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Inside govt’s ambitious plan for Uganda airline

In the blueprint to national airline revival, the current government proposes to implement the delicate venture in three phases – starting with consolidating regional routes and then international routes in 2021, writes ALON MWESIGWA.

Uganda will spend $319 million (Shs 1.2 trillion) in aircraft acquisition to ply regional and international routes in phases 1 and 2, according to the blueprint laid out by the government.

The country also needs additional start-up capital of $70m (Shs 270bn) required to launch the airline. There was an option for leasing aircraft which would have been cheaper but government says purchasing the core fleet of airplanes would be more appropriate.

Members of the aviation fraternity like Capt Francis Babu say it would have been better to first lease the aircraft as the government studied the performance.

But the 136-page blueprint written for the government by an audit and consulting firm (names withheld) says: “In contrast, cash outflows in the form of lease charges would only work to benefit international lessors with aircraft title remaining outside the company.”

“Newer aircraft are more fuel-efficient compared to old ones and benefit from technological advances that lower the fuel burn. The acquisition of new aircraft is accompanied by support packages that help start-up airlines to build own internal capacity to operate and maintain aircraft efficiently.”

Government, therefore, says the decision to buy was also because several countries are enforcing lower carbon emissions from airlines flying into their airspace. New aircraft have lower carbon emissions – meaning they will have no problem entering certain airspaces.

Efforts to revive the national airline come against a backdrop of heavy pessimism from many ordinary Ugandans and some top public officials. The Observer understands that even Bank of Uganda wrote to the president dissuading him from the venture, saying it will be a financial burden to the country.

Some officials at the ministry of finance, which will own 99 per cent of the airline according to the plan, have also spoken against the venture.

Ministry of Works and Transport will own one per cent of the airline. In a carefully worded article in 2016, Jim Mugunga, the ministry of finance publicist, said: “The reality is that post-2016 airline management has to be professional, experienced and competent. The government appointments and interference, failed ideology, backward thinking and corruption have no place here.”

Indeed, early in the plan document, government interference is identified as the biggest threat to the airline. It says: “Government involvement in the business operations of a national carrier can deter the primary business objective of profit maximisation and hinder optimal efficiency.”

Slow, legislative decisions have the potential to impair operations of the airline, the plan says.

It refers to successful national carriers such as Ethiopia Airlines, Singapore Airlines and Egypt Air which have categorically rejected government involvement in management and as a result they have remained profitable and sustainable.

“Failure to run the company as a separate legal entity from its stakeholders…would create bureaucratic-slow systems, which are inadequate to address dynamic markets,” the plan reads.

This means that even the consultants who wrote the document acknowledge that it will take unwavering discipline for the airline to succeed.

“And it can succeed,” said Babu, adding “only if it can rise above the culture of corruption, nepotism, [and] intrigue.”

Babu observes,  “the political will is there because they have started the airline. The onus is on government to make sure the industry works.”

The retired flight captain, however, points out the reality that the airline can only begin to see a profit after five to seven years. The consultants gave the ambitious target of one year to profit.

The government must martial significant resources in order to meet operational, maintenance and expansion costs essential in the very competitive aviation industry.

“Poor financing usually pushes management to cut corners, which is detrimental to the business,” the blueprint reads.

In the first two years, Uganda National Airlines will fly regional routes, introducing international flights at the third year. For the regional network, the plan says, the Bombardier CRJ900 next-generation aircraft was found suitable.

The Montreal-based airplane maker Bombardier announced last week it had signed an MoU with Uganda National Airlines to sell four of such planes. It has 12 business-class seats and 64 economy class.

The plan projected that had the purchase agreement been signed in January 2018, the planes would have been available in August and September. Since they signed this month, it will take another eight months to have the planes ready.

According to the official analysis of regional routes, the Entebbe-Nairobi leg had the largest market. It is followed by Kilimanjaro, Kigali, Johannesburg and Juba.

It also found underserved markets to Khartoum, Mogadishu, Kinshasa, Lubumbashi, Goma, Mombasa, Lagos, and Accra. These will be the national airline’s regional routes, according to the plan.

Long-haul routes that come into the picture around 2021 will be flown by the Airbus A330-800 Neo aircraft which, though not flown by any carrier anywhere in the world, is highly praised in the blueprint.

“This aircraft uses proven technology to deliver economic advantages on long haul flights and has a seating capacity of 257 in the chosen three class layout. This improved version of the classic A330-200 is equipped with new technology engines that leverage on geared fan advantages to lower maintenance costs and deliver efficiency in fuel consumption,” says the plan, despite the fact that Uganda is the first country to buy  this model since 2014 when it first came onto the market. Most countries go for the A330-900 model.

For the routes, based on 2016 data compiled by airline industry-tracking concern, Sabre, the country’s planners found that Dubai, London, Mumbai and Guangzhou in China will return the most profit – accounting for 60 per cent of the origin traffic.

“The initial long-haul network for the airline is, therefore, based on flights to these key points with the market size being used to determine the aircraft capacity required,” the plan reads. “These routes will be launched using the Airbus A330Neo aircraft, configured in a three-class layout as per market requirements with feed from the short-haul intra-Africa regional network.”

As at the end of 2016, passengers carried through Entebbe were 1.6 million – a two per cent growth from the year before. The plan notes that lack of convenient scheduling and affordable pricing on the majority of routes has stifled growth which in turn has resulted in the stagnation of tourism.

PROFITABLE

Government plans to borrow all the money that will be initially invested in the airline. It estimated it would be at five per cent interest and payable between five and 10 years. The overly-ambitious plan claims that in the first year of operation (2019), the airline will post a profit of $3.9m. This will jump to $ 7.2m in the second year.

Profitability is impacted by the introduction of long-haul flights resulting into a loss of $6.1 million in 2021, the third year of the operation.

According to the plan, the international flights section is expected to make losses for the first five years. The airline is cash-positive throughout the plan period with bank and cash balances increasing significantly after year 10 when the majority of the loans for aircraft purchase should have been repaid. Net cash generated from operations increases from $10.6 million in year 1 to $28.7 million in year 5.

Uganda’s discovery of oil is also seen as an advantage that will boost the airline business. Other minerals like gold, copper, tantalite and tin, all around the country, the plan reads, have led to an increase in economic activity throughout the country.

The role played by air transport in this light cannot be understated, it said. But it said for its sustainability, Uganda must ensure Ugandans’ disposable income improves so they are able to travel a little bit more.

The industry is highly regulated with licensing and registration procedures that require significant effort to complete. In addition, airlines do not have control of traffic rights and require permission from their home countries and the respective government authorities in all targeted markets before any flights can commence.

Fuel will be the biggest outlay (27%) to grapple with as direct operating costs. This will be followed by maintenance, flight crew costs, lease charges, handling and dispatch fees, respectively. These costs make the aviation industry one of the most expensive and, therefore, a need to carefully think through whatever decision is made.

Market access will be key. Uganda already has agreements it signed before the collapse of the defunct Uganda Airlines. It can probably still use them to access certain markets. However, it will have to leverage free market access agreed on by African countries in the framework of the 2017 Yamoussoukro Decision taken in Cote d’Ivoire, which liberalises the continent’s air-spaces.

Yet even with these glowing numbers, one thing is for sure: government must not repeat the past mistakes: under capitalisation, political interference, grand corruption and non-commercial decision-making which condemned the past airline to its grave.

amwesigwa@observer.ug

Comments

+1 #1 Apollo Ekelot 2018-07-25 10:51
This is ambitious but in the right direction. Hopefully the numbers have been properly crunched.

The past airline went to the grave; what is not clear is whether it was killed or died a natural death.

If it was killed, then there is something we need to put in the epitaph; I propose "Born during the reign of the 'worst' leader Uganda had and died during the reign of the 'best' leader in Uganda" No business can survive cumulative bad decisions, selfishness and greed.

I am not sure anyone has evaluated the effects of the privatisation, liberalisation, localisation and all the "...sations" of yore, that were so trumpeted in the 90s. It will spell doom if we go into this without such and analysis.

I believe government's hands are quite unclean in terms of managing business, so should disinvest themselves from running the airline, lest we lose the business objective of profit maximisation.
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+2 #2 miki 2018-07-25 21:25
Likely end game of this gambit?

After spending all this money on this sure money loosing venture, they will run it for a few years on massive subsidies with no chance o turning a profit.

Then they will privatize it. You guessed right! General Salim Saleh (Museveni's expert on all matters shady) will come up 'buyers'.

H will make a killing for himself and his brother and in due course this airline die a second death.

Ugandans will get the bill of its outstanding debts/losses. This what happened with Uganda Commercial Bank and later with Uganda Grain Millers.

In both of these General Salim Saleh and probably the rest of Mr. Museveni's family were the sole beneficiaries.

Alternatively, after cumulative losses, government will declare it unsustainable after all. Mr. Museveni will then disown the manner in which the project was done.

Then they will sell all the aircraft to Salim Saleh at a tenth of the original price. Same con game, same players with a few extras like the Azuba's
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0 #3 miki 2018-07-25 21:34
Is the revived airline going to reclaim the lucrative ground handling business from General Salim Saleh, Mr. Sam Kutesa and whoever else these two are fronting for?

To have even the limping chance before the hyenas devour it (which they will certainly do eventually), the airline would desperately need to own and manage the ground handling/and the business aspect of at least Entebbe airport.
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+1 #4 rubangakene 2018-07-25 22:43
I would have started with two Bombadier aircraft and one Airbus to test the waters.

You see these aircraft are well designed, a pilot's airplane that requires very little maintenance thereby eliminating down time; you see, aeroplanes are designed to be in the air earning money.

These types also require very little training of pilots to fly or maintain since they are automated. (you can actually pick a guy of the street and teach him to maintain them, you only need a few highly trained personnel to direct them.

In any case the heavy maintenance is always tied up with the airframe/engine manufacturers or their contractors.
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+2 #5 Ugthinker 2018-07-25 23:05
With the Uganda government’s corruption record, I must say, I’m already out. I will never fly Uganda Airlines for as long as the NRM is in government.

If the NRM can’t construct a decent primary school classroom, how can one trust them with the delicate airplane maintenance?

I’m sure even government officials will avoid it!

That’s what Museveni & co, don’t understand. They have lost even the little fictitious credibility they came with from the bush!

Aftter many years of lies, theft, outright neglect etc, Ugandans are by default despondent towards any government project. That’s where we are!
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-1 #6 kabayekka 2018-07-26 15:18
Mr Babu, you know very well that if the former President, Lule had been given a chance to take over government from former President Idi Amin during 1980, Uganda Airline would be richer than Kenya Airways. Right now Kenya has over 27 expensive modern planes flying all over the world.
One needs to shame you the lot of NRM leadership. You must now sell off that Presidential jet so that the people of Uganda who are land locked can start flying more with the national airline. Many Uganda citizens are prepared to buy shares in this company if this government does not mess up this commercial company again. Many former Uganda Airline staff still living are prepared to contribute their knowledge and skills on a pension basis contract so that this company can get on in the airline world.
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0 #7 Kikonyogo 2018-07-26 18:09
I flew Uganda Airlines 33 yeras ago..Direct..Ebb..London..I will never fly it again..can not trust the food..
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