Shrunken Fleet

Air Macau seems to have breached its contract with the MSAR government leasing 5 of its 16 planes from Air China, but executives say this is part of a plan to save the company Troubled Air Macau’s franchise contract requires that it have a fleet of 12 planes, but the company only has 11 because five of them are loaned from its parent company, Air China. The Civil Aviation Authority (AACM), however, allows these planes to be considered as part of Air Macau’s fleet. The agreement also allows the government to negotiate the end of the concession with Air Macau, under unspecified conditions. Also, under a ‘minimum standard of service’, the airline must retain a fleet of at least 12 planes, from the year 2000 onwards, unless it gets government approval. Air Macau leases 5 of its 14 passenger planes from its largest shareholder, Air China, including the maintenance and cabin crews. The Macau carrier therefore has nine passenger aircraft to make use of, plus two cargo planes, making a total of 11 aircraft, with an average daily operation of nine hours per plane. Allegedly, before June 2009, Air China had only two Air Macau aircraft at its disposal, according to a provisional report. Air Macau’s capacity to carry passengers has been dwindling over the past two years. According to Air China’s annual reports, the Macau company was operating 13 passenger aircraft and one freighter as of June 30, 2008, a number that fell to 10 passenger planes and two cargo planes in late 2008, and dwindled even further to the current nine passenger planes and two cargo planes. Generating revenue Air Macau’s balance books have been in the red since 2005 and passenger traffic has dropped from 2.47 million in 2006 to 1.88 million in 2008, but the company says that their business performance has improved since mid-2009, following a reduction in the losses registered that same year. An AACM spokesperson said the rental agreement is standard practice aiming to “generate revenue for Air Macau” and the use of the whole fleet will improve as a result. According to the spokesperson, the leased aircraft are “still regarded as part of the Air Macau fleet” because they are “technically under the operational control of the Air Macau Air Operator Certificate (AOC) […], which means that these aircraft remain under the safety supervision of the AACM”. Joy Gong, marketing director for the company, admits that the lease agreement for the five airplanes is a relief measure from the major shareholder to help Air Macau out of a bad situation and to contribute to the development of Macau. “It’s good for us and we can reclaim the planes when we need them. Not only is Air China our largest shareholder, but it also supports Air Macau’s mission to help further the development of Macau,” Gong told Macau Hoje Daily , refusing however to provide any statistics on flight delays and/or cancellations, saying it would be unfair to judge the airline solely from this data, since flights are sometimes cancelled due to external factors. Neither the AACM nor the Macau International Airport were willing to provide the statistics on cancellations and delays. The only reference to these numbers recently published was an AACM document released by Viva Macau on April 2nd. The document showed that the percentage of flight cancellations by Air Macau for the last two quarters of 2008 had been 15.6 percent (Viva Macau: 4.6 percent; Air Asia: 4.7 percent) and that, in the first quarter of 2009, such numbers had declined to 9 percent (Viva Macau: 4 percent; Air Asia: zero percent). Decisive factors Cancellations and delays are not mentioned in the requirements outlined in the contract binding the franchise, although they may be decisive factors in terms of the airline’s reputation. The remaining part of the annex to the franchise agreement establishes some conditions under which the Government may transfer the rights of Air Macau to a third party, “possibly by force”. Articles 2 and 5 of the annex make it clear that Air Macau may be required to transfer its concession rights to a third party through subcontracts if the government “deems” that the company is unable to meet the demands through its operation of charter flights, or is unable to operate intercontinental flights, or does not have the ability or desire to operate scheduled flights and cargo flights. Lawmaker Kwan Tsui Hang, and director general of the Macau Public Utility Companies Consumer’s Association Leong Kam Chuen, , requested the cancellation of the franchise agreement earlier this month because they consider that if more companies in Macau could enter the market in new ways, Macau could reposition itself as a centre for low cost airlines carriers. How to terminate? According to the fifth chapter of the contract, the franchise may be revoked in a number of ways, including “salvage”, “execution” or “termination by agreement”, before its expiration deadline in 2020. Article 31 of the contract allows for the possibility of an outcome where the franchise is totally or partially cancelled, where the consequences can be negotiated by the government and Air Macau, but the measures defined do not favour any unilateral action by the government. The contract may be terminated if Air Macau changes the objective of the services it renders; if it fails to meet normal demand; if it is not sufficiently equipped to render its services; if it undertakes a sub-concession without government approval; or if it goes bankrupt. Notwithstanding, Air Macau can always retain the right to initiate judicial proceedings for whatever reason. The government may also “salvage” the franchise within a six month deadline, paying back the value of the company’s assets after depreciation, as well as compensation equal to the annual profit of its best recorded period (see chart) multiplied by the years remaining until the end (2020 minus the current year) of the franchise contract.