Rethinking Uganda Airlines
Analysts say the government needs Shs800bn subsidy annually to keep national carrier in the air.
The good news is that if President Yoweri Museveni’s New Year 2017 pledge is implemented, Uganda could end this year with a revived national air carrier. The bad is that the revived Uganda Airlines could end up like a dove flying among eagles in very turbulent skies.
Research by The Independent across Africa, Europe, Asia and the Middle East shows that a government needs to inject between US$250 million (Approx. Shs875 billion) and US$350 million (Approx. Shs1.3 trillion) annually to keep the national air carrier flying.
Faced with that decision, many investment managers question whether any country should be paying that price for national pride.
“The idea of having a national carrier is good but we are trying to chew what we cannot swallow. We are likely to have a very huge debt that could choke the economy,” says George Mulindwa, a portfolio manager at Stanlib, the US$40 billion South African investment management firm with operations in Kampala.
“I will need to know whether government has done an assessment on whether it is cheaper to use a state-owned airline in doing a similar job that other airlines can do,” says Rachel Sebbudde, an Economist at the World Bank office in Kampala.
But there are many people, especially government technocrats and politicians who have spoken strongly in favour of reviving the national carrier which the same Museveni government had closed in 2001 when the IMF/World Bank privatization drive was starting.
“We are advocating for re-instating of Uganda Airlines in order to make Uganda remain a hub and for sustainable development,” said Wilberforce Kisamba Mugerwa, the chairperson of the National Planning Authority (NPA).
Part of the attraction is the growing passenger traffic which has grown more than 10-fold to 1.51million in 2015 over the past two decades. However, this same passenger traffic is being used by 18 international carriers and a revived Uganda Airlines would struggle to compete at fare rates and service.
Jannie Rossouw, the head of School of Economic & Business Sciences at the University of the Witwatersrand in South Africa wrote in the Mail and Guardian that time when national airlines flew as carriers of national pride is a thing of the past as they have become major liabilities to their respective states.
“They must be cut loose to protect the pride of the nation,” he said, adding that with some exceptions, the situation in many developing countries is particularly bad that they can’t afford the huge financial burden that comes with failing national carriers.
To even make the situation worse, African carriers have continued to make losses every year. Latest data from the International Air Transport Association released mid last year shows that African carriers are expected to post a $500 million loss in 2016, a slight improvement on the $700 million that the region’s carriers lost a year before. Capacity growth (5.3%) is anticipated to outpace demand growth of 4.5%.
“Carriers in the region continue to confront a plethora of challenges including intense competition on long-haul routes, political barriers to growing intra-Africa traffic, high costs and infrastructure deficiencies,” the Association said in its assessment.
In addition, many major economies in the continent have been hit hard by the collapse of commodity prices, and the impact that has had on revenues and the inflow of hard currencies. Also, unresolved foreign exchange crises are adding to the economic difficulties facing airlines in this region.
Debate over the airline has risen since December 31, 2016, when President Yoweri Museveni said in his New Year message that the government has finalised a plan to revive a national air carrier. He said it would ease air travel and enable Ugandans to spend money on local rather than foreign airlines.
Earlier, during the 54th Independence Day celebrations in Luuka District in eastern Uganda, the President had made the same point.
“Somebody has told me that Ugandans are spending $420 million per year on travel,” he said, “The National Resistant Movement (NRM) Government has decided to start a national airline to stop the outflow of this money and to end travel inconveniences to Ugandans.”
In an interesting twist, the politicians and bureaucrats now accept reviving the airline does not make business sense. But, they say, a national carrier is needed not necessarily as a profit making business but as a facilitator of other sectors of the economy such as tourism and agriculture to leapfrog the country into the middle income status.
“We are not setting up the airline for a profit motive,” said Kisamba Mugerwa in an interview with The Independent, “Much as later, it can make money, what is important is its indirect linkages with tourism, exports like perishable goods and off course the costs of passengers in terms of the people who are travelling in and out of Kampala.”
What is not said is that Uganda Airlines had been flying for 10 years from 1976 on government subsidies until it was liquated by the Museveni government in 2001.
Then popularly known by its slogan as the ‘Flying Crane’, as a result of mismanagement, it had accumulated debt to a tune of $6million ($8million in current prices). In a controversial move at the time, the ground handling operations which were the only profitable part of the business were taken over by a private firm associated with Sam Kutesa, who is current minister of Foreign Affairs and is a relative of President Museveni taken over.
Several commentators have warned that even if it is revived, Uganda Airlines will fail again unless such political interference is avoided.
Under the new plan, the government says will initially lease at least six aircrafts, four for short-haul regional flights and two for long-haul and later acquire its own aircraft.
Failing national carriers
As plans to revive the national carrier gain steam, questions about whether it is a good move at this time are also rising. Several critics point at the poor performance of national carriers around the globe to show it as a wrong move.
From Africa to Asia to Europe, the national carriers continues to post losses, raiding state coffers to stay in the air as a result of stiff competition, oil price fluctuations, and uncertainties in the globally economy.
In Africa, Kenya Airways, South African Airways, Air Zimbabwe, Air Nambia, Camair-Co and Air Botswana have all continued to raid their state-coffers to keep flying their wings.
Last year, the Kenya government injected $250million in Kenya Airways to keep going. This is after the carrier suffered losses in three straight consecutive years citing foreign exchange losses including interest rate expenses.
Kenya Airways, which is 26.7 % owned by Air France-KLM, recorded a loss of $258.3 million in the year ended March 2016 widening the $251miliion loss the year before. This was the same situation in the previous year having recorded a more than expected $92milion loss.
South African Government injected worth $350million in the South African Airways during the same period as the carrier continued to register losses.
SAA is said to be currently surviving on state guarantees having recorded losses for several years now, with the loss standing at $ 130.6million for the financial year 2015/16 compared with the $340.8million loss a year before. In November last year, the South African government hired a Bain&Co to advice on a strategy of loss making national carrier.
The investment firm is also intended to advise the national treasury on the country’s two other state-owned airlines: South African Express and low cost carrier Mango, with the view of merging SAA and South African Express as it seeks for an equity partner in the flag carrier.
Similarly, the Namibian Government has injected more than $290million in Air Namibia over the last 15 years whereas the Zimbabwean Government injected close to $300million in Air Zimbabwe to remain operational having suffered losses and accumulated debts over the years.
RwandAir, which started its operations in 2002 and now boasting of 11 aircrafts, has continued to register losses even as it continues to expand its network across the African continent, Middle East and Asia.
The carrier has in the past two years sought to sell 30% stake to acquire capital it needs to improve efficiency, and fend off competition from regional and international competitors. However, the airline is yet to get any interested party.
Egypt Air, with 79 aircrafts, has suffered accumulated losses of $1.58 billion since January 2011, stemming from the revolution that saw ousting of Hosni Mubarak and the downing of Russian plane in 2015 in Egypt.
Other national carriers including Air Nigeria, Ghana Airways, Air Gabon, Air Senegal, Gambia Bird Airlines, and Zambia Airways have folded over the past decade due to losses and accumulated debts amidst stiff competition.
In Asia, India’s national carrier, Air India has made losses over the past decade and the government is now under pressure to privatize the airline. In 2012, the Indian Government gave over $4.4billion under a bailout plan stretching a period of nine years to turnaround the company.
The only flourishing national carriers including Ethiopian Airlines and Morocco’s Royal Air Maroc on the African continent and the Middle East national carriers such as Emirates, Etihad, and Qatar Airways, and are said to have benefitted from government funding but allowed to operate with limited interference.
Ethiopian Airlines CEO Tewolde Gabremariam told Financial Times that the company has been growing at 20-25% annually in revenue and fleet size over the past five years due to good government policies of non-interference in the airline’s operations.
In the year ended June 2015, Ethiopian Airlines recorded net profit of $148million compared with $87.4million a year earlier, with the analysts attributing much of this success to the carrier’s owner, which does not demand dividends.
It has also acquired a 40% stake in a Togo-based ASKY Airlines, private airline established by the West African governments in 2007 and 49% stake in the loss making Air Malawi in Malawi in 2013.
European national carriers too struggling
European national carriers, too, are struggling to remain operational. They are still saddled with high costs from their days as state-run monopolies but now, trying to privatize to face the high-quality, low-fare service from Persian Gulf carriers on long-haul flights.
Italy’s national carrier, Alitalia’s latest $2.5 billion bailout came from Etihad of the United Arab Emirates in 2015; TAP Air Portugal was saved by an investment group led by JetBlue founder David Neeleman during the same year through acquisition of a 61% stake and promised to inject a minimum of $355.8million into the debt-burdened carrier.
Some are still seeking buyers; state-owned LOT Polish Airlines has been on for sale for several years to follow the footsteps of British Airways and German’s Lufthansa while others including Malev, Hungarian Airlines have folded.
The United Kingdom privatised British Airways to pull itself from slump management in 1987. Now, BA’s parent company, International Airline Group, owns and operates Spain’s Iberia and Ireland’s Aer Lingus, with the respective countries acting as their hubs.
Similarly, Germany privatised its national carrier Lufthansa in 1994, which also now owns Austrian Air in Austria, SwissAir in Switzerland, and Brussels Airlines in Belgium.
This trend, however, demonstrates that privatisation and liberalisation of air transport in the mid 1980’s brought competition from low cost carriers that most state-owned carriers have failed to adapt and remain profitable.
Analysts told The Independent that the experiences of the planned revival of Uganda Airlines will not be any different with other struggling national carriers both within the region and around the globe.
George Mulindwa, a portfolio manager at Stanlib, an investment management firm in Kampala said while the government appears to have made up its mind on reviving the national carrier, it should be ready to continue injecting capital in the carrier to remain operational.
“With the exception of Entebbe-Nairobi route, the aircrafts operating on Entebbe-Kigali route are rarely at full capacity. So, we already have strong competition in the aviation industry in the region “he said.
To make the situation worse, Tanzania President John Magufuli has taken a bold step to revive the national carrier, Air Tanzania.
Currently with three aircrafts, two of which were acquired in last September, Tanzania has ordered for three more aircrafts including a Dreamliner to boost its local operations and facilitate expansion into the East African aviation market.
On the same note, RwandAir is on a rapid expansion, with its 12th aircraft expected to arrive next year to boost regional and long haul flights.
Going forward, Mulindwa says it is better for the government to complete the ongoing big infrastructural projects-Karuma and Isimba dams, Standard Gauge Railway, Entebbe Expressway, and Jinja Bridge- analyse their multiplier effect to the economy before embarking on re-establishing national carrier.
Mulindwa says subsidising an airline could increase Uganda’s debt which is already higher up.
Uganda’s public debt has increased from $7.2 billion as at the end of financial year 2014/15 to about $8 billion as at the end of last financial year and analysts warn that the cost of financing the debt is becoming unsustainable.
Mulindwa says the government should first work on improving its tourism potential and boost its agricultural sector in the next three years then embark on reviving the airline to ensure its sustainability.
Rachel Sebbudde, the World Bank economist says Uganda does not need a national carrier because it is already well connected with both local and regional airlines.
“As we are developing infrastructure, we have to be strategic… For example, if we say, we need to have a national airline, is that really the best way of reducing the cost of doing business in Uganda or there’s an alternative,” Sebbudde says.
She says there are already other airlines already serving travelers in and out of the country and can still do the same job.
Analysts, further, argue that the government has an option of involving private investor using Entebbe as a hub, a similar model being used in most of the European countries to ease travels.
Statistic on the performance of the national carriers:
Some of the loss making national carriers
Kenya Airways made a loss worth$258.3 in the year ended March 2016, up from $251miliion net loss in 2015.
South African Airways made loss worth $ 130.6million loss in 2015/16, down from a $340.8million loss in 2014/15.
EqyptAir has suffered accumulate loss of $1.58bn between 2011 and 2015
Air India made loss of $858,7million in 2014/15, down from $920.2million in 2013/14
Camair-Co from Cameroon made a loss worth $59 million between2012-2014
Some of national carriers receiving government injections to remain afloat
Camair-Co from Cameroon received government injection worth $50.5 in 2016
South African Airways received government injection worth $350million in 2016
Kenya Airways received government injection worth $42 million in 2015 and $250million in 2016
Air Zimbabwe received government injection of $300million in 2015
Air Namimbia has received government injection of more $290million over the 15 years
Air Botswana received government injection worth $37millioin in 2014
Some airlines that have received cash injections from their governments in tough times or prior to privatization
Alitalia $1.58bn and $1.26bn from Italian Government injections in 1997 and 2005, respectively
British Airways- $196.5million from UK Government debt write off pre-privatisation in 1981
Iberia- $589.5million from Spanish Government capital injection in 1996
SwissAir -$1.5billion shared aid in 2002
Aer Lingus -$210.5million Irish Government capital injection in 1996
TAP Air Portugal-$1.89bn package of Portuguese Government aid measures in 1994