February 18, 2013


How much is the FNPF loan?

Samisoni Pareti & Dionisia Tabureguci 

Fiji’s national airline’s 60th anniversary celebrations will now be remembered as the time it dumped American jet aircraft manufacturer Boeing, in favour of its European rival, Airbus. 

Actually, when Dave Pflieger, Air Pacific’s Managing Director/CEO, and Airbus Senior Vice President Pacific Sales, Isabelle Floret signed on the dotted lines to seal the F$1.2 billion (US$600 million) deal in Suva on October 24—and watched by Attorney-General Aiyaz Sayed-Khaiyum—they literally signed into oblivion the airline’s 31-year relationship with Boeing.
And it took an American CEO to do that, helped of course, by a group of aircraft experts from Hong Kong.  

“We took a good six to eight months of our time to look at our entire fleet, our entire network, not just passenger assumptions but revenue assumptions, growth assumptions and where we can fly the airplanes to,” explained Pflieger to journalists at the October 24 announcement of the Airbus purchase deal.
“We had all the work validated by an aviation expert to make sure we’re making the correct assumptions, growth, etc, and we came down to the conclusion that Airbus is absolutely the best plane for Air Pacific. 

“It’s a phenomenal airplane technology-wise, compared to what competition was putting up for us, and at the end of the day, we are very confident we’ve made the right decision, not only for Air Pacific but for Fiji as a nation.”
The aircraft of choice is an Airbus A330-200, and the airline has ordered three—the first to be delivered in March 2013, while the remaining two to arrive before the end of that year.

Foggy loan 
It may be a well-choreographed move as the lease for Air Pacific’s two ageing and what Pflieger likes to call “gas-guzzling” Jumbos will be up by 2013. But the deal has come under heavy scrutiny with the involvement of the Fiji National Provident Fund (FNPF) in providing part of the financing. 

Conflicting reports are emerging about just how much and why the fund—which recently launched a structural reform programme to tackle what it called unsustainable annual pension returns—has lent to Air Pacific. 

Critics—who are also FNPF members—have targeted the vagueness of the information surrounding this loan, and there is alarm that such a company as a government-owned airline, with three consecutive loss making financial years, should be “bailed out” by FNPF. 

Political pressure, they believe, had a hand in the loan approval and questions were raised on the returns and security of the loan, and whether FNPF—which ought to be acting in the interests of its members but in this case has been accused of not doing that—even has the expertise to assess this investment.

Its foray into the tourism sector had burnt it badly and it is now rehabilitating some of its major investments there, such as the Momi Bay project, Natadola and Penina Ltd, a joint venture between FNPF and Tappoo Holdings.  

Millions of members’ funds had to be foregone as a result and now that Air Pacific, yet another tourism-related venture, will be chalked into FNPF’s investment portfolio, it has raised eyebrows from fund members who regularly observe its activities. 

“I do not claim to know the terms and conditions under which the loan has been made but as you’ve stated, FNPF has made a string of investment decisions in real assets as opposed to financial assets that have proved to be spectacular failures, suggesting that it does not have the expertise to evaluate such investment opportunities,” said Professor Michael White, a University of the South Pacific academic, in an interview with FIJI BUSINESS.

“The loan to Air Pacific is a little different in that Air Pacific has other assets that it can offer as security against the loan. Has FNPF established a lien over Air Pacific assets or secured a government guarantee that the loan will be repaid? Something it should have done in this case but could not do in the case of its investments you identified (Momi Bay, Natadola, Penina). If it failed to do so, it has clearly acted imprudently. 

“As (FNPF) is restricted in terms of the overseas investments it can make, it will face limited opportunities to invest in Fiji. The alternative to lending to Air Pacific may be to have funds sit idle or to be invested in securities with very low yields,” White added.

Another concern emerging from this deal is the readiness of FNPF’s lending of members’ funds to an entity that would have to remit that fund offshore as opposed to FNPF investing the same funds offshore, an exercise that it has had trouble with in the past.  

FNPF has had numerous discussions with the Reserve Bank of Fiji (RBF) since 2005 when it was instructed by RBF to bring back around F$300 million it held in offshore investments because of problems in Fiji’s foreign reserves.

The long negotiation to allow it to diversify some of its F$3 billion worth of members’ funds overseas only bore fruit in January this year when it was finally given regulatory approval to invest up to F$100 million overseas.

“Had FNPF been given more opportunities to invest offshore, it could certainly have earned better returns while accepting a lower level of risk than by lending to Air Pacific,” said White.

A less than F$100m loan?
The terms of Air Pacific’s FNPF loan have not been forthcoming from either Air Pacific, the government or the FNPF, although bloggers have circulated figures that conflict with those in Fiji’s mainstream media and have labelled the FNPF loan as being Air Pacific’s ‘collateral’ in securing the offshore component of its total funding need.  

“The fact that some financial support is forthcoming domestically will provide a signal that there is some confidence in the local economy for this activity,” said White. 

“However, I believe that all of Air Pacific’s previous purchases/leases of aircraft have been secured with overseas finance, suggesting that an element of domestic financing may not be crucial. Note that overseas lenders will certainly look to take a lien over the aircraft bought and call for the kinds of securities that I have identified that FNPF should look for.  

“They may have well sought a lien over the overseas cash flows that Air Pacific obtains from its operations. This raises the question—if Air Pacific had to offer such securities to overseas lenders, what security did it have available to offer FNPF?”

The information divulged by Pflieger at Air Pacific’s announcement of its new Airbus is that the catalogue price for the planes is roughly US$200 million each, putting the total purchase price at a minimum of US$600 million

“With respect to FNPF’s involvement, they’ve helped us with some of the initial down-payment on the airplanes but majority of the financing—over 80 to 85 percent—will come from offshore and we’re still in the process of putting those funds together as we speak,” Pflieger said.  

But whether the 15 percent component of the Airbus financing—around US$90 million or F$160 million to be sourced domestically—is all coming from FNPF is unclear.

Both the FNPF and Air Pacific, when questioned by FIJI BUSINESS said they are bound by confidentiality clauses and could not divulge the details of the loan. 

This magazine has been reliably told, however, that FNPF’s loan to Air Pacific, a result of a due diligence ‘conducted over a five-month period’, is a government-guaranteed loan of less than F$100 million at an interest of a little ‘above 10 percent’.

FIJI BUSINESS also understands that the fund had also managed to negotiate rights over ‘other Air Pacific assets’.

Why Airbus, not Boeing
Time will tell whether or not this multi-million dollar loan will benefit FNPF members but for Fiji’s national airline and indeed its tourism business, the Airbus purchase is as strategic as it is timely.

Air Pacific’s other wide-bodied jet, the Boeing 767-300 ER, returns to its lessor in January 2012 and the immediate impact of the switch from the four-engine Boeing 747 to a two-engine A330 is the savings on fuel.

This is actually not the first time that Fiji’s carrier has flirted with the France-based aircraft manufacturer.

Air Pacific in 2002/2003 was eyeing Airbus A330-300 as its wide-bodied jet of choice. Although the aircraft reduced cargo capacities to Los Angeles, the 300 series of the A330 offers greater seating capabilities for the lucrative Nadi-Australia routes.

A deal was already signed between Air Pacific and Airbus before Fiji’s airline withdrew its interest when Boeing unveiled its Dreamliner planes.

The American manufacturer’s relationship with Fiji’s international carrier goes right back to 1980 when the airline damp-leased an Air New Zealand’s Boeing 737-200.

Air Pacific followed this up with a pilot localisation programme, strengthened by an intensive training programme at Boeing’s Seattle headquarters of local pilots like George Marlow, Warren Seymour, Jerry Savage and Save Nasu.

Since then, the Air Pacific-Boeing relationship grew from strength to strength as the Fiji-based airline went on to lease its first Jumbo Jet in 1985, a Boeing 767-300 ER in July 1990, and placed orders for the purchase of three Boeing 737 in August of 1996.
This manufacturer-client bond was cemented further when Air Pacific in 2006 announced the biggest deal in its history with a F$2.4 billion order for eight Boeing 787 Dreamliner airplanes.
Initially, the deal was for the first Dreamliner to be delivered in 2011 and Air Pacific used its cash reserves to pay for a down-payment of US$50 million.
Pflieger—citing delivery delays—scuttled the deal after he became CEO in May 2010.
It’s not known whether Air Pacific got its US$50 million refund and whether Boeing also offered compensation for the delays. For Airbus however, it is a win that is becoming common these days.

Tough competition
“It’s been a tough competition, it’s been a long competition, but I think Air Pacific made the right choice and selected the right aircraft, the A330,” said Isabelle Floret, Airbus Senior Vice President, Pacific Sales.

“It’s a great aircraft, it’s one of our best sellers, we’ve sold more than 1100 or so and Air Pacific will be joining some of the 90 operators of the aircraft and it’s really great.

“The aircraft will deliver new standards in terms of cabin for passengers and save 45 percent on fuel burn on its flights to Los Angeles.

“The less fuel you burn, the less carbon you emit, and you become the green airline and this is the direction Air Pacific is heading.”

For Attorney-General Sayed-Khaiyum, the Air Pacific-Airbus deal proves that Fiji can “think outside the box, that we are ready and willing to traverse the grounds that have not been traversed previously.

“We have never bought an Airbus, let alone lease an Airbus. So this is introduction of new technology, introduction of new aircraft and indeed an introduction of a new partnership.

"I’d like to also acknowledge the assistance that have been provided by the British, French and the European Union missions in Fiji.”

Sayed-Khaiyum, who also holds the tourism and civil aviation portfolios, said the three brand new wide-bodied aircraft will help position Fiji’s tourism industry for the future.

“We are saying to the world that we are ready and willing to compete and willing to offer services and infrastructure that other countries can offer you also. This is very much part and parcel of the modernisation, liberalisation, and reforms the Bainimarama Government is bringing about,” he said.

Here’s what CEO Dave Pflieger  told the media about the Airbus purchase

What is cost of the aircraft? 
“The catalogue price for each of these airplanes is approximately US$200 million each and with respect to FNPF involvement, they’ve helped us with some of the initial down-payment on the airplanes. But majority of the financing, over 80/85 percent, will come from offshore and we’re still in the process of putting those funds together as we speak. 

"Because it’s a commercially sensitive deal, I am unable to give details. But again, the catalogue price of the airplane is about US$200 million each. We are already in discussions with the European credit 
agencies and other banks in Europe to provide the 80/85% financing.”

How much is the loan from FNPF? 
In approximate terms, it will be under F$200 million.”

To be paid over how long? 
“I can’t get involved with specific terms but I can tell you the interest rate is pretty healthy from our perspective.”
So you are moving away from leasing to purchasing aircraft outright. Will this mean savings for Air Pacific?

Absolutely. If you analogise this to your daily lives; buying a car over leasing car, it is always cheaper in the long run to buy rather than lease, and the great thing here is not only can we buy, we can also design our own airplanes. So we will be able to customise these and tailor them to be Fiji’s national carrier and not necessarily take in someone else’s used airplane and leasing them. It’s a fantastic opportunity.

How’s Air Pacific doing financially?
“The short answer is Air Pacific has had a couple of tough years but we’ve been able to put together—with the help of our entire team, our partners, business vendors even aircraft manufacturers—a plan to restore Air Pacific to profitability. It was that plan that allowed us to instill confidence in the aircraft leasing community for the almost new B737 that we got last week and more importantly to be able to borrow money to get brand new airplanes.

I can tell you it was exceedingly difficult to negotiate with FNPF, to make sure they were comfortable that we would be able not only to pay the bills but pay the bills with a healthy interest rate back to them. So from a financial perspective, we are not out of high water yet when you look at being able to get a brand new airplane that’s going to be able to cut down on our fuel burn and our fuel cost by 45 percent from the four-engine gas guzzling jumbo jets we got now. You can see how all of those things will happen in good time, particularly when you are talking about less than 18 months before the airplanes start to arrive. So we at Air Pacific have a heck of a lot to do as a team. We’ve been doing a lot over the past 17 months but I can tell you it’s a team effort and if you look at what you are seeing here in Fiji on a daily basis; on-time, safety, customer service, all of those are considerably better from our perspective. On-time alone is 10 to 20 percent better than what it used to be 18 plus months ago, and more importantly, when you put those in relative terms against our competition. We are now beating the likes of Jetstar and Virgin and Air New Zealand in on-time performance. That’s what you want as a customer, you want to get to your destination on-time.” 

Where will A330 fly? 
“ When the 330s come, they will fly to the same places. They will go from Fiji to LA, from Fiji to Hong Kong, from Fiji to Sydney, and from Fiji down to Auckland. We will actually have more frequencies because the value of going to a right size airplane if you will is we can better size the supply to the demand.”

Will it have an implication on Qantas? 
“I would say no. The shareholder discussions between Qantas and the government are shareholder discussions so I’d defer to folks there to speak on that but I can tell you the Qantas board members gave us their full support in this decision.

"It was an unanimous decision by the board of directors to support the management’s recommendation to buy the A330-200 and we are thrilled with the outcome not only of the work we did but the work we did with Airbus to be able to talk about buying brand new wide-bodied airplanes for the first time in our history.”

Will we see a reduction in airfares? 
“Airfares right now are set by competition, so we have a very healthy competition in the Australian market, in particular. We’ve got Jetstar flying in, we’ve got Virgin flying and we’ve got Air Pacific flying, so fares have already dramatically come down over the last couple years by virtue of all that competition. Competition is a great thing for the consumer but also at the end of the day, it does mean less revenue for people flying airlines.”

No comments: