VANUATU PROPS UP AIRLINE WITH $1.3 MILLION LOAN

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PORT VILA, Vanuatu (Vanuatu Daily Post, August 31) – The Vanuatu government has given Air Vanuatu a cheque for Vatu150 million [US$1.3 million] as part of total Vt360 million [US$3.3million] needed by the airline for a company refinancing project that includes the leasing of a new Boeing 737 -800.

The loan will be at a preferential interest rate of six percent. More funds may be made available in the future.

The Minister for Finance Willy Jimmy advised that the cheque was possible due to the very healthy situation the government is in financially and advised, "We could have financed the whole amount but we want to give them Vt150 million initially at a small interest rate of 6 percent and we will assess how they perform with this MOA being signed between the government and Air Vanuatu before additional funds are given."

The government support to the airline has come at a time when Air Vanuatu is facing financial pressure as a result of heavy maintenance bills and rising costs despite a massive turnaround in 2005 where the company lost around Vt33 million [US$306,000] following a disastrous Vt460 million loss in 2004.

Minister Jimmy made it clear that the airline is expected to restructure the company and reduce overheads with the assistance of the funds which will be used to pay off creditors. He said, "Since its establishment on 17th December 1987 with an initial share capital of Vt100 million the airline receives and continues to receive enormous financial support from the government. In the years 1998 to 1991, the government injected Vt200 million a year and an amount of Vt50 million in 1992 making a total equity of Vt950 million. "Despite the airline being given exclusive operational rights in Vanuatu and a monopoly since its establishment, despite making profits in the early years, it has never paid a dividend to the government and instead requests that the government forgo its dividends for reinvestment into the development of the airline. Regardless of these investments and the continued growth of the tourism market into the country, the 1990’s proved to be the start of the loss making track record that the company continues to be plagued with until present."

Jimmy was critical of the financial problems the airline has had which has seen the shareholders capital eroded due to increases in operational costs, overhead costs and an alarming negative working capital ratio from 2004 until present.

"This is clearly shown by the company balance sheet which shows higher current liabilities than current assets. The airline is technically and legally insolvent. This in itself implies a structural problem with the set up and modus operandi of the national carrier which requires immediate adjustment solutions in order to ensure the viability of the airline."

He warned CEO Terry Kerr and board Chairman Harry Iauko, "It is imperative that board and management take stock of structural issues affecting the financial position and performance of the company as the government cannot continue to inject funds into an ailing institution that is in dire need of reforms." He also made it public that the airline owed Agriculture and Quarantine dues up to Vt25 million. "The fact that the airline is owned by the government doesn’t relieve it from paying its legal dues." Willy Jimmy said, "the government has adopted a policy of ‘no free lunches’ and hence this cheque is a loan and you are advised that the approval of the Government guarantee is pending on the company providing to government a clear strategy on how it plans to revive the airline with its existing resources.

The 5-year plan provided is a good first draft of what management plans to do and in order for this to succeed it is important that the plan is adhered to." The airline wants to borrow an additional Vt210 million to refinance and restructure operations over the next 5 years (which includes the outstanding Vt88 million owed the VNPF through their loan to Vanair). They are currently in negotiation with Westpac and VNPF.

According to Kerr in an exclusive interview in tomorrow’s paper, the airline has run into a sticky financial situation in 2006 as a result of high maintenance costs on the Boeing and ATR42 which is still sitting on the tarmac in New Caledonia awaiting repairs to fix corrosion. The airline will receive assistance from China with the donation of a 17-seat Y12 Chinese version of a Twin Otter aircraft that is popular in Fiji and uses the same engine as the Otter. One Y12 aircraft is scheduled for delivery before the end of the year and a second at a later date on a preferential loan from China with a 5-year concession period which will help the airline. The new Boeing 737 – 800 coming in March 2008 will increase seat capacity by 35% and should have very low maintenance over the first 4 years as a new aircraft so the change and yields are hoped to be far more profitable over the next 5 year plan.

September 4, 2006

Vanuatu Daily Post: http://www.vanuatudaily.com

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