestige and political considerations; Samoa’s airline history includes multiple restructurings and rebranding (Polynesian Airlines, Virgin Samoa, Samoa Airways).
- Provision of public goods and CSOs:
  - Many passenger routes are not economically viable; governments may subsidize connectivity through direct subsidies or Community Service Obligations (CSOs).
  - From 2020, the Government of Nauru started paying CSOs to Nauru Airlines for below-market services; in return the airline should not operate with a loss.

### PFM perspective: strengthening governance, oversight and transparency
- Scope and rationale:
  - National airlines are public nonfinancial corporations overseen as part of the SOE sector; added scrutiny is required where entity size or risk profile implies fiscal implications.
- Best-practice governance framework:
  - Strong legislative framework defining ownership and management responsibilities, managerial autonomy, accountability, and sanctions for non-compliance.
  - A published Ownership Policy setting out rationale for ownership, dividend policy, board appointment, reporting, approvals (e.g., borrowing).
- Roles and responsibilities:
  - Dual reporting lines: (i) sector ministry for policy; (ii) central agency or SOE oversight unit for financial matters.
  - Management boards should exercise duties without undue sector ministry influence; government retains financial accountability as owner.
- Legal framework elements to specify:
  - Board appointment; policy (including pricing); reporting requirements; dividend policy; approval of medium/long-term investment plans; borrowing powers; quasi-fiscal activity rules; sanctions for non-compliance.
- Observed gaps in PICs:
  - Many PICs have SOE governance acts, but Fiji and Vanuatu (two of the largest carriers) lack regulations governing national airlines.
  - Most governance laws do not require approval of capital expenditures and borrowing including lease agreements—major risk sources.

### Airline planning, budgeting, execution, and reporting (best practice)
- Airline corporate planning should include:
  - Strategic goals; operating and financial plans; investment plans; performance targets; route expansion and growth plans; expected financing for CSOs; other required budget financing.
- Government role in planning:
  - Approve Statements of Corporate Intent (SCI); issue letters of expectation (e.g., safety, conservative growth forecasts, government approval for borrowing and leases).
  - Monitor progress and intervene on significant deviations.
- Budget transparency and execution:
  - Best practice: clear publication of budgeted inflows/outflows (e.g., an annex to the budget) covering SOEs; robust budget challenge process; transparent remuneration of CSOs via the budget.
  - Airlines should provide early notification of significant anticipated deviations from plan and timing of required budget funds known at the start of the financial year.
  - Operational risks of delayed payments include consequences for debt servicing, fuel, maintenance, landing and airport fees; extreme instances include aircraft being impounded.
- Reporting and monitoring enhancements:
  - Annual IFRS-based audited statements are useful but suffer from timeliness and frequency issues.
  - Recommended: in-year (quarterly) reporting of SOE performance for early warning; monthly or weekly reporting when probability of material risk is high.
  - Immediate notification of materially significant events; close monitoring of contingent liabilities.
  - Oversight entities should enforce timely audited statements, in-year reporting, nonfinancial reporting, approval of plans and borrowing, and board meeting documentation; legal framework should permit sanctions for non-compliance.

### Risk management, diagnostic tools, and capacity development
- Recommended diagnostic tools and frameworks:
  - Conduct SOE Health Check (including a Simplified version).
  - Assess guarantees to estimate fiscal exposure.
  - Apply SOE stress tests under alternative macro scenarios.
  - Compile the Public Sector Balance Sheet (PSBS).
  - Conduct Fiscal Transparency Evaluation (FTE) or Fiscal Risk Assessment.
  - Use debt sustainability frameworks (MAC DSA and LIC-DSF) and contingent liability stress tests to assess implications for public debt and financing needs.
- Capacity development priorities:
  - Strengthen oversight arrangements and fiscal risk management in Ministries of Finance.
  - Improve budget documentation and preparation.
  - Update legal frameworks on SOEs.
- Simplified SOE Health Check summary findings:
  - Overall high risk: Samoa Airlines and Air Kiribati.
  - Generally low risk: Solomon Airlines and Nauru Airlines.
  - Liquidity: all national airlines show high risk of being unable to meet short-term obligations.
  - Caveats: results sensitive to outdated or unavailable financial statements, accounting methods, and exclusion of implicit government guarantees or assistance other than grants.

### Examples of support measures and considerations for use
- Remedial measures before government support:
  - Airline borrowing independently; selling non-core assets; postponing investments; lay-offs; reducing/delaying dividends or royalty payments; cost containment and efficiency strategy required.
- Assessing need for state support:
  - For ongoing losses and private competition: assess whether saving the national airline is warranted; systemically important airlines require substantial reform packages potentially involving development partners and private investors.
- Emergency financing:
  - Appropriate for temporarily distressed but otherwise profitable airlines (example: Fiji airlines, Solomon airlines, Air Vanuatu).
- Types of government support and implications:
  - Budgetary measures: capital grants, targeted transfers, tax cuts/reliefs/deferrals; CSOs paid via budget where appropriate.
  - Equity injections: preferred over regular subsidies for shock-related distress; enables future recovery via dividends.
  - Debt-for-equity swaps: may reduce airline debt service burden but immediately increase government debt and debt service.
  - Government guarantees: least immediate pressure on cash but should be temporary and limited; Fiji and Vanuatu provided large guarantees.
  - On-lending: government borrows and lends to airline—government assumes risks but may secure lower cost for airline.
  - Public banks and national provident funds: can provide support if financially sound; potential downstream fiscal costs if losses occur.
  - Bring in private investors: strategic investors can inject capital and expertise but may be infeasible during global crises and PICs routes may be unattractive.

### Annex highlights: country experiences and regional lessons
- Air Kiribati Ltd.:
  - Unprofitable from 2014 to 2017; government purchased a Dash 8 aircraft in 2017 (roughly 3 percent of GDP).
  - 2021 recurrent budget showed expenditure for Embraer Aircraft of A$44m in 2019.
  - 2021 development budget showed development partner grant assistance of A$60m for Embraer Aircraft.
- Fiji Airways:
  - Cancelled all passenger flights from April 2020.
  - Reduced monthly costs to F$20 million per month, up to August 2021.
  - Laid off 51 percent of workforce (758 people); applied a 20 percent pay cut for remaining staff.
  - Fiji government provided a government guarantee of F$455m (4 percent of 2019 GDP), comprising domestic borrowing (F$191.1m) and offshore borrowings (US$117.1m).
  - Ownership: Fiji government 51 percent; Qantas Airways 46.3 percent; Air New Zealand nearly 2 percent; governments of Kiribati, Tonga, Samoa and Nauru hold less than 1 percent in all.
- Nauru Airlines:
  - Allocated A$5.1m emergency government support in the FY2020-21 budget; A$2.5m to support staff redundancy in Brisbane.
  - October 2020 Supplementary Budget included a loan from Exim Bank of Taiwan US$25m (about 20 percent of GDP), to replace aging aircraft.
  - Government started paying CSOs to NAC for services below market price; in return NAC should not operate with a loss.
- Samoa Airways:
  - Not profitable in 2018 or 2019; negative equity position with negative net assets.
  - SAT$30m loan from the Unit Trust of Samoa, carrying a government guarantee.
  - Received $1m tala in government support in the budget and will receive a total $12m as compensation for land taken over by the government (to be paid in installments).
- Solomon Islands national airline:
  - Reported profits in 2017 and 2018 after earlier losses; pandemic led to a reported loss of 60 percent of income.
  - Laid off 20 percent of workforce.
  - Received SI$15 million concessional loan and SI$5 million grant as part of the COVID-19 stimulus package.
- Air Vanuatu:
  - VT2 billion loan in 2019 (2019 Supplementary Budget).
  - Government guarantee to Air Vanuatu for VT592 m in 2020.
  - VT 200m cash injection in 2020 to cover costs associated with the new planes.
  - Commission of Inquiry underway; Council of Ministers decided to terminate the remainder of the Board in March 2021.
- Regional pooling and privatization lessons:
  - Pacific pooling initiatives historically failed due to perceived inequity and country rivalry.
  - Caribbean example LIAT shows multi-government ownership can lead to sustained subsidies and restructuring under crisis.
  - African small island state cases (Air Seychelles, TACV, Air Mauritius) highlight the need for governance reforms, prudent fixed-cost decisions, and careful preparation for privatization or restructuring.

### Summary and conclusions
- Fiscal risks from national airlines merit special attention in IMF surveillance with PICs due to airline liabilities and government support, particularly post-COVID-19.
- While many PICs have governance legislation and oversight arrangements and reforms are underway, further implementation and deeper analysis are needed.
- Improved information and transparency are key to better fiscal risk management for national airlines.

*Source: wpiea2021183-print-pdf — https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021183-print-pdf.pdf*

### 1. Political Economy of  National Airlines  _____________________________________ 6

### 1. Political Economy of National Airlines

### Introduction and purpose
- Vulnerabilities of state-owned enterprises (SOEs) pose a substantial fiscal risk to governments; national airlines are among the SOEs with the highest stakes.
- The paper analyzes fiscal risks from national airlines in Pacific Island Countries (PICs) prior to and during the COVID-19 pandemic, benchmarks current Public Financial Management (PFM) practices in the PICs against best practices, and summarizes diagnostic tools and capacity development options.
- A simple “SOE Health Check” can illustrate airline vulnerabilities; improving governance and transparency is the first step to mitigating risks.

### Role and commercial challenges of national airlines in PICs
- Airline connectivity is critical for tourism, education, employment, access to healthcare, and delivery of goods and services in geographically remote and dispersed PICs.
- National carriers are often sole or major providers:
  - Over 60 percent of the seat capacity in Fiji, Vanuatu and PNG is provided by the national airline.
  - 100 percent of the routes in Nauru are provided by the national carrier.
- Commercial viability is weak due to remoteness, geographical dispersion, and thin traffic and freight levels, contributing to persistent financial losses for several Pacific airlines.
- Examples of recent airline performance:
  - Fiji Airways is the only airline to have made consistent profits over the past six years.
  - Air Vanuatu restructured in 2016 following Tropical Cyclone Pam.
  - Samoa Airways has faced financial difficulties since its inception in 2017.
- Balance sheet size relative to GDP:
  - Around twenty percent of GDP for Fiji (airline assets).
  - Over ten percent of GDP for Nauru (airline assets).
  - Kiribati and RMI also have relatively large balance sheets.
  - Samoa Airways had a negative equity position in 2019.
  - For comparison, Qantas and Air New Zealand have assets of around 1-2 percent of GDP.

### Financial impacts and COVID-19
- COVID-19 has severely impacted the airline industry and presents an opportunity to overhaul fiscal risk management and strengthen governance.
- Ongoing costs continued despite collapse in revenue; example reported costs for Fiji Airways in early 2020:
  - Monthly costs of F$38 million comprising aircraft loans and leases of F$20.2 million, employee costs, fixed payments for aircraft maintenance and other costs.
  - Reported reduced monthly payments to F$20 million through loan and payment deferrals.
- Employment and cost-cutting measures documented:
  - Fiji Airways laid off 51 percent of its workforce (758 people) and applied a 20 percent pay cut for remaining staff.
  - Solomon Airlines laid off 20 percent of its workforce.
- Recovery prospects:
  - Travel and tourism recovery is uncertain and could be protracted; levels of travel unlikely to reach pre-COVID-19 levels prior to 2023.
  - Airlines are likely to hold excess capacity well after the pandemic recedes, particularly where carriers had been expanding pre-crisis.
- Pre-crisis purchase agreements increasing future obligations:
  - Air Vanuatu has agreements to purchase four A220s starting in 2020; official figures and current status not yet available.
  - Example government purchase recorded in budget: Cabinet-approved purchase of two Embraer E190-E2 jets in 2018, with A$44m (15.7 percent of GDP) recorded in the 2019 recurrent budget for one plane.

### Government support, fiscal exposure, and oversight gaps
- Governments are directly exposed to airlines through state ownership and were providing financial support even before the pandemic, diverting resources from other development needs.
- Government guarantees and support:
  - The government of Fiji has guaranteed loans of around 5 percent of GDP for the national airline, adding to fiscal contingent liabilities.
- Government transfers and stimulus allocations:
  - Charted government support during 2018-2021 shows Nauru Airlines received the most government support over this period; Nauru also demonstrated higher levels of transparency (Table 1).
  - In some countries, a significant part of the fiscal stimulus response to COVID-19 has been allocated to national airlines.
- Some support may not be fully captured in reported charts and estimates:
  - Purchases recorded directly on the government balance sheet (e.g., aircraft purchases recorded in recurrent budget).
  - Implicit government guarantees over loans from development banks may be omitted.
- Weak governance, limited oversight capacity, and sparse information availability undermine governments’ ability to assess and contain fiscal risks from national airlines.
- Restructuring episodes present an opportunity to overhaul governance and oversight:
  - Government takeover of Air Vanuatu, board dismissal, new CEO appointment, and a commission of inquiry into prior purchase decisions.
  - Air Niugini undergoing restructuring.
  - Tonga launched state-owned Lulutai Airlines after private Real Tonga shut down.

### Political economy considerations (Box 1)
- Control over air connectivity:
  - Governments view ownership of national airlines as critical for maintaining international connectivity, pricing, and frequency of flights important for tourism and growth.
  - Examples: Air Vanuatu is the only direct provider between New Zealand and Vanuatu, accounting for 12 percent of annual visitors; Fiji Airways is the sole direct connector from the US to Fiji, representing 11 percent of annual visitors.
  - Concerns about loss of control limit enthusiasm for development of regional airlines.
- National prestige:
  - National carriers can be linked to prestige and political considerations; Samoa’s airline history includes multiple restructurings and rebranding (Polynesian Airlines, Virgin Samoa, Samoa Airways).
- Provision of public goods and cross-subsidization:
  - Many passenger routes are not economically viable; governments may subsidize connectivity through direct subsidies or Community Service Obligations (CSOs).
  - Example: From 2020, the Government of Nauru started paying CSOs to Nauru Airlines for below-market services; in return the airline should not operate with a loss.

### Policy implications and tools
- Strengthen governance and transparency as first-line measures to mitigate fiscal risks from national airlines.
- Use diagnostic tools and capacity development to evaluate risks:
  - The paper highlights an “SOE Health Check” tool to illustrate vulnerabilities of airlines.
- When providing financial support to national airlines, apply guiding principles to manage and limit fiscal risks while maintaining essential connectivity.

*Source: wpiea2021183-print-pdf — https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021183-print-pdf.pdf*

### Box 1. (continued).

### Box 1. (continued)

### Too Big to Fail and Limited Transparency
- National carriers can be large relative to GDP and are considered integral to the development of the tourism sector, which contributes to "over a third of employment in countries like Fiji and Vanuatu."
- Public financial exposures:
  - As of December 2018, loans to Air Vanuatu amounted to "4.2 percent of Vanuatu National Provident Fund’s total assets."
  - The Fiji National Provident Fund (FNPF) provided a loan of "F$53.6 million" to Fiji Airways during the COVID-19 crisis; tourism accounts for "around 16 percent of the Fund’s investment portfolio."
- Political economy pressure: strong proclivity toward government intervention during crises to protect jobs and reduce insolvency risk.
- Transparency problems:
  - Many airlines have not published financial statements in a timely manner.
  - Concerns exist that public release of loss-making airline financials may erode public support if airline operations have added to fiscal contingent liabilities.

### III. The PFM Perspective: Strengthening Governance, Oversight and Transparency
- Scope:
  - National airlines are public nonfinancial corporations overseen as part of the SOE sector; added scrutiny is required where entity size or risk profile implies fiscal implications.
- Best practice governance framework:
  - Strong legislative framework defining ownership and management responsibilities, managerial autonomy, accountability, and sanctions for non-compliance.
  - A published Ownership Policy setting out rationale for ownership, dividend policy, board appointment, reporting, approvals (e.g., borrowing).
- Roles and responsibilities:
  - Dual reporting lines: (i) sector ministry for policy; (ii) central agency or SOE oversight unit for financial matters.
  - Management boards should exercise duties without undue sector ministry influence; government retains financial accountability as owner.
- Legal framework should specify:
  - Board appointment; policy (including pricing); reporting requirements; dividend policy; approval of medium/long-term investment plans; borrowing powers; quasi-fiscal activity rules; sanctions for non-compliance.
- Observed gaps:
  - Many PICs have SOE governance acts, but Fiji and Vanuatu (two of the largest carriers) lack regulations governing national airlines.
  - Most governance laws do not require approval of capital expenditures and borrowing including lease agreements—major risk sources.

### B. Airline Planning Process (Best practice)
- Airline corporate plans should include:
  - Strategic goals; operating and financial plans; investment plans; performance targets; route expansion and growth plans; expected financing for Community Service Obligations (CSOs); other required budget financing.
- Government role:
  - Approve Statements of Corporate Intent (SCI); issue letters of expectation (e.g., safety, conservative growth forecasts, government approval for borrowing and leases).
  - Monitor progress and intervene on significant deviations.
- Plans must explicitly identify all liabilities and contingent liabilities, including lease contracts.

### C. Transparency of Airline Support in the National Budget (Best practice)
- Best practice: clear publication of budgeted inflows/outflows (e.g., an annex to the budget) covering SOEs; robust budget challenge process; transparent remuneration of CSOs via the budget.
- Current situation:
  - National airlines rely heavily on government support, often not transparently reported—funding is frequently buried in Ministry of Finance output structures.
  - Company-level disclosures are incomplete, inconsistent with accounting standards, and untimely.
- Pandemic urgency:
  - COVID-19 pushed carriers closer to insolvency; full transparency is critical for designing appropriate government support.
- Recommended disclosures by airlines:
  - Audited financial and operating results; business plans; debt levels and servicing ability; nonfinancial information (remuneration policies, related party transactions, governance structures/policies).

### Key PFM Practices Snapshot (high-level observations from Table 1)
- Examples of recorded practices and issues:
  - Fiji: Public Enterprise Act 1996 — Includes Airlines: N; Revenues: N; Transfers: Partial; CL: Y; Profitability: N; Last available for 2019.
  - Kiribati: SOE Act 2013 — Includes Airlines: Y; Coverage (elements): 6/7; Revenues: N; Transfers: N; CL: N; Profitability: N; Last available for 2017.
  - Nauru: Public Enterprises Act 2019 — Includes Airlines: Y; Coverage (elements): 7/7; Revenues: Y; Transfers: Y; CL: N; Profitability: Y; Last available for 2020.
  - Vanuatu: No legislation found; Revenues: N; Transfers: Y; CL: N; Profitability: N; Last available for 2014.
- General finding: many PICs report budget allocations to national airlines, but reporting of revenues, contingent liabilities, and profitability needs improvement.

### D. Budget Execution Considerations (Best practice)
- Airlines should provide early notification of significant anticipated deviations from plan and timing of required budget funds known at the start of the financial year.
- Flows:
  - Airlines contribute dividends and taxes; call on budget via subsidies, capital injections, borrowing.
- Operational risks of delayed payments:
  - High consequences for debt servicing, fuel, maintenance, landing and airport fees; extreme instances include aircraft being impounded.
- Recommended process:
  - Well-defined access to budget funds, obligation to inform government of timing and magnitude of requirements to avoid surprises and imminent default risks.

### E. Reporting and Monitoring (Best practice)
- Promote compliance culture; hold boards accountable; increase oversight frequency during extreme financial distress.
- Limitations of annual reporting:
  - Annual IFRS-based audited statements useful but suffer from timeliness and frequency issues; annual data is often months delayed.
- Recommended monitoring enhancements:
  - In-year (quarterly) reporting of SOE performance for early warning; monthly or weekly reporting when probability of material risk is high.
  - Immediate notification of materially significant events; close monitoring of contingent liabilities.
- Oversight entity role:
  - Enforce timely audited statements, in-year reporting, nonfinancial reporting, approval of plans and borrowing, board meeting convening and documentation; legal framework should permit sanctions for non-compliance.

### IV. Risk Management, Diagnostic Tools, and Capacity Development
- Best practice: use risk assessment tools, SOE Health Check and stress tests, and incorporate airline risks into consolidated fiscal risk register.
- IMF diagnostic tools and CD offerings:
  - Conduct SOE Health Check (including a Simplified version).
  - Assess guarantees to estimate fiscal exposure.
  - Apply SOE stress tests under alternative macro scenarios.
  - Compile the Public Sector Balance Sheet (PSBS).
  - Conduct Fiscal Transparency Evaluation (FTE) or Fiscal Risk Assessment.
  - Use debt sustainability frameworks (MAC DSA and LIC-DSF) and contingent liability stress tests to assess implications for public debt and financing needs.
  - Capacity development: strengthen oversight arrangements and fiscal risk management in MoFs; improve budget documentation and preparation; update legal frameworks on SOEs.
- Simplified SOE Health Check findings (summary):
  - Overall high risk: Samoa Airlines and Air Kiribati.
  - Generally low risk: Solomon Airlines and Nauru Airlines.
  - Liquidity: all national airlines show high risk of being unable to meet short-term obligations.
  - Caveats: results sensitive to outdated or unavailable financial statements, accounting methods, and exclusion of implicit government guarantees or assistance other than grants.

### A. Examples of Support Measures and Considerations for Use
- Remedial measures before government support: airline borrowing independently, selling non-core assets, postponing investments, lay-offs, reducing/delaying dividends or royalty payments; cost containment and efficiency strategy required.
- For ongoing losses and private competition: assess whether saving the national airline is warranted; systemically important airlines require substantial reform packages potentially involving development partners and private investors.
- Emergency financing:
  - Appropriate for temporarily distressed but otherwise profitable airlines (example: Fiji airlines, Solomon airlines, Air Vanuatu).
- Types of government support (implications noted):
  - Budgetary measures: capital grants, targeted transfers, tax cuts/reliefs/deferrals; CSOs paid via budget where appropriate.
  - Equity injections: preferred over regular subsidies for shock-related distress; enables future recovery via dividends.
  - Debt-for-equity swaps: may reduce airline debt service burden but immediately increase government debt and debt service.
  - Government guarantees: least immediate pressure on cash but should be temporary and limited; Fiji and Vanuatu provided large guarantees.
  - On-lending: government borrows and lends to airline—government assumes risks but may secure lower cost for airline.
  - Public banks and national provident funds: can provide support if financially sound; potential downstream fiscal costs if losses occur.
  - Bring in private investors: strategic investors can inject capital and expertise but may be infeasible during global crises and PICs routes may be unattractive.

### V. Summary and Conclusions
- Fiscal risks from national airlines merit special attention in IMF surveillance with PICs due to airline liabilities and government support, particularly post-COVID-19.
- While many PICs have governance legislation and oversight arrangements and reforms are underway, further implementation and deeper analysis are needed.
- Improved information and transparency are key to better fiscal risk management for national airlines.

*Source: wpiea2021183-print-pdf - Box 1. (continued).*

### References

### References

### Cited works and scope
- Academic articles, IMF Working Papers, IMF Policy Papers, IMF Country Reports, Asian Development Bank program reports, World Bank infrastructure note, regional facility studies, and parliamentary records are cited.
- Topics covered in the cited literature include: government support to airlines after COVID-19; state-owned enterprise (SOE) governance and fiscal risks; Pacific and African small island state aviation experiences; and infrastructure roles of public and private sectors.

### Representative citations (by theme)
- Government support and COVID-19:
  - “Government Support to Airlines in the Aftermath of the COVID-19 Pandemic,” Journal of Air Transport Management, Vol. 89.
  - IMF Special Series on COVID-19, “Government Support to State-Owned Enterprises: Options for Sub-Saharan Africa,” June 2020.
- SOE governance and fiscal risks:
  - IMF Working Paper No. 19/253; IMF Working Paper 20/213.
  - IMF Policy Paper, “Analyzing and Managing Fiscal Risks. Best Practices,” 2016.
- Regional and country case studies:
  - Asian Development Bank, Program Report and Recommendation of the President to the Board of Directors, November (Papua New Guinea).
  - IMF Country Reports: Kiribati Country Report No. 19/26; Papua New Guinea Country Report No. 20/95; Seychelles Country Report No. 2020/170.
- Regional infrastructure and aviation strategy:
  - Pacific Regional Infrastructure Facility, “Post COVID-19 Pacific Short-term Aviation Strategy Scoping Study,” Consultants’ Final Report, October 2020.
  - World Bank, “Air Transport Infrastructure: The roles of Public and Private Sectors,” 2005.

---

### Annex I. Pacific Island Airlines – Country Experiences

### Air Kiribati Ltd.
- Unprofitable from 2014 to 2017 according to financial statements.
- 2018 Article IV Staff Report noted the airline was not profitable and had received government subsidies.
- Government purchased a Dash 8 aircraft in 2017 (costing roughly 3 percent of GDP).
- Cabinet approved purchase of two Embraer E190-E2 jets for delivery in 2019 and 2020; operating losses may grow due to competition (Fiji Airways) and low utilization risk for E190-E2.
- 2021 recurrent budget showed expenditure for Embraer Aircraft of A$44m in 2019 (page 87).
- 2021 development budget showed development partner grant assistance of A$60m for Embraer Aircraft (page 29).

### Fiji Airways
- Cancelled all passenger flights from April 2020.
- Reduced monthly costs to F$20 million per month, up to August 2021.
- Large share of fixed costs are lease payments, including two A350s delivered in November 2019.
- Laid off 51 percent of workforce (758 people); applied a 20 percent pay cut for remaining staff.
- Financing measures included new loans, deferred loan and lease payments, and release of cash security held by lenders to secure standby letter of credit facilities.
- Fiji government provided a government guarantee of F$455m (4 percent of 2019 GDP), comprising domestic borrowing (F$191.1m) and offshore borrowings (US$117.1m).
- Ownership: Fiji government 51 percent; Qantas Airways 46.3 percent; Air New Zealand nearly 2 percent; governments of Kiribati, Tonga, Samoa and Nauru hold less than 1 percent in all.

### Nauru Airlines
- Allocated A$5.1m emergency government support in the FY2020-21 budget.
  - Of that, A$2.5m announced to support staff with a redundancy package for staff based in Brisbane.
- October 2020 Supplementary Budget included a loan from Exim Bank of Taiwan US$25m (about 20 percent of GDP), to replace aging aircraft.
- Government started paying Community Service Obligations (CSOs) to NAC for services below market price; in return NAC should not operate with a loss.

### Samoa Airways
- Established in 2017; most recent financial statement is for 2019 (Polynesian Limited trading as Samoa Airways).
- Not profitable in 2019 or 2018; negative equity position with negative net assets.
- SAT$30m loan from the Unit Trust of Samoa, carrying a government guarantee.
- Ended wet lease; a new and less expensive dry lease replacement plane arrived in August.
- Received $1m tala in government support in the budget and will receive a total $12m as compensation for land taken over by the government (to be paid in installments).

### Solomon Islands (national airline)
- Fleet upgraded prior to pandemic; received a new A320 in March 2020.
- Reported profits in 2017 and 2018 after losses in 2014-16.
- Pandemic led to a reported loss of 60 percent of income.
- Laid off 20 percent of workforce; competing for charter flight business.
- Received SI$15 million concessional loan and SI$5 million grant as part of the COVID-19 stimulus package; further concessional lending announced.

### Air Vanuatu
- Government support includes:
  - VT2 billion loan in 2019 (2019 Supplementary Budget).
  - Government guarantee to Air Vanuatu for VT592 m in 2020.
  - VT 200m cash injection in 2020 to cover costs associated with the new planes.
- A Commission of Inquiry is underway; Council of Ministers decided to terminate the remainder of the Board in March 2021.

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### Annex II. Scope for a regional airline: History in the PICs and example from the Caribbean

### Pacific pooling history and failures
- Regional pooling initiatives in the Pacific have failed due to perceived inequity and country rivalry.
- Example: Air Pacific in the 1970s–1980s served seven Pacific Island government shareholders but failed; Fiji was left as majority shareholder and later restructured successfully as Fiji Airways in 2012.

### Caribbean example: LIAT
- Leeward Islands Air Transport (LIAT) was owned by seven Caribbean governments.
  - Major shareholders: Barbados, Antigua & Barbuda and St. Vincent and the Grenadines along with Dominica (94.7%).
  - Other governments, private shareholders and employees held 5.3% from 1974.
- Sustained competition led to limited profitability and heavy subsidies by shareholder governments.
- As a result of the COVID-19 crisis, LIAT is currently under administration for restructuring.
- Note: Countries with national airlines like Trinidad and Tobago (sole shareholder of Caribbean Airlines) chose not to participate.

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### Annex III. Lessons from Airlines in the African Small Island States

### Common characteristics
- African small island states (e.g., Mauritius, Seychelles, Cabo Verde) share smallness, geographic dispersion, isolation, and tourism dependence with PICs.
- National airlines in these states often struggle financially and require government recapitalization.

### Strengthening governance and oversight (Air Seychelles case)
- Etihad acquired 40 percent of Air Seychelles in 2011–12; airline turned profitable for a few years but returned to significant loss in 2017-18 due to increased competition.
- Restructuring included workforce reduction and termination of loss-making international routes.
- Government support included debt write-off from Etihad, annual guarantees and grants, and additional transfers amounting to 0.5 percent of GDP in 2020 (IMF 2020a).
- Public Enterprise Monitoring Commission (PEMC) undertaking governance and operational audit and increasing financial oversight; audit delayed due to COVID-19.
- Over the medium-term, government working on strengthening governance of non-financial SOEs via legislation, preparing a dividend policy, and improving financial oversight.
- Lesson I: Maintaining fiscal space and improving oversight are essential to managing recurring fiscal risks from national airlines.

### Privatization example (Transportes Aéreos de Cabo Verde - TACV)
- Government partially privatized the national airline in March 2019: sold 51 percent of shares to a subsidiary of Icelandair; created Cabo Verde Airline.
- 10 percent of remaining shares sold to workers and emigrants; 39 percent remained in state ownership.
- One-year management contract with Icelandair for international routes in October 2017; domestic routes transferred to private company Binter Cabo Verde with government retaining 30 percent.
- Government transfers to TACV increased in 2017 to prepare for restructuring and privatization.
- Lesson II: Privatizing a national airline requires substantial preparation and resources; government interventions may still be required when the state remains a stakeholder.

### Restructuring amidst COVID-19 (Air Mauritius)
- Air Mauritius was struggling pre-COVID; placed in voluntary administration on 22 April 2020.
- Monthly fixed costs of over US$ 20m, which include salaries of around 3,000 employees and leasing costs of Airbus A350-900 and A330-900neo.
- Saved US$ 50m in fixed costs between April and October 2020.
- Two brand new A350s leased to South African Airways in 2019 were returned in August 2020.
- Governance concerns: board believed to be too closely tied to politics despite frequent turnover in top management.
- Lesson III: Decisions on fixed costs (purchase/lease of new aircraft) require increased scrutiny; boards should include qualified apolitical members and adopt best practices for board term limits to ensure discipline and mitigate conflicts of interest.

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### Annex IV. PIC coverage in SOE Governance Act

- Note: “Y” indicates existence of relevant provision in the respective SOE Governance Act while “N” indicates no such provision in the Act.
- Footnote: Fiji Airways is not covered by the SOE Governance Act and Vanuatu does not have a SOE Act.

*Source: wpiea2021183-print-pdf - References*

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_Source: https://www.imf.org/-/media/files/publications/wp/2021/english/wpiea2021183-print-pdf.pdf_