By Sameer Sharma

Over the past few days, commentators from all four corners of the island of Mauritius and politicians alike have paraded a narrative that Air Mauritius has been ruined over a period of three years. There is no doubt that our elected officials have this tendency to put the wrong people at the wrong places, a move which can cost billions to the country, let alone the many more billions in opportunity costs.

At the core, politicians and their nominees earn a fixed salary rather than a lower salary coupled with a higher performance bonus linked to performance with clear Key Performance Indicators. The interest of a politician to remain in power and reap its fruits and the interest of most people are not always aligned, but this is all the result of the Mauritian political system of spoils. Unless Mauritians engage in some mea culpa and in significant political reforms to re-align these interests, the trend is not likely to change anytime soon.

Poor credit health metrics


As I have argued to some who hold the stick in the recent past, you can be nominated to a certain post, but neither your IQ nor your EQ can go up because of it. Politicians after all are not Gods, but all too often those who do not know but think they know tend to be more vocal and powerful than they should. One of the few good causalities of this otherwise tragic crisis, the first in 40 years for Mauritius, may be the start of some introspection in terms of needing to have the right people at the right places.

To be fair to the dispensation currently in power, the data on Air Mauritius have been clear for more than two decades. The Altman Z score, a financial measure of credit health of a company has been hovering at best at around the bankruptcy area and more often than not below it for close to two decades. Only the implicit government guaranty kept the company going and made creditors happy to fund it all the same. There is otherwise no financial rationale to have lent money to a company with such poor credit health metrics for such a long period of time. When looking at both return on capital and return on invested capital metrics, bar some noticeable improvements between 2015 and 2017, the company has a long track record of mediocre performance which aligns well with its poor credit health. If this was a private company in most countries on the planet, it would have gone bust a long time ago.

However, its raison d’être was obviously not just financial. Air Mauritius’ strategies, which were not always viable, reflected the whims and fancies of the hotel industry and of that of the government. In return for the implementation of sub-optimal strategies that often went against its interests as a company, it benefited from the implicit sovereign guarantee. Air Mauritius of course is not the only public majority owned company which benefits from such guaranties. Over the years, political interference, be it in terms of strategy, key nominations and in terms of pushing staff count and salaries up, created quite the cost structure. The airline was often forced to act in the interests of local operators and in some cases operate unprofitable lines. We all know the story.

The timing of near bankruptcy could not be worse.

Over time the Air Mauritius debt burden got so large that an increasingly cash strapped government finally pulled the plug on 22 April 2020. This is not surprising. In fact no later than last year, the Prime Minister had announced plans in his budget to offload some state owned companies. Air Mauritius was getting too big to be bailed out all the time despite the fact that governments and other forces are to be blamed for its sorry financial state.

Bloated cost structure and liabilities


The timing of near bankruptcy of course could not be worse. In the current environment, finding a strategic partner which can bring equity into the business will not be easy. Finding private equity investors to take over the company will also come at a heavy price in the current context. Anyone who looks at the bloated cost structure and liabilities, be they debt or pensions, will ask the government to take a fair chunk of these liabilities before they even invest. This is more about the government cutting its losses than avoiding them altogether. Given the context, the losses for the government will be higher than they would have been last year or in a recovery.

There is no magic wand to save Air Mauritius. It needs to be recapitalized by existing or new shareholders, and if the government will be selling the bulk of its stake to a private player, it will need to take on a lot of the existing liabilities, and the creditors too will need to take the hit.

Is this a Lehman moment for other sectors such as tourism?

The Air Mauritius saga, however, makes me ask the following questions. If a large state backed company is allowed to go bust because the backer cannot handle it anymore, then what does this mean for creditors who continue to finance other state majority owned companies which enjoy this “implicit state guaranty”? Is this a Lehman moment for other sectors such as tourism which will no longer benefit from an airline that took on a lot of unprofitable routes for their benefit? Has anyone looked at the Altman Z score of these sugar and hotels companies recently, and if so, on what basis have they been able to stay afloat for so long? Who in the government or at the Bank of Mauritius is monitoring the credit profile of large corporates right now and stress testing increasingly probable tail risk events? Are enough companies looking to change this debt fuelled business model of theirs and open up the capital structure or bring back money from abroad to recapitalize their firms? What will happen to the hotels sector, which is already struggling, if they no longer have a public majority owned airline to help them out? Have politicians learnt their lesson and will they stop putting armchair generals at the helm of important institutions and companies?

Answers to these questions will more likely than not dictate how the Mauritius of tomorrow fares in the years to come. Air Mauritius as we know it today may go the way of the Dodo, but let us hope that in so doing, it does not take the country along with it.

Sameer Sharma
Sameer Sharma is a chartered alternative investment analyst and a certified financial risk manager.