AIR MAURITIUS CAN'T FLY OVER THIS HEDGE,

C O N F I D E N T I A L SECTION 01 OF 02 PORT LOUIS 000005

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E.O. 12958: DECL: 01/08/2019
TAGS: EAIR EFIN ECON ETRD OPIC USTR MP
SUBJECT: AIR MAURITIUS CAN'T FLY OVER THIS HEDGE,
GOVERNMENT ENTANGLED

Classified by Ambassador Cesar B. Cabrera for Reason 1.4(d).


1. (C) SUMMARY: Air Mauritius made a very bad bet. After
increasing its hedge ratio to 80 percent of its projected
fuel requirements until mid-2010 at an average price of USD
105 per barrel, the airline is losing about USD 8.4 million
per month. These severe self-inflicted losses have led to
stop-gap government rescue funds and a government demand
for a reform plan. The ruling Social Alliance will attempt
to rescue and restructure the publicly-owned company with
the least amount of political backlash, but success is not
guaranteed. END SUMMARY.

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Avoiding an Airline Crash
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2. (SBU) The Board of Directors of Air Mauritius (which
includes an Air France Executive Vice President) and the
GOM, its principal shareholder, are currently working on an
urgent rescue plan to avoid the crash of the national
airline. After reviewing the company's financial
situation, particularly the growing impact of the fuel
price on the company's hedge profile and the drop in demand
for air travel worldwide, the Board indicated in a public
communique dated December 26 that the current situation is
worse than initially forecast and that the company's
financial results for the financial year ending March 31,
2009 will be "significantly impacted." The communique
added that "the additional measures envisaged to face this
unprecedented situation are being finalized and will be
implemented urgently."

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Was the High Hedge a Fuelish Bet?
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3. (SBU) As revealed in a series of news stories beginning
in late December 2008, Air Mauritius decided in August
2008, at a time when the price of oil was soaring, to
increase its hedge ratio to 80 percent of its projected
fuel requirements for the next two years (i.e. to the end
of July 2010) at an average price of USD 105 per barrel.
The subsequent drastic fall in fuel prices (to as low as
USD 35 per barrel recently) represents a loss of USD 8.4
million per month for Air Mauritius, with devastating
consequences for the company's cash flow. That the
spending hemorrhage coincided with a world-wide slump in
tourist travel, the source of nearly all Air Mauritius'
revenue, meant the company was bleeding uncontrollably just
as its oxygen intake was being choked off. In the context
of the international financial crisis, the hedge
counterparties (Barclays, BNP, Mitsui Corporation and
Merrill Lynch) insisted that Air Mauritius provide cash or
cash equivalent collateral for the two-year contract
period. Given Air Mauritius' precarious liquidity
situation, the GOM stepped in with the necessary guarantee
(USD 110 million),which allowed the company to release
cash resources which were pledged as security to the
counterparties.

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A Cyclone of Commentary
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4. (SBU) Since the news broke, Air Mauritius' management
has faced a barrage of criticism from various quarters on
the way it handled the hedging agreement. In an interview
given to "l'express," a widely-read local daily, one
shareholder asserted that it was irresponsible for Air
Mauritius to enter a two-year hedging contract. "A six-
month contract would have been more reasonable," he added.
In another interview, the director of an asset management
company expressed surprise that Air Mauritius did not "take
a second short-term cover" in anticipation of a possible
major drop in fuel prices. "This would have saved the
company the hedge loss of Rs 4.4 billion (USD 138 million)
for the two-year contract period," he asserted. In the
aviation sector, people are wondering why the Air Mauritius
Risk Management Committee increased its hedging ratio from
the normal 50 percent to 80 percent of its fuel
requirements. Air Mauritius CEO Manoj Ujoodha claims that
the hedging decision was good at the time it was made.

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"It's easy to be wise after the event. Who would have
predicted that the price of fuel would have dropped so
low," he commented to "le Mauricien," another local
newspaper. He claims the global financial crisis and its
consequences on air travel demand have affected the airline
more than the hedging contract itself.

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Rescue Me! (Without Pain, Please)
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5. (SBU) Air Mauritius' Board of Directors is expected to
submit its reform or rescue plan to the GOM in January.
According to "Business Magazine," a local weekly, Air
Mauritius is considering several options, including a
reduction of fleet. The company, however, maintains that
it will finalize the purchase of a new Airbus (A330-200) in
October 2009, increasing the fleet's size from 11 to 12
planes. "It's too late to cancel the order; the contract
was signed in 2007," said Donald Payen, Air Mauritius Vice
President for Communications, according to "Business
Magazine." Air Mauritius' destinations and their
frequencies might also be revised by the rescue plan.
Players in the tourism industry are calling for a reduction
in the price of air tickets. Although Air Mauritius is
believed to have 450 employees in excess, cutting the
workforce is unlikely to obtain consensus and would be an
unpopular political move. Those in favor of a soft
approach to layoffs argue that in such circumstances, the
company needs more than ever the motivation of its
employees. They pointed out that such a measure would go
against the current GOM's efforts to preserve jobs in the
context of the global economic crisis.

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Governmental Grumbling
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6. (SBU) In a statement to the weekly "le Mauricien"
December 30, Finance Minister Rama Krishna Sithanen said he
is against the privatization of Air Mauritius since he
deems that "it is a strategic tool that is extremely
important for the country." He is also, however, against
the massive injection of capital into the company in the
absence of a new business model. He admits the situation
is "very very difficult," and that he is not happy with the
way Air Mauritius handled the hedging issue. "Some serious
mistakes have been committed. There should have been more
professionalism on this dossier," he added.


7. (SBU) The Prime Minister was harsher in the New Year.
He was "said to be angry" with the company chairman in a
page one "l'express" story January 5, and issued a
statement full of complaints about the company to "le
Mauricien" the same day, which included a request to the
directors to reduce both company expenses and "the number
of their visits abroad." The PM said he was waiting for a
"reform plan" before committing to supplying additional
funds.


8. (C) COMMENT: Given its strategic importance for the
tourism industry, and thus for the Mauritian economy as a
whole, Air Mauritius is "too big to fail." Nonetheless,
the airline will not be easy to rescue. After the ruling
Social Alliance's haste in asking struggling hoteliers not
to lay off workers, it can hardly make drastic cuts to an
admittedly fat work force at the national airline. On the
other hand, it is not clear how much red ink Mauritius can
afford. END COMMENT.

CABRERA