Pacific Island Airlines: Flying on Empty?

IMF Blog, August 18, 2021

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Photo credit: Antonistock by Getty Images
COVID-19
Vybhavi Balasundharam, Leni Hunter
August 18, 2021
With virtually no international travel since March 2020, national airlines in the Pacific face mounting financial difficulties.
Pacific Island countries rely on airline connectivity for tourism, education, employment opportunities, access to healthcare, and delivery of goods and services.
Many Pacific Island countries have state-owned national airlines that cater to both domestic and international markets.

National carriers are typically:
- the sole provider of domestic routes and a major provider of international routes.
- accounting for over 60 percent of the seat capacity in Fiji, Vanuatu, and Papua New Guinea, and 100 percent of the routes in Nauru.
Financial losses and weak profitability were long-standing concerns for several Pacific airlines:
- Only Fiji Airways has made consistent profits over the past six years.
- Fiji Airways is the only national airline in the Pacific Island countries that is not fully government-owned (Qantas Airways has a 46 percent stake).

The majority of national airlines had at least a moderate overall risk rating prior to the pandemic.
Many have already been through one or more restructurings and remain extremely vulnerable to external shocks.
- Example: Air Vanuatu was most recently restructured in 2016, following damages from Tropical Cyclone Pam, and is now undergoing another restructuring to recover from the COVID-19 crisis.

Governments are directly exposed to local airlines by virtue of state ownership and were often providing financial support even before the pandemic.
Direct government support has been large relative to GDP in several cases, diverting resources from other development needs.
Indirect support includes implicit guarantees on loans from financial institutions such as national provident (social security) funds.
Governments have struggled to monitor and contain risks from national airlines due to:
- inadequate governance frameworks,
- lack of oversight capacity,
- lack of transparency from the airlines that undermines the ability to assess potential risks.
The pandemic has forced governments to increase support of national airlines; for some, continued losses represent significant quasi-fiscal liabilities.

Tourism is unlikely to reach pre-COVID-19 levels prior to 2023.
Given these conditions, airlines will struggle to improve financial performance in the near term.

Recovery presents an opportunity to overhaul governance and oversight of national airlines to mitigate future risks.
Priorities to mitigate risk to government balance sheets:
- Greater transparency and accountability in the running of national carriers.
- Rigorous oversight in the difficult months ahead.
- Transactions between the government and the national airline should be disclosed in the annual budget and in quarterly budget reports.
- Audited financial statements of the airlines need to be published in a more timely manner.
- Strengthen independent oversight units that monitor and mitigate risks from state-owned enterprises, including national airlines.
- Ensure sufficient capacity in oversight units, along with comprehensive governance laws and effective enforcement.

Pacific Island Airlines: Flying on Empty?, Vybhavi Balasundharam and Leni Hunter, IMFBlog, August 18, 2021.