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Project background

The opportunity

The Government of the Republic of Vanuatu is in the process of reforming its parastatal (or Government-controlled) sector with the objective of promoting increased economic growth and improving the competitiveness of the economy. In this context, the Government is currently undertaking a legal, technical and economic due diligence of Air Vanuatu, with a view to introducing private-sector equity ownership into the company.

Aviation in Vanuatu

Vanuatu is an island archipelago nation of approximately 220,000 people, located one third of the way from Sydney to Hawaii. According to the 2006 Happy Planet Index, Vanuatu is the “happiest country on Earth”. Three air routes dominate the market: Port Vila to Sydney, Auckland and Brisbane. The Sydney route accounts for approximately 30% of traffic and is operated exclusively by Air Vanuatu, with a codeshare agreement with Qantas. The Brisbane route is approximately the same size and is operated by Air Vanuatu and Pacific Blue, with approximately equal market shares.

In the nine months to September 2007, approximately 69,000 people visited Vanuatu, with the full year total expected to reach 100,000. The Government is aiming to grow tourist arrivals to 200,000 by 2012.

Vanuatu is currently experiencing a sustained burst of strong GDP growth. This is largely being driven by increased tourist visitor numbers, attracted by the emergence of a strong global tourist brand. WTTC, a travel and tourism industry association, forecasts annual tourism revenue growth of 6.8% for the 10 years from 2006. This places Vanuatu as the 12th fastest growing tourist market globally. Supporting these forecasts, considerable investment is being made by hotel operators. The number of hotel beds in and around Port Vila has increased by 50% in the last 18 months, with occupancy rates remaining consistent at between 60 and 70%.

The company

Air Vanuatu is the national carrier of Vanuatu. The airline offers international services to from Port Vila to Sydney, Brisbane, Auckland, Noumea and Nadi and from Santo to Brisbane. Since acquiring VanAir in September 2004, domestic services are also operated by Air Vanuatu.

Currently the airline has a fleet of six aircraft. A Boeing 737-800 is leased from ILFC, and runs the international routes. An ATR42 is owned by Air Vanuatu and operates the main domestic trunk routes of Port Vila to Santos and Tanna, as well as international routes to Noumea. Two Twin Otters and two Islanders are also owned. These operate the other domestic routes to outlying islands.

Despite an extremely challenging internal and external operating environment, Air Vanuatu is currently generating a positive net income, a substantial turnaround over historic performance. In 2004, when the current management team was appointed, the airline had an inappropriate fleet (including two leased Boeing 737s). In addition, the company was merged with the loss making domestic carrier VanAir, presenting significant integration challenge. A net loss of US$4.19m in 2004 was translated into net profit of US$0.89m and US$1.42m in 2005 and 2006 respectively. In this context, Air Vanuatu’s operations are currently a notable success.

Reform programme

Today the domestic routes are not profitable – they amount to loss-making social services. This is likely to remain the case for the foreseeable future. In this context, the objective of the domestic restructuring is to expand services, encouraging additional tourists to venture away from Port Vila to the outer islands. This will be achieved by introducing a subsidy regime whereby funds are made available to the airline to efficiently and effectively provide the services that the population of the outer islands needs.

Arrangements will involve a management contract, awarded to the operator requiring the smallest subsidy. This transaction will follow on from the successful conclusion of the creation of the new international airline venture.

Vanuatu’s international routes will be restructured into a separate company, and potential strategic partners will be invited to bid for a strategic stake in the new venture. The precise level of shareholding will be determined during the due diligence stage after discussions with the bidders, but is expected to be between 40-49% of the shares. Investors are invited to carry out a due diligence, which will be followed by drafting and negotiation of the transaction documents, bidding, award, financial close, and handover to the strategic airline partner.