VZCZCXRO1304
RR RUEHDU RUEHMR RUEHPA RUEHRN RUEHTRO
DE RUEHPL #0005/01 0071241
ZNY CCCCC ZZH
R 071241Z JAN 09
FM AMEMBASSY PORT LOUIS
TO RUEHC/SECSTATE WASHDC 4346
INFO RUCPDOC/USDOC WASHDC 1238
RUEHZO/AFRICAN UNION COLLECTIVE
RUEHFR/AMEMBASSY PARIS 0602
RUEHLO/AMEMBASSY LONDON 0345

C O N F I D E N T I A L SECTION 01 OF 02 PORT LOUIS 000005 
 
SIPDIS 
 
DEPT FOR AF/E, AF/EPS, AF/EEB 
DEPT PLEASE PASS TO USTR, OPIC, EXIM, AND TDA 
USDOC FOR 4510/ITA/MAC/ANESA/OA (ROBERT TELCHIN) 
USDOC FOR 3131/USFCS/ANESA/OIO 
JOHANNESBURG FOR FCS AND TDA 
 
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. 
 
------------------------- 
Avoiding an Airline Crash 
------------------------- 
 
¶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." 
 
--------------------------------- 
Was the High Hedge a Fuelish Bet? 
--------------------------------- 
 
¶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. 
 
----------------------- 
A Cyclone of Commentary 
----------------------- 
 
¶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. 
 
PORT LOUIS 00000005  002 OF 002 
 
 
"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. 
 
--------------------------------- 
Rescue Me! (Without Pain, Please) 
--------------------------------- 
 
¶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. 
 
---------------------- 
Governmental Grumbling 
---------------------- 
 
¶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