Papua New Guinea's government seeks privatisation of national air carrier

In Papua New Guinea, more than in many other countries, airplanes are a critical component of transport infrastructure for economic development. Port Moresby, for instance, is not linked to any other major centre by road, and access to some remote villages is only possible by air. The country therefore needs a healthy and efficient airline industry.

Servicing this need are PNG’s two main airlines: the national airline, Air Niugini, and its main rival, PNG Air. Other operators in PNG include Philippines Airlines, Travel Air, Virgin Australia Airlines, Qantas, Hinterland Aviation and Air Tahiti Nui.

Air Niugini is the main capacity provider to the country, accounting for 64% of all weekly seats offered on PNG’s domestic and international routes in mid-2015. It has a carrying capacity of around 40,000 passengers per week, according to an aviation industry analysis. This was almost three times that of its nearest competitor, PNG Air, which has a weekly passenger capacity of around 14,000.

A Regional Hub

In a November 2015 speech for a new aircraft launch, Prime Minister Peter O’Neill announced his vision for aviation in the region, touting PNG’s potential to become the air transport hub of the Pacific region and promising to continue to expand the sector’s capacity.

“We are very much in flying distance and on the same time schedule with most of our neighbouring countries,” the prime minister said. “We are eight hours to Beijing, just over seven hours to Seoul, and six hours to Singapore and Tokyo and Manila. This places our country in a very unique geographical position for the regional and global air transport market. We know that investment in our airline industry is providing a good return for shareholders.”

The prime minister added that his government was engaging with neighbouring countries to put more air services agreements into place, to add to NATIONAL PROVIDER: Named after the Tok Pisin word “Niugini” – meaning “New Guinea” – Air Niugini is PNG’s national airline. It began operations in 1973, flying domestic routes and opening up previously inaccessible areas to locals and tourists.

Today Air Niugini operates a domestic network from Port Moresby and Lae, as well as international services to Australia, Oceania, and Asia. Its fleet comprises Boeing 767 and 737 jets, Fokker F-100s, Bombardier Q400s and Dash 8 aircraft.

At the Singapore air show in February 2016, Air Niugini placed an order for four Boeing 737 Max 8s worth $440m at list prices. The first planes are scheduled for delivery in 2020. “The superb economics of the 737 Max will enable us to increase flight frequencies and develop into new markets which offer significant opportunities,” Air Niugini’s chairman, Frederick Reiher, said of the acquisition.

Since 2014, Air Niugini has operated a low-cost subsidiary carrier called Link PNG that services routes to provincial and district centres. Many of these routes are not profitable but are carried out under the carrier’s community service obligations, which ensure that remote and less profitable services are maintained to meet the basic transport needs of all the country’s citizens.

Second Player

PNG Air has two majority shareholders, the Mineral Resources Development Company, which represents many landowners, and Nasfund, an investment fund servicing the pension plans of private companies. Between them, the two majority shareholders represent a large part of the country’s population, which is seen as the key to focusing on serving the domestic market.

PNG Air operates scheduled domestic and international flights, as well as charter flights, out of its main base at Jacksons International Airport in Port Moresby. It began operations in 1987 as a charter company, Milne Bay Air, servicing the resource development industry. In 1992, it was licensed as Airlines PNG to operate scheduled passenger services, and in 1997 it was awarded an upgraded airline licence. In 2015, Airlines PNG underwent a rebranding that included the introduction of a new name, PNG Air, as well as new livery and the delivery of the first craft of its new fleet, an ATR 72-600 turboprop. In May 2016, the Civil Aviation Safety Authority of Papua New Guinea (CASA) issued PNG Air with a three-year Air Operator’s Certificate.

“CASA issuing a certificate to us for this longer period reflects the continuing confidence CASA has in our quality and management safety systems, and also indicates they are happy with the other progress we’ve been making,” PNG Air CEO Muralee Siva said at the time. “I’m particularly pleased that we’ve been able to get this recognition from the regulator for our safety performance and operating systems while also managing the introduction of the brand new ATR 72-600 aircraft into our fleet, expanding the routes we fly and the number of seats we offer on those routes, and greatly increasing the numbers of the PNG travelling public we carry on our services.”

Aircraft

The ATR 72-600 model, which has a 72-passenger capacity and can operate at all PNG’s major domestic ports, will make up the core of the airline’s fleet by 2020. Its fleet of 14 Dash 8-100 aircraft will be phased out as new ATR 72-600s are delivered. PNG Air plans to have an all-ATR fleet by the early 2020s. The ATR 72-600s include a flexible layout in which the cabin can be converted from a full passenger layout to a mixed passenger-freighter configuration in less than a day, resulting in an 82% increase in cargo capacity, from 1700 kg to 3100kg. Adding to the model’s versatility, the ATRs can also be equipped with gravel kits for narrow and unpaved airfields, which are commonplace in PNG. PNG Air’s ATRs also include an option to install business-class seating. In April 2016, PNG Air’s ATR service was expanded to Mount Hagen and Madang, flights to Vanimo increased to four per week, and a fifth daily service was added between Port Moresby and Lae.

In addition, daily freight trips began between Port Moresby and Mount Hagen and Port Moresby and Lae, while a new weekly freight option was introduced to serve the New Guinea Islands. The airline’s fleet of Dash 8 aircraft has been configured for freight to support Mount Hagen, Lae and the Islands, where an increased demand for bulk goods has created a need for additional service.

Government Sale

In September 2014 the government announced that it was planning to sell its 50% equity stake in Air Niugini to private investors, and that the sale would open at the end of 2015. The prime minister said preference would be given to PNG-owned entities, but the shares would subsequently be made available to other investors if all shares were not acquired by local entities. Despite the government’s declared intention to begin Air Niugini’s privatisation at the end of 2015, no news of any share sales had been made public as of mid-2016.

Air Niugini currently serves international destinations in Cairns, Brisbane, Sydney, Honiara, Port Vila, Nadi, Bali, Singapore, Manila, Hong Kong and Tokyo. However, as part of a broader plan to extend its reach in the Pacific region, in 2015 Air Niugini launched a new route from Port Moresby to the Vanuatu capital of Port Vila, via Honiara in the Solomon Islands.

A new service from Mount Hagen to Jayapura in Indonesia was expected to begin in mid-2016, and its Japan service was set to expand to include two flights weekly to Tokyo’s Narita Airport in July 2016. Air Niugini’s chairperson, Frederick Reiher, announced that test charters to Ponape and Truuk in the Federated States of Micronesia would begin in September 2016.

Like PNG Air, Air Niugini is also undergoing a re-fleeting programme. Fokker 70s are set to replace its Bombardier Q400s, which will allow Air Niugini to further increase its reach. Reiher told OBG that the re-fleeting was part of a wider effort to increase the airline’s footprint and raise the profile of Port Moresby as an aviation centre.

“For the international network, a key strategy for Air Niugini is to promote Port Moresby as a gateway to the Pacific and Asia by linking airports in Asia with airports in the Pacific Islands and Australia,” Reiher said. “This means increasing the frequency of services to key destinations such as Singapore, Hong Kong, Manila, Denpasar and Narita, with coverage to be extended to China in the future.”

The expense involved in both of the country’s principal airlines striving to make the country a regional hub via re-fleeting and route expansion, while at the same time linking up domestic areas, makes it likely that private investment will be required at some point in the not too distant future. Potential investors and competitors alike will both be watching keenly for the moment when the government opens up bidding for its shares of the national carrier, a moment which is likely to signal a key turning point for the market.