Tuesday, July 17, 2018

UGANDA AIRLINES WILL BE A POISONED CHALICE

A few weeks ago I put out a public request for the business plan for the revival of Uganda Airlines. Nothing happened until a few days ago, when the full feasibility study that justified the project fell in my laps. So to speak.

According of the writers of the feasibility plan, which was the National Planning Authority (NPA) the justification of the airline is based on the assumptions that it will facilitate tourism, stimulate economic growth, promote exports, improve our widening trade deficit and reduce cost of air transport.

They also added that it will help break foreign dominance of airspace, help market the country abroad and create employment opportunities for Ugandans in the aviation industry.

The planners set the start-up costs as $400m (sh1.6trillion) which will be spent on buying six planes -- $330m, start-up costs $20m and contingency money of $70m or about three months of expenses assuming no revenues.

The airline will fly seven international routes – London,  Brussels, Dubai, Doha,  Mumbai, Johannesburg and Lagos and 18 regional routes, which would include all capitals of East African Community as well Kinshasa, Juba, Khartoum, Asmara, Addis Ababa, Lusaka and Harare.

From this point on things begin to get fantastic.

According to the plan the airline will manage a passenger load factor – a measure of how many passengers they will carry per flight compared of available seats, of 49 percent. In other places in the plan they put the load factor in year one at 62 percent.

This is important because the more people you can carry from day one the faster you can become profitable, if your costing is correct.

Industry experts have pointed out two flaws in this scenario. 

One that it is impossible, especially given the anaemic advertising budget of less than $5m per year in the first four years.

Secondly and related to that the airline business is dependent on reputation and loyalty, neither of which the new Uganda Airlines has. As a new entrant they will be starting from scratch in an extremely competitive market so to have half a chance of working they need to have a bigger marketing budget.

And the competition is real to Brussels, Dubai, Doha, Johannesburg, Addis Ababa and Nairobi, the new airline will be flying in to hubs with established competition on those routes. Even with bilateral flying agreements between the respective points one should not expect those airlines to roll over and hand over their market.

One aviation veteran pointed out that there can be no Uganda Airlines without an Entebbe-Nairobi route. But that route happens to be one of the most lucrative for Kenya Airways and it will be a fight to the death for them to even give an inch. The failure to gain traction on this single route has been the downfall of all airlines trying to fly out of Entebbe.

"The choice of routes is also curious because the promoters of the airline have consistently argued that the airline would provide non-stop flights from tourist markets that are not currently served by the current airlines. That rationale flies out the window with the plan to compete directly with existing players....
Their argument would have been supported by routes to Frankfurt or Barcelona or Tokyo or any number of other destinations serving potential toursim markets.

Experts are divided on whether buying planes or leasing them is the better option.
One expert said the better deal would be to buy the planes and do away with leasing costs which would come due whether the plane is flying profitably or not, but that is if we can buy them cash down.

The feasibility study does not forsee such a scenario so have provided for borrowing to finance the $330m plane purchases. They plan for interest and amortisation payments of at least $14m annually from the third year onwards.

Another industry source buying the planes is a bad idea because it would be locking all that money in planes with no guarantee of traffic. All the projections in the feasibility study are not realistic, he said and he hoped the planners did not think that because it is Uganda Airlines, Ugandans will be falling over themselves to fly it.

“There is no loyalty in this industry. Passengers are looking for reputation and convenience. We won’t care about Uganda Airlines,” he said.

The money he suggested would be better spent in the first two years code sharing, where an airline sells tickets but passengers fly other airlines, to establish some traffic before you invest in the airplanes. This money would be used to heavily market the airline in the meantime.

"There was unanimity though that there was no way that the airline would attain profitability by the fourth year....

“That would be a world record,” one industry expert as he all but rolled in the aisles.
“You are building a reputation, especially reliability. You cannot believe how many empty flights you are going to make to all your destinations before passengers begin to take you seriously. That is all money. But in this industry it’s an understandable cost of business.”

In fact he added, that $70m you have budgeted for contingency will be done in a sooner than three months.

Across the border Rwanda Air has been flying since 2001 have never made a profit. A few months ago they gleefully announced that they had cut losses last year to one million dollars.

The supporters of the project however counter that the benefits to the economy in job creation – all of 439 jobs over five years, promotion of exports and lower fairs out of Entebbe will more than make up for the losses the airline will make.

On exports the planners had a curious insertion about exports, “

It would seem that the limitation to the development of a good export industry has been the lack of regular air services to transport what is produced in Uganda to other markets. “

This seems to suggest that if we have our own planes suddenly people will start exporting by air.
Most of our exports – coffee, maize, beans are bulky and more cost effectively shipped by land than air. We have some fish and horticulture products which can flown out but this has been going on for the last two decades without our own airline.

Interestingly despite projecting how profitable the enterprise will be the authors cover themselves by asserting deep in the plan that the airline need not be profitable and should be considered as infrastructure like a road, which the tax payer finances without caring about the bottom line.

That is not only lazy thinking but encourages moral hazard and corruption. Given a blank check like that to start a business what incentive would the management have to make it self-sustaining?

Richard Branson, who has started and owned an airline joked one time that the best way to become a millionaire is to start with a billion dollars and buy an airline. He should know.

"It is an amazing plan with more holes than a kitchen sieve. No wonder it is a closely guarded secret...

We do not need an airline of our own. We have more than a dozen airlines flying into Uganda already. 

There are cheaper ways to get what we want – connectivity to the world, higher tourism numbers and export receipts.

This particularly true in this time when we are trying hard to raise revenues to finance badly need public goods – education, health and infrastructure.

3 comments:

  1. Hey Paul, what an expose! To hell with Planning Authority... someone in there must have been planning to drop a deep hole into Kisanja no muchezo. This whole process for writing the Ug Airlines plan should have involved the wider knowledgeable public... The secret is now aburst. No mor elies. God save Uganda.

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    Replies
    1. I couldnt believe it. Don't think any respectable business school would pass that thing!

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