African state airlines: Necessity or folly?

By Rafiq Raji, PhD
Twitter: @DrRafiqRaji

In May 2017, the Nigerian government announced plans to set up a national airline. Considering the country’s chequered history with such ventures, more than a tad eyebrows were raised. The last time an attempt was made at setting up a national airline, the Nigerian government entered into an arrangement with Virgin Atlantic, a British airline. It did not end well. And if the objective was to restore the national pride that supposedly comes with a national carrier, that too failed. The botched airline, then named “Virgin Nigeria” was more “Virgin” than it was “Nigeria”; in name, that is. The issues that led to the Richard Branson – led Virgin Group to finally leave Nigeria are more complicated. They were literally kicked out. When Nigeria had a proper national airline, it was called “Nigerian Airways” and yes, it was a source of pride; for a while. It is a little disturbing that while African countries like Ethiopia, Kenya and South Africa have since then been able to run airlines that by and large meet the mark internationally, Nigeria has floundered in this regard ever since Nigeria Airways ceased to exist officially in 2003 (It stopped major operations years before). Nigeria’s President Muhammadu Buhari seemed determined to forge ahead regardless; especially now that he seeks re-election, at campaigns of which he would have to account for earlier promises, one of which is to set up a national airline. The original plan was to merge a couple of private airlines, which due to insolvency, had been bailed out by the state’s “bad bank” and thus effectively owned by the goverment. There was a change of plans, it seems. Instead, the Nigerian government appointed international advisers for the setting up of a brand new airline in May 2017; a consortium led by Lufthansa. In early February, it emerged Lufthansa’s terms might have been a little onerous for the governmment. The terms, which included a 75 percent upfront payment of costs in Euros to be domiciled in an internatinal bank, suggest Lufthansa took a few lessons from the nation’s not too stellar record. As both parties could not agree, the Nigerian government appointed Airline Management Group in Lufthansa’s stead. With elections due in about a year and the government in full election mode, how much progress would be made thenceforth is doubtful. And should the Buhari administration fail to get re-elected, it is not unlikely that the idea might be jettisoned all together by a new one.

Corruption, cost-cutting, little or no profit
There is a consistency about the causes of the sad narratives of state-owned African airlines: corruption. Whether it is Kenya Airways, South African Airways, Air Zimbabwe, to mention a few, the wreckage they have become can be traced to fraud, patronage and almost maniacal mismanagement. And to repair the damage, the modus operandi is almost always the same: cost-cutting. Just in April, Sudan Airways announced plans to cut 80 percent of its staff. It had little choice; it does not operate any of its planes currently. Sudan Airways’ troubles are unique, though, having been instigated by international sanctions on the Sudanese government. With hopes up that America would eventually delist Sudan from its list of state sponsors of terror, much needed financing might come about in due course to help with a direly needed turnaround. It is a little surprising therefore that African governments remain determined to either continue managing or set up national airlines; even as examples clearly abound about the difficulties of managing one. John Ashbourne, Africa economist at London-based Capital Economics provides some perspective: “For many countries, this is largely a political decision by leaders who see successful flag carriers as a sign of status.” Whether it is Kenya Airways, South African Airways, Air Zimbabwe, or Sudan Airways, the tales of woes are the same. They are not making enough money to cover their costs, some are alltogether insolvent, and others like the South African one have been weighing overly on state treasuries. Kenya Airways, which made a $251 million loss in its most recent 2016/17 financial year and negative equity of 45 billion shillings, had to be rescued by the Kenyan government in November 2017. The resultant restructuring of the airline’s debt upped the equity stake of the government but inevitably diluted the holdings of existing shareholders. It would take at least 10 years for the new management of the airline to clear the airline’s indebtedness; at least that is the period the government’s guarantee covers. Now the priority of Kenya Airways is not so much about making profit as it is about cutting costs to squeeze as much cashflow for servicing its debt.

The story is no different for South African Airways, the continent’s second largest airline. After years of setbacks under the previous Jacob Zuma adminstration, the South Africa’s state airline finally unvieled a turnaround strategy in March 2018. Cost efficiency is the goal as well. Loss-making since 2011, with debt guaranteed by the state to the tune of $1.7 billion, SAA epitomises all that could go wrong when a government manages an airline. Now with new management, there is hope that its fortunes might be turned around; probably by 2023. Why not just sell it, though? There are suggestions flying around in government circles about a potential 49 percent stake sale. But it is believed the government desires that when that happens, if it happens, it should be a better-run and more valuable SAA that it bequeaths to a potential equity partner. An example of the sentimental attachment to the idea of a national airline is the recent purchase of Boeing planes by the cash-strapped Zimbabwean government. Only just emerging from the clutches of longtime ruler Robert Mugabe, and in dire need of foreign exchange to revive an economy long in the doldrums, Zimbabwean authorities bought four Boeing 777 planes for $70 million in April with plans to purchase even more. Although purchased via a special purpose vehicle and not yet transferred to the hugely indebted and floundering state-owned Air Zimbabwe, it is quite astonishing that such a venture would be a priority of a government that most recently ran a budget deficit of $1.8 billion (11.2 percent of 2017 GDP). There are speculations that the new planes would eventually be part of the fleet of new state-owned airline in the place of Air Zimbabwe, which with debt of more than $300 million is expected to be dissolved or privatized.

Bright spot
There is at least one examplar in the African state airline industry. Ethiopian Airlines is virtually a miracle. With revenue of $2.43 billion from carrying 7.6 million passengers in 2015/16, Ethiopian is Africa’s largest airline by revenue. It is also the largest African airline by profit, according to the International Air Transport Association (IATA). And its growth figures have been through the roof. In the year highlighted, its net profit grew by 70 percent. Imagine that? In a continent where its peers are making losses upon losses or are simply insolvent. Unsurprisingly, it is being called upon to help out elsewhere. In January, it signed an agreement with the Zambian government to, like in the Nigerian case, help revive Zambia Airways, a national carrier that was run aground in 1994, more than 20 years ago. This is just a latest addition to a burgeoning portfolio. Ethiopian Airlines already manages ASKY, a West African airline, and Malawi Airlines. Is Ethiopian’s success reason to be hopeful? “Ethiopian’s success does suggest that a few firms will find their niche; but Africa certainly doesn’t need 54 competing national airlines linking their various capitals to London, Paris, and Johannesburg”, says Capital Economics’ Ashbourne. Some African countries, smaller ones, say, would have to give up on their big dreams, however. Mr Ashbourne suggests “[they] should either merge their efforts, or focus on building regional networks. There is a lot of opportunity to improve intra-African links, for example.” 

(An edited version was published by African Business magazine in May 2018)

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