(Bloomberg) — Air Vanuatu might justifiably be described as a hard sell. The collapsed airline’s accounts are years out of date, half the fleet is in disrepair, there aren’t enough funds to repay creditors and that’s just the start of it.

But despite all those drawbacks, there’s still buyer interest.

The national carrier of Vanuatu, a South Pacific nation that’s home to little more than 300,000 people — about the same as the US city of Cincinnati — has become an unlikely investment target since liquidators at Ernst & Young took over in May. Several parties have submitted offers, according to Ernst & Young, while Australia, which has a bilateral security agreement with Vanuatu, has said it’s monitoring the situation.

The appeal of a failed state asset like debt-ridden Air Vanuatu, which finally buckled after Covid and cyclones decimated the country’s tourism industry, is a telling reflection of geopolitical tensions in the Pacific, where countries including China and the US tussle for leverage.

Whoever rescues Air Vanuatu would expect access to — and influence over — the Vanuatu government, according to Tess Newton Cain, a Brisbane-based adjunct associate professor at Griffith Asia Institute. “That’s all part and parcel of international diplomacy,” she said. “Airlines are critical infrastructure.”

Amid escalating tensions in Asia, small Pacific nations have gained outsized clout. 

China has become one of their biggest lenders, part of an effort to build a network of developing countries to take its side in global forums such as the United Nations. Export-Import Bank of China accounted for 30% of Vanuatu’s public debt in 2022, according to the International Monetary Fund. Pushing back, Australia has sought closer ties with Vanuatu and other regional neighbors.

Australia’s department of foreign affairs and trade said in a statement that it’s “in contact with the government of Vanuatu as it manages its current aviation challenges.” 

Before it collapsed, Air Vanuatu’s domestic fleet shuttled between 26 islands across the archipelago. Overseas, the airline’s assets include airport slots in Sydney, Auckland and Fiji.

Vanuatu needs an airline, whether it’s profitable or not, Evan Papageorgiou, the IMF’s mission chief for Vanuatu, said after a visit last month. That means a rescue package could potentially include an obligation to operate money-losing flights to remote communities. 

“Tough decisions need to be made now or very soon,” Papageorgiou said in an interview with Bloomberg News from Washington.

A report to Air Vanuatu’s creditors in May revealed the fragility of the company’s finances, and the challenges facing any new investor.

Creditors, staff and the government were owed at least $66.6 million, more than double the airline’s assets, while Air Vanuatu had made several loans to third parties that couldn’t be verified. Of the six aircraft in its fleet, three needed maintenance. The sole Boeing Co. 737 jet had been repossessed, Ernst & Young said, weeks after the airline warned it was struggling to obtain spare parts.

Other discoveries pointed to an airline functioning with little oversight. Employee entitlements had reached $5.6 million. That equates to almost $13,000 for each of the 441 staff, more than triple Vanuatu’s per-capita gross domestic product. Air Vanuatu’s inventory showed almost $200,000 worth of alcohol, food and general items.

Ernst & Young, which is already cutting 170 positions at the airline, said the accounts were so out of date that the numbers will almost certainly change. Liabilities are likely to “increase materially,” the firm said.

Air Vanuatu’s financial statements from 2020, the latest on the Treasury’s website, showed the airline lost money that year and in 2019, even before the pandemic all but halted international travel.

With the Air Vanuatu fleet grounded, Qantas Airways Ltd. and Virgin Australia are stepping up to meet holiday demand, potentially making life harder for any Air Vanuatu owner.

Qantas and its budget carrier Jetstar has said it will start as many as nine return flights each week between Australia and Vanuatu, while Bain Capital-owned Virgin Australia also plans to operate more services to the Pacific nation.

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