By Kalima Nkonde
The recent statement by Minister of Transport and Communications, Brian Mushimba at the Zambia International Trade Fair on July 2, 2017 that the Ministry was still looking at establishing a National airline came on the heels of the South African government scampering to look for funds to bail out the ailing national airline and were forced to use funds from the National Revenue Fund (NRF), a reserve fund for exceptional expenditure.
South Africa’s national Carrier, South African airways is drowning in a mountain of debt and government had to bail it out in order to avoid default and trigger the call out on all its loans. The airline has been bailed out several times and had prepared several restructuring strategies which all failed.
The South African government announced in a statement on Saturday July 1, 2017 that it had provided South African Airways (SAA) funds to help it repay loans of about 2.3 billion rand ($176 million) to Standard Chartered.
“A default by the airline would have triggered a call on the guarantee, leading to an outflow from the NRF and possibly resulting in elevated perceptions of risk related to the rest of SAA’s guaranteed debt”, the statement said. “Drawing on the NRF was a tough decision versus the worse one of defaulting. It was taken to reassure lenders that state firms and more importantly government won’t default,” ministry spokesman Mayihlome Tshwete added.
The South African national airline SAA relies on government guarantees estimated to amount to about 20 billion rand in order to keep it solvent. The airlines is said by experts and rating agencies to be a threat to the South African economy.
In neighbouring Botswana, the Government decided to start privatizing the national airline, Air Botswana after giving up on supporting it from the treasury. Air Botswana(AB) had been bailed out several times and that country president’s General Khama at one time in 2013 said that they will continue bailing it out because they can afford it but finally due to perennial losses and unsustainable drain on the treasury they have decided to try once again to privatize it. Earlier attempts to privatize the airline failed.
All African countries apart from Ethiopia that have national airlines such as Air Namibia, Air Botswana, Air Zimbabwe, TAAG of Angola and many others are all loss making and a burden to their treasury. There are just stuck with these airlines and cannot close them because of the dire consequences like the resulting unemployment similar to what Zambia went through in 1994 when Zambia airways was liquidated. Running and owning a national airline by Governments in modern times is like being in an unhappy marriage and the parties are just forced to be together because of the children or other compelling reasons! But Zambia wants to take that route.
Background to Zambia national airline project
It is important for the reader to understand that the whole issue of re-establishing the national airline in Zambia was politically motivated by the late President, Michael Sata whose modus operandi to economic management was based on wishes, sentiment, populism and not rational and informed economic decision making. Despite being part of the Government that abolished Zambia airways in the first place, he wanted to re-establish it and so one would beg to ask: what has changed?
To kick start the project, instead of commissioning an independent feasibility study to carry out an objective analysis of the Costs and benefits of re-establishing a national airline, the President appointed a large technical committee made up of unemployed former Zambia airways staff, the Zambia air force, civil servants from ministries of transport, Commerce, finance, tourism. They operated without a budget or a formal structure in terms of a special purpose vehicle through which they could have been operating in.
To circumvent funding issues, the Zambia Air force was to play a leading role and was required to provide funds for meetings, allowances etc! Up to now, the Zambia air force is at the forefront of the national airline project. It was also a question of the blind leading the blind as no proper independent, experienced and exposed experts were involved. There still not involved and consulted. The stakeholders like those operating airlines or trying to establish airlines were and are still not formally consulted.
The influence of the Air force in a civilian Commercial project is mind boggling especially given the accident record of Zambia Air force. There is also the difference in the operational paradigm of a Commercial airline and the Military! It is common knowledge that if they had started with the feasibility study, it would have answered a lot of questions including why Zambia airways and other national airlines fail, costs and benefits of the project-tangible and intangible, the recommended business model, benchmark airlines, the route network and so on and persuaded them to abandon the project early.
The approach that the late President followed was flawed from the beginning and it amounted to doing the same thing all over again – restarting Zambia airways – and expecting a different result. There is so much day dreaming in the airline project as they boast that they do not want a “Kantemba” Airline forgetting that it took Zambia airways over 30 years to grow to where it was when it was disbanded in 1994. Successful businesses are not started big!
Why Zambia does not need national airline
It should be noted that it is a well known fact in aviation circles that the national airline business model is a discredited and failed business model. Any body who understands the aviation industry or who can carry out an objective and in depth analysis will come out with the same answer that the national airline in the traditional sense is not a viable proposition. The IMF and World Bank have not been in support of national airline projects at all. Most Governments that continue running national airlines are doing so because there are stuck with them.
On his visit to Zambia in December, 2015, Sir Richard Branson – the founder of Virgin Atlantic Airways – clearly pointed out that Governments have no business in running airlines! According to Sir Branson, “Governments are not good at running companies. There are a lot of opportunities in Zambia for businesses to expand and I think those businesses should be done by Zambians rather than by people like myself. It would be great to get Zambian entrepreneurs on setting up a low cost airline and may be we can help a bit……” he was quoted as saying. Who better to listen to than the Entrepreneur extraordinaire himself!
There are numerous countries that have abandoned the running of national airlines among them the UK government which divested its majority shareholding in British Airways in the 1980s, Kenya, Nigerian, Ugandan, DRC, Ghana and others have also done the same.
The proponents of the National Airline argue that it will promote tourism, trade and investment but this is a fallacy and it is not really proven especially that they do not match these perceived benefits against the cost to the economy of the national airline in terms of Government subsidies, re-capitalisation, stifling competition in the aviation industry and keeping fares high and so on and so forth.
The real motivation behind the national airline by those driving the project is employment, the nostalgia of flying free or subsidized to London and other European countries, the convenience to the Party in power to fly around the country including for political campaigns and national pride of having a national airline as they admire Rwanda Air and others who they do not even understand how they sustain their airlines despite not being resource rich.
The main argument against the re-establishment of the national airline is that it is not the best way of using the scarce tax kwachas as the project will not benefit the majority of poor Zambians whether directly or indirectly. The beneficiaries to such an airline will be: the aircraft manufacturers, Aircraft leasing companies, the Zambia air force staff who want commercial pilot licenses on retirement, the politically connected, unemployed former Zambia airways employees, Government officials who will fly on credit and build up debt for the airline.
There is no doubt that such an airline will have all the ingredients of failed national airlines which include a blotted workforce, over paid staff, low productivity by staff including crew like pilots, appointment of incompetent managers who are mainly party cadres, imprudent acquisition of aircraft, acquisition wrong aircraft, political interference and abuse of the national carrier by politicians, overcapacity (too many airplanes for too few routes.
Although most Zambian experts local and abroad are critical of the establishment of the National airline, they still believe that our aviation sector needs to grow and develop. It needs to be more vibrant and competitive but it should be driven by the Zambian private sector with minimum Government support. If countries like South Africa, Ghana, Nigeria, Kenya, have home grown airlines and the fares are affordable because of competition, why can’t we not do it in Zambia? The current position where to travel locally by air is so expensive because you have Proflight who are a virtual monopoly with the typical monopoly behavior of restricting output (small aircraft) and charging exorbitant fares is not good for the industry and the country’s economy
There is no argument about the fact that Zambia has a problem with air transportation especially for local air travel especially which is too expensive as Proflight is a monopoly. The solution, however, is not a national airline where government is the main driver.
Recommended solution to aviation sector problems
The first solution to Zambia’s aviation and tourism sector problems is to address the cost of doing business in these sectors in comparison with neighbouring countries. Government levies and taxes are a great impediment to the development of these sectors. The local and foreign airlines that have closed shop in Zambia have mainly done so on account of the cost of operating an airline in Zambia.
The cost of aviation fuel in Zambia is the highest in the region and fuel in one of the major components of operating an airline and it can make or break a carrier, this needs to be addressed by government and positive results will show within a short period of time.
The other major cost of a carrier in Zambia is government levies and taxes which are way too high. The cost of a domestic airline ticket is made of 25% taxes and levies. There are four types of taxes that passengers pay to fly domestically – departure tax, civil aviation tax, security tax and development tax and yet well run Airlines’ net profit margin world wide is about 5%. If one was to add 35% income tax, it means government takes 60% of an airline’s cashflow. This is no way to develop the industry.
Second solution is for the Government to consider a Public Private Partnership (PPP) and team up with credible local aviation entrepreneurs to slowly and prudently establish the National Flag Carrier using Kenya Airways and Mauritian Airways as benchmarks. Kenyan Government’s shares are below 20% and Mauritian Government has about 15% in Mauritian Airways.
The Government should have minimum shareholding for credibility of the airline in the financial markets and the travelling public but effective control should entirely be with the private sector like it has done with Kagem, Zanaco and Quantum mines.
The Government should ask indigenous Zambian entrepreneurs who have run airlines or attempted to run airlines like Zambian airways, Zambezi airlines, Mahogany, Mukuba Airlines and others to make proposals for a PPP and they can then choose one to work with. Zambian government should merely facilitate Zambian entrepreneurs in aviation so as to have more competition as the following examples in other countries demonstrate in : David Neeleman of Azul in Brazil, Tony Fernandes of Air Asia in Malaysia, Eric Ventor founded Kulula.com and runs Comair in South Africa, Richard Branson has Virgin Antlantic and the list goes on.
Zambians participation in high value industries
It is time that the Zambian government encouraged Zambians to participate in high value industries like mines, telecoms, power, aviation etc if we are not to continue being blackmailed by foreign investors like the mines have done five times now! They won on Windfall tax; on Statutory instrument monitoring inflows and outflows of foreign exchange, VAT S18, Royalty tax and recently on the reversal of the 15% tax on export of concentrates. The Government curved in after various threats by the mines of retrenchment, relocation and restricting supply of dollars to the market resulting in the kwacha depreciating in 2014/15! It is high time our politicians understood that foreign investment alone never developed a country!
It is hoped that the analysis will help Government make an informed and objective decision. It is alleged that Zambia has already paid $10million to Airbus as deposit for aircraft over a year ago. They should just convert this into equity and invest in a qualifying Zambian owned Carrier. The establishment of a majority Government owned national airline is an expensive exercise and pursuing it with vigour is tantamount to misplaced priorities when we are struggling to pay pensioners and clearing arrears to contractors and government suppliers. South Africa and Botswana are richer countries than us and are more endowed with better experienced and qualified technocrats and politicians than Zambia and for them to give up on the national airline business model, tells a hell lot of things and our technocrats and politicians better take note.
The writer is a Chartered Accountant by profession and a financial management expert. He is an independent and non partisan commentator/analyst. He has lived in the diaspora in England, South Africa and Botswana for over 25 years.