Costs spiral while Air Chathams awaits government loan

By Andrew Curran.

Air Chathams is still waiting for funds from the New Zealand Government after being promised a NZD17.2 million (USD10 million) concessionary loan in April. CEO Duane Emeny told Radio New Zealand earlier this week that the money “can’t come fast enough”.

The funds will be used to help Air Chathams manage debts stemming from a decision to upgrade its fleet during the pandemic.

“We borrowed to get them (the new planes), and we borrowed to keep them operating,” said Emeny. “That’s the thing, you’re in this kind of debt spiral where you’re constantly having to reinvest back into your fleet. Once you do that, you have a runway to operate them for four or five years, then you go back into the reinvestment cycle.”

“On top of that, you have the global economic impact of the sugar rush when everyone wanted to travel after the pandemic restrictions lifted, and that was quite a nice little period of time for airlines,” added Emeny. “But we very quickly went from that into what became quite a deep recession.”

The downturn after the sugar hit

For Air Chathams, that resulted in a significant softening of demand and a sharp escalation in operating costs. Emeny said Air Chathams was experiencing cost increases of around 35% last year because of supply chain constraints.

“And that was before the 2026 fuel price rises,” said Emeny. He does not think the end of the Iranian War will bring any immediate relief in operating costs, including fuel costs.

“We’re seeing significantly elevated fuel prices through to at least the middle of next year,” he said. “If they drop, that’s brilliant, but I don’t think we’re going to see the kind of fuel prices we had earlier this year any time soon."

"That’s a serious concern for us because we’re delivering the same product but have increased operating costs that you can’t get rid of.”

Grateful for the funding, just waiting for it to arrive

Twelve months ago, Air Chathams axed its Norfolk Island (NLK) flights and reduced services to Whakatāne (WHK) and Whanganui (WAG). Earlier this month, the airline said it would suspend its Auckland–Kāpiti Coast/Paraparaumu (PPQ) flights in late July, saying the route was no longer commercially viable.

Emeny says things were “strained” 12 months ago. Now they are “quite a bit worse”.

During the pandemic, Air Chathams retired some of its older aircraft, replacing them with newer Saab 340 and ATR72 aircraft. The airline now has two ATR72-500s and five Saab 340s, although one of each type is parked. However, Emeny said the fleet decision came with a high capital cost.

“You’re trading low-capital aircraft that require substantial investment in heavy maintenance and component overhauls for more modern aircraft with higher capital costs, higher ownership costs and, therefore, more debt,” he said.

The CEO is grateful that the New Zealand Government decided to step up and make concessionary loans available to local airlines, although Air Chathams’ loan has not yet landed in the airline’s bank account.

“We haven’t received that money yet, but we are aware it is very close,” he said. “We’re learning a lesson in government bureaucracy and process.”

Overnight, Emeny confirmed to Aero South Pacific that the funding still hadn't arrived.

“From where I’m sitting as a private business trying to provide air services into communities, it can’t come fast enough.”

Air Chathams CEO lobbies for reform

In April, the government decided to ring-fence NZD30 million (USD17.5 million) within the Regional Infrastructure Fund to help support regional air routes and safeguard essential air services.

Along with Air Chathams, Sounds Air, Island Air and Golden Bay Air also received funding, although Air Chathams received by far the largest amount.

Emeny has lobbied extensively for reforms to the way New Zealand supports its regional airlines, arguing that many other countries support regional operators more effectively because they recognise the value those airlines provide.

“No more band-aid solutions,” Emeny said. “There needs to be a conversation about how we make the system more stable, robust and resilient so we can withstand these shocks that will inevitably come from time to time and not rely on families and shareholders to prop up regional air connectivity in this country.”

Emeny says recognising regional air routes as essential infrastructure, as Ireland recently did, would result in changes to the current user-pays model in New Zealand. He argues that airlines should not be responsible for covering 100% of the costs of entities such as the Civil Aviation Authority and Airways New Zealand, given the social and economic benefits they provide.

“It’s really about looking at the whole country, the airports, the air links people need, and weighting them appropriately to determine how you would support each one to ensure they remain viable,” Emeny said.

“The issue you have right now is that the economics of running a small regional airline in this country are very poor, and that’s a problem.”

Cutting routes is not the solution

Emeny is not a fan of cutting routes because doing so also cuts revenue.

“For us, it’s a case of looking at our current asset base and determining what can be deployed most effectively to ensure we are at least covering our direct operating costs while generating enough revenue to keep the airline running.”

“The concessionary financing helps, but we are going to have to look at other ways to reduce costs and identify opportunities to generate additional revenue. These are all things we are considering so we do not have to cut services because that is simply a short-term solution to a longer-term problem.”

You can listen to the full Radio New Zealand interview here.

Photo: Air Chathams.

Contact the writer: andrew@aerosouthpacific.com