Reviving Uganda Airlines

By Independent Team

Investors, gov’t moot $450m plan as experts warn on turbulent skies

Uganda has recently been considering some quite dramatic developments in its aviation sector but, analysts warn, it could be flying into some foul weather without a risk-management plan. In July, Parliament approved a request by the government to borrow over Shs 680 billion for the expansion of Entebbe International Airport.

The two-phase expansion plan involves construction of more runaways, terminals, upholds, and taxi-ways.

In the first phase, the borrowed funds would be used to construct a new cargo terminal, resurface the main runway, and construction of a new terminal building to connect to the existing one.

But the high-risk antennae were raised by the confirmation in early August that the government was indeed considering reviving its defunct national carrier, Uganda Airlines.

Just a year ago, in August 2014, The Independent revealed that it had confirmation from the Vice Chairperson of Parliament’s Infrastructure Committee, Simon Peter Aleper, that his committee was auditing the performance of the local airlines to pave way for the revival of Uganda Airlines.

The Independent reported that it had seen a document sent to President Yoweri Museveni detailing the interest of investors abroad to revive the national carrier.

Dated September 16, 2013, the proposal was prepared by two officials; Peter Yehangane and Enock Machelikim on behalf of Air Oasis (UG) Limited (the local coordinating team) for the USA-based Fly Comoros.

In the proposal, investors proposed to inject $160 million and start operations with 23 aircraft. Ugandan investors, probably the government, would foot the balance of US$40 million on an 80 to 20 ratio. Eventually, it was envisaged in the paper that the start-up would have operational capital of US$450 million. That would be higher than the total equity of Kenya Airways as at March 2013.

The investors proposed that they would run the airline for a period of three to five years and then exit after recovering their operational costs and earned a good return on their investment.

At the exit point, the investors say, all shareholding would revert to the State.

At the time, analysts said, the proposal was largely backed by CAA insiders and could have influenced the decision to ground Air Uganda.

At the time, Uganda’s then-de facto national carrier, the privately owned Air Uganda, had just been grounded. It did not recover.

Other carriers grounded included Uganda Air Cargo, owned by the government and supervised by the Defence ministry, and smaller operators TransAfric Airlines, Mission Aviation Fellowship (MAF), NdejjeJuu and Aeroclub and Flight Training Centre (KAFTC) – all based at Kajjansi Airfield.

Since the collapse of Uganda Airlines, numerous efforts to revive a de facto national carrier have floundered. These included efforts by the East African Airlines, started by some Ugandans and Africa One, a pan-African airline initially based at Entebbe.

But the revival of the national carrier is favoured for both political-economic reasons and sentimentality.

When it was last discussed in Parliament, the Opposition Chief Whip and Dokolo District Woman MP Cecilia Atim Ogwal, spoke out passionately for it.

She said, without a national carrier, Ugandans have been forced to pay for costly tickets from Kenya Airways and other foreign carriers. “It is time we revive our airline,” Ogwal said. Now, in an interview with The Monitor newspaper, the Executive Director of the Uganda Development Corporation (UDC), Fred Ogene, reportedly said his institution has been authorized to reinstate the national carrier within six months.

The revival of Uganda Airlines comes in the wake of British Airways suspending flights between Entebbe International Airport and Heathrow airport on grounds that the flights are not “commercially viable.”

Big lessons for Uganda

The region’s biggest carrier, Kenya Airways, in early August announced a loss of US$257 million (KShs 25.7 billion).

The third loss in three consecutive years, it was the biggest ever loss in the airline and country’s corporate history.

KQ’s bad fortune is being blamed on external factors, including terrorism, a slump in the European economy, the Ebola outbreak, travel advisories against Kenya and oil price volatility as contributing to the company’s losses in 2014.

But, according to the local press, there have also been credible reports of shady procurement and aircraft leasing scams within the company that have been haemorrhaging cash.  According to KQ’s consolidated income statement, although turnover increased by 4% in the past year, it just wasn’t enough to keep up with costs – operating losses were 500% higher than last year, net finance costs nearly three times higher, and ultimately, loss after tax was 661% higher than in the year before when the company posted a net loss of$33 million (Ksh3.3billion).

By 2013, KQ’s wage bill had more than doubled to $161 million in seven years, and staff numbers stood at 4,000. According to the Centre for Aviation, the average annual wage at the airline was $32,333, about double what Ethiopian Airlines was paying its 6,300 workforce.

Meanwhile, Ethiopian managed to persuade its workforce to accept a pay cut in 2012. In a related development, there are unconfirmed reports that RwandAir is looking for a strategic partnership with either Ethiopian Airlines or Etihad Airways. Under the plan, RwandAir would cede 49% of Rwanda’s national carrier and its management.

The Rwanda government continues to finance the operations of the non-profitable airline. In the 2013/2014 national budget, Rwanda allocated Rwf29 billion to RwandAir, a Rwf9 billion jump from the year before.

RwandAir recently borrowed $160m from PTA Bank to buy two Airbus aircraft and increase its fleet to eight.

“The airline business in Africa is not very profitable and in most cases relies on subsidies from governments,” says RwandAir CEO John Mirenge.

Farther afield, South African Airways, one of Africa’s big carriers has been in the red for years now, according to The Mail & Guardian newspaper.

In the latest figures for 2014, it posted a net loss of $200 million, up from $91 million in 2013.

Only Ethiopian Airlines appears to be flying under blue skies. It reportedly posted profits in the region of $96 million, according to The Mail & Guardian.

The paper also reports on a proposal that the then CEO of Kenya Airways, Titus Naikuni, made in 2012 to delegates attending an aviation conference in Johannesburg. He suggested a three-way merger between KQ, Ethiopian Airlines and SAA, according to an article in The Economist reports.

Naikuni reportedly argued that an African “super-airline” was the only way to survive competition from Middle Eastern carriers like Emirates, Qatar Airways and Turkish Airlines that were “stealing” African passengers with cheaper fares, bigger and better planes.

According to the African Development Bank, 17 countries in sub-Saharan Africa continue to operate weak State-owned carriers in very small, protected markets, that only survive thanks to substantial government subsidies and often represent a considerable drain on public finances.

An additional 25 countries have scrapped their flag carriers in favour of private operators – including Uganda, Nigeria, Ghana, Cameroon, Senegal Tanzania, Democratic Republic of Congo, Zambia and Malawi.

Analysts say that to be viable and survive operationally, African national carriers need governments with a firm hand, especially against corruption.

The Mail & Guardian writes: “Perhaps there is something unique in the airline business that makes it suitable for a “clever” hybrid democratic-authoritarian regime (emphasis on “clever”) to find success. First, there is probably no other business that a developing country can run that is so embedded in the global economy, and that is so exposed to exogenous risk.”

In Rwanda, however, President Paul Kagame takes a different view on the so-called RwandAir losses.

“If you compare the so-called ‘loss’ and how much money local businesses have made, the benefits are significant, and I am yet to be proven wrong,” he said at the recent launch of the Rwanda-Kenya Business Forum in Kigali.

Kagame explained that in five years of government-aided operations, RwandAir flying to 20 destinations in at least 12 countries, has boosted tourism and widened market opportunities for the private sector.

Perhaps, Uganda needs to take a similar realistic perspective as it ventures into the skies under very dark clouds.