Connecting East Africa

Source:
This story is sourced from Flight International
Subscribe today »
Kenya Airways has shown how to succeed, but its East African regional rivals are struggling

Michael Wakabi/KAMPALA

A shareholders' meeting on 26 November could pose ominous implications for the East African air industry. The stockholders control African Joint Air Services Agreement (AJAS), the holding company behind SA Alliance, the airline owned by Uganda, Tanzania and South African Airways (SAA). To grow, SA Alliance - previously known as Alliance Air - needs access to East Africa's regional routes. If a deal cannot be worked out, the fragile partnership could unravel.

The saying, "the more things change, the more they stay the same" is becoming a truism in the hotly contested East African market, where indications are that after years of independent national airlines, the carriers' survival may depend on them joining under one banner, just as they had years before.

Privatisation of Africa's airline industry is complicated because nationalistic pride is vying with financial pragmatism to turn competing interests into a viable venture that benefits all.

Kenya Airways' venture into privatisation has been a success. Three years after selling 26% of its shares to KLM Royal Dutch Airlines, the airline is East Africa's dominant carrier. The marriage with the Dutch brought in $26 million, led to joint operations on long-haul routes and to vital technical collaboration, all of which have helped turn around the carrier. A new all-jet fleet, coupled with route expansion, has given the airline as much as 75% market share on some regional routes.

Elsewhere, the picture is not so rosy. In March last year, Alliance Air bought 49% of Air Rwanda and reformed it as Alliance Express Rwanda. A Boeing 737 was brought in to augment the fleet, which then consisted of a single de Havilland Twin Otter turboprop, since retired.

A year on, the relaunched carrier, which also flies a Bombardier Dash 8-200, had expanded its route network as far as Johannesburg in South Africa, but the year closed with a $4 million loss.

"That is not bad, considering where we've come from. It could have been worse. But we have exceeded our wildest expectations," says Fredrick Ochieng-Obbo, deputy managing director of Alliance Express Rwanda.

For SA Alliance's participants Uganda and Tanzania, the road to privatisation is not proving easy. The two countries are in dilemmas over the futures of their national airlines, with their stakes in SA Alliance complicating the issue of profitable privatisation of the carriers.

Long-haul surrender

Along with their governments, Uganda Airlines and Air Tanzania are shareholders in SA Alliance. Under the agreement, Uganda and Tanzania have surrendered their long-haul routes to Europe and the Far East to SA Alliance.

But, with the possible exception of SAA, the alliance has not worked for any of the participants. The national airlines that were meant to feed the international operation have grown weaker and, after four years, SA Alliance's operating deficit has grown to $40 million. According to privatisation minister Manzi Tumubweine, Uganda Airlines costs the treasury an average $500,000 a month in subsidies. The huge cost to the taxpayer is the reason Manzi has been pushing to divest the government of Uganda Airlines at any cost.

Consistent under-performance has convinced all parties that privatisation or liquidation of the carriers are the only options. Privatisation is the preferred choice, but how to maximise value out of the sales, with an agreement that takes away the most important assets, is proving as difficult as reinventing the wheel. Recapitalisation is out of the question because of World Bank-dictated restructuring programmes that are running in the two countries.

Uganda put 49% of its national carrier on the market last September. The offer attracted interest from six bidders, including British Airways, SAA and Sabena. Six months later, only SAA was left. BA and Sabena pulled out, citing unresolved route issues, effectively killing off any competitive bidding.

Direct discussions

Desperate to stem the haemorrhage, Uganda opted for direct discussions with SAA. But more than five months of negotiations and 3,000 pages of agreements later, the two parties are no closer. Using its unchallenged position, SAA is pushing for a deal that has met opposition from Uganda's legislature.

Among sections of the agreement that legislators oppose is a condition that the relaunched carrier use the SAA call sign, for which it will pay a franchise fee. Another provision that has met opposition gives SAA the option to sell its interests in Uganda Airlines to any of its subsidiaries or merge the Ugandan operation into them within 12 months of the purchase.

Legislators are concerned that if this were allowed to happen, Uganda Airlines would enter the partnership with assets but emerge with liabilities .

Uganda's Parliament has blocked the agreement, accusing the privatisation authorities of designing a tailor-made deal that was meant to fit only SAA. Operating a leased 737-500, international routes were seen to be the only major asset that would have attracted competitive bidding for Uganda Airlines. Refusal by the political establishment to pull out of AJAS has undermined value and with parliamentary approval not forthcoming, the deal is stuck.

A similar pattern is emerging in Tanzania. With its two 737s and two Fokker F27s, Air Tanzania has posted modest profits since 1992. This year, a $ 1.2 million profit is projected.

Air Tanzania management wants to leave AJAS, but with 100% owned by the state, that decision is the government's prerogative. So far, there is no indication that Tanzania will pull out, a situation that is raising concerns.

"The Air Tanzania board decided that we should pull out of AJAS and the issue has been discussed at the level of cabinet," says Air Tanzania managing director Emmanuel Kimaro.

"Our view is that the issue of traffic rights should be revisited as a way of restoring value to Air Tanzania," he adds.

Among alternatives open to the East African carriers is multiple designation. This would allow SA Alliance to co-exist with the privatised carriers. According to analysts, however, this option is not attractive to SAA and its allies within the Uganda Government because of the size of the Ugandan market. Just under 400,000 international passengers used Entebbe Airport last year and opening up to competition would reduce margins. SAA wants the lion's share of an integrated East African operation, which would result in a combined market of at least 1 million passengers a year.

This type of arrangement could work for Tanzania, but in Uganda the commercial agreement between SAA and Uganda's Government would have to be torn apart. According to the documents, SAA does not want competitors designated on the routes it takes over for at least 12 months or until load factors of 73% are achieved.

"But as anybody in the aviation industry will tell you, when an airline achieves such a load factor, they will simply seek to increase frequency. SAA is asking Uganda to give it a monopoly," says Dick Turinawe, Uganda Airlines' general manager.

Such an agreement would also go against the liberal provisions of the open skies initiative agreed in August by the 21 member states of the Common Market for Eastern and Southern Africa (Flight International, 25-31 August).

Should the deal with SAA fail to go through, Uganda's Government warns it will not put any more money into the national carrier. Since June, the airline has been largely running on its own resources. Parliament and the airline management feel that the deal with SAA should be put on ice.

Uganda Airlines, they suggest, should be re-tendered under more competitive conditions, after routes are recovered from AJAS. If this cannot work, the airline should be allowed to restructure and enter alliances that will give it access to wider markets at minimal cost. As far as the privatisation authorities are concerned, however, if a deal with SAA cannot be clinched, liquidation is the other option.