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Monday, October 17, 2016

WHAT IT WOULD TAKE TO MAKE A NATIONAL AIRLINE WORK

If there was any doubt that we are going ahead with a state airline President Yoweri Museveni’s word at the Independence Day celebration last week put them to rest.

My own opposition to the airline revolves around two questions.

What is it that the state airline would do for us that the existing players cannot do for us? Supporters of the project have never come up with a convincing answer for this except for a few vague mumblings about national pride.

"And secondly the issue of opportunity cost. That in spending the hundreds of millions of dollars required to make the project halfway viable, do we realise we will be denying more pressing needs in education, health and infrastructure the badly needed resources they need to deliver adequate service?...

The proponents don t seem to have a comeback for this one. Some have hazarded that we waste money on parliament and in corruption so why not on an airline.

That’s when I switch to another whatsapp conversation.

But since it is a fait accompli what would we really need to do to make this adventure work?

Project supporters point to the increased number flying into Entebbe – 1.5m last year compared to about 350,000 when Uganda Airlines folded, as a sign there is enough business for one more airline. 

The logic of that argument is lost on me. So the extra passengers will stop flying the time tested Emirates, Etihad, KLM, SN Brussels and even Kenya Airways to jump onto the untested new airline?

That being said it should be noted that these airlines feed into their respective hubs where they have onward flights to other destinations. Industry players estimate that only about 15 percent of travellers out of Entebbe are end-end users. This means for example that there are very few users who fly and stop in Addis Ababa or Dubai or Amsterdam or Nairobi for that matter. Most catch onward flights to elsewhere. Who would want to fly to a destination and have to change airlines? It’s a headache we would all rather avoid. Put that way it further narrows the numbers the new airline will be competing for to about 250,000 passengers a year.

Industry experts remember that the reason the initial Uganda Airlines collapsed was because it was undercapitalised and couldn’t take advantage of the lack of competition, then relative to now. Today the competition is much stiffer, with upwards of 15 airlines flying in and out of Entebbe which by extension would mean we would need more money to start-up the airline and keep it afloat.

"They point out that start-up airlines work on a business plan which sees revenues matching expenses after between 18 to 24 months, with break even coming much further down the line. RwandaAir started in 2002 and is still waiting to break even...

What can be expected is that there will be a long period of loss making, which losses, ongoing costs of operations and maintenance and continuous investment will have to be covered by the government.
To buy a brand new Boeing 737, the smallest of the company’s line, will set us back anything from $50 (Sh165b) to $90m (sh300b). To be competitive we will need several so already we can expect that on planes alone we will shell out at least $100m.

We could lease planes but industry experts are against this option as leasing costs will be a loadstone around the airlines neck especially when business is low. But assuming we used the leasing option to lease the same Boeing 737 with crew would cost us about $2500 an hour or $21.9m annually as this figure is regardless of whether the plane is flying or not.

And this is just the planes, we haven’t started talking about fuel, landing fees, staff costs, marketing and branding.

"To cut a long story short industry experts say for the airline to have half a chance of survival the government wold have to buy the planes and to buy back ground handling services from ENHAS....

One of the reasons for Uganda Airlines collapse was that the main cash cow of its operations, ground handling was hived off and sold to private operators. Observers say that a one off sale may mean at least $100m pay-out to the ENHAS owners given their annual revenues estimated in the millions of dollars. With more than 26,000 flights in and out of Entebbe annually and the cost of handling the smallest plane at $500, these cash flows would go a long way to easing the losses of the nascent airline.

Given this out lay one can expect that government would have to indulge in some predatory behaviour favouring the new airline over other airlines. This wouldn’t be bad if quality standards are what passengers have been used to but the flip side is that other airlines may have to start rethinking their investments in Uganda much to the discomfort of the passengers.


The key of course is whether the government will have the stomach to keep pouring money into what can develop quickly into a financial blackhole, as they wait for it to become profitable.

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