HEDGING & HAJJ

MK's twin divine comedy ? (II)

Why should we worry about the National Airline's future ?

We have to firmly confront the majority shareholder of Air Mauritius [Government] with salient
features of the apprehensions of internal and external stakeholders of our National Airline, namely -

We need assurances that fundamental structural reforms in the managerial systems and work flows of
Air Mauritius is conducive to the [globally benchmarked international aviation standards] efficiency
levels that accommodate the rigorous management of risks factors in a [henceforth] highly volatile
financial global space which formally rules out amateurism tolerated by political patronage and local
communal politics.

We have no credible re-engineering of the strategic management layering of the National Airline since
2008, which did not shield Air Mauritius from the hedging debacle that threatened its very existence,
and undermined national security as it would lay bare our vulnerability to foreign airlines and their
policy agendas.

We have hazy human resource management planning and human resource development strategies
[succession planning, recruitment and appointment process, transfer process, promotion process] which
hinder the ventilation of the multi-skilling and multi-disciplinary managerial decision-making process
[multi-layers] which is fundamental to have a risk-focused strategic path beyond 2010.

We have an unhealthy/uneasy industrial relations mechanism, coupled with political dimensions which
colour strategic management and restrain MK operational efficiency ratios across its global operations.

I have appealed to the Prime Minister in my Hedging interviews [January/February 2009] to address
the issue of corporate governance within our National Airline, with specific reference to the tender
process at Air Mauritius across all service sectors [commercial/marketing, operations, support services]
as well as the due diligence required for shareholders to have access to data regarding the beneficiaries
of the contracts awarded. Transparent business practices across MK activities are essential to pricing
MK shares and to express a scientific view as to the future MK share value in terms of investor
confidence…

We have a hazy [often paradoxical in its conception] yield management strategy which underpins the
route planning and scheduling of flights. In line with our stipulation that the national airline corporate
strategy is not located in a policy void for its own sake, but is rooted in its crucial synergy with national
macro-economic development strategic path of an elected government. Corporate self-gratification is
no longer an option - MK does not exist for its own sake, but as a mechanism to fuel the growth engine
for our nation building.

MK route planning, scheduling and pricing is thus within the context of national agendas and national
security policy considerations, and not purely in terms of balance sheet ratios. The hedging debacle
would have been fatally suicidal were it not for government guarantees to keep the creditors and
hedging counterparties at bay, while the injured beast recovered its heartbeat… MK can no longer shift
the goal posts to suit its own intrinsic logic, which is no longer in tune with the new global economic
wisdom post 2010 crisis.

Specifically, we maintain a market presence in core medium term potential demand growth nodes and
centres of market gravity to maintain our brand and image… This entails low load factors during
seasonal cycles, but viewed as an investment strategy holistically, we need a delicate balancing act
between yield revenue management and investment strategies for market penetration and consolidation
in the medium to long term. The hedging debacle [unjustified] caused a reverse psychology of
overcautious and risk-free options which does not bode well to flying the National Airline to new
heights post-2010 crisis phase.
The issue of risk management focus that should shape the very foundations of the new strategic
thinking within Air Mauritius has to be engineered by professionals with profiles which exhibit their
ability and propensity to take risks, and manage the associated uncertainties whilst grasping the
probabilities linked to their decisions. We have a para-statal mindset within MK with a senior staff who
have never changed jobs or careers over the last 10 to 20 years, and thus give rise to change
management issues at the top management level of decision-making. It is beyond reasonable
expectations to wish for them to accommodate risks in their daily routine and maintain decision
mindsets founded on a risk-averse psychological profile, and thus implicate the entire viability of the
business and the sustainability of the national carrier in the wake of their decision-making processes.

The recent press statements by the new MK Chairman does not allay the apprehensions of the seasoned
investor, nor the astute specialist. The new Chairman does not surf in tandem with the new wave thrust
determined by the new economic currents of modern financial paradigms in this post-crisis age. We are
no longer in a neat ultra-liberal free-market economics mechanism. We are firmly anchored in a
sustainable development path where the national airline has a growth partnership role to play, and not a
stockmarket share index bubble game for profit-taking trading positions. The new Chairman's balance
sheet management style does not bode well, as it would thus put the Government in a quirky position of
having to get its nose off the National Carrier so as to maximize operating profits [an archaic measure
of performance].

Within that new thinking framework, the view of the new MK Chairman with respect to Hajj flight
ticket pricing is widely offmark. Pilgrimage is an intrinsic facet of the National Rainbow cultural
fabric. Government policy has always historically been to budget for cultural and religious activity
investments in infrastructure and facilities, across all religious faiths. The National Carrier, in that
context, is a national resource enabling facility to facilitate 20% of the population of Mauritius to
perform a pillar of Islam rituals abroad - the strategic view of MK in terms of this inelastic demand and
revenue maximization to capitalize on the pilgrimage market is insensitive and, at best, inelegant.
Political undertones which nominate people at key national positions are akin to those which determine
the electoral fate of those who decide on these appointments…

The Prime Minister and the CEO of MK have concrete proposals to de-classify Hajj flights out of its
special flight status [requiring the hazy tendering processes on the rationale of MK crude logic of
empty return leg from Jeddah] and treat Hajj flights as supplementary, and thus would be priced on
similar grounds as supplementary flights during the peak tourist seasons several times per annum
[when hotel occupancy and tourism revenue are key considerations]. Route economics, as in the
Rodrigues case, does not always prime in our overall airline economics.

Hajj flights should not be a Divine Comedy… The Hedging Comedy was a bad farce already, and one
too many, that left a sour aftertaste for Air Mauritius shareholders and wellwishers [yours truly
included].

Sadek Ruhmaly

Consultant Economist

Hedging/Risk Management,

London

England