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Opinion | To Revive or Not to Revive Uganda Airlines

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Posted October 28, 2013 by Ugandan Diaspora News Team in Business ~ 4,420 views

     

UG AIR

By Eng. Dickinson Dunstan Turinawe — There has been a growing debate on whether Uganda Airlines should be revived or not. Having worked for the Airline for a period of 22 years up to the time it was closed, in various senior positions, I feel it appropriate to add some flavor to this debate as a civic obligation.

I trust that my input will further inform any decisions and plans that are being formulated. It is my considered opinion that the historical background of Uganda Airlines be considered to avoid similar mistakes.

As it is, my submission will look at what made Uganda Airlines fail, the current industry situation, the success factors in the industry, the rationale of a National Airline and the requirements for a sustainable Uganda National Airline.

The pitfalls of Uganda Airlines Corporation

When I joined Uganda Airlines in 1978, the Airline had an Aircraft fleet made up of 15 Aircraft fully owned by Uganda Government. Of course, the fleet structure was disjointed with unclear strategic purpose. The fleet ranged from two to 16-seaters that belonged to the Small fleet.

There were Two Fokker F27s, 44-Seaters that operated on domestic regional routes. Then Two Boeing 707s that operated international routes (mainly to London, Rome, Brussels, Cologne, Cairo and Dubai).

The Airline also operated Lockheed L100, commonly known as C130 (the only surviving Aircraft to date) which was dedicated to cargo operations. Given the above background, the decline and eventual collapse of Uganda Airlines is attributable to undercapitalisation, gradual asset stripping, faulty privatisation process and uncompetitive fuel prices.

Undercapitalisation and gradual asset stripping

Prior to the 1980s, Uganda Airlines was heavily financed by the Government and was not treated as profit making organisation that was meant to be autonomous. This was largely a result of how it had been formed.

It was treated as a strategic entity with the main aim of mitigating the impact of sanctions against the then government given that Uganda is land-locked. Indeed Uganda Airlines fulfilled its role very effectively.

Against this background, undercapitalisation may be irrelevant to that period.

Come to the 1980s the role of Uganda Airline changed to a profit-making organisation without any additional capital despite the heavy negative impact the 1979- 1980 war had inflicted on her. As a result, the Airline had poor technical support services.

The Police Air wing Hangar meant for Helicopters and small aircraft was the only facility to talk about for purposes aircraft maintenance, workshops and stores. Most of the basic repairs such as tire building were being done in Nairobi in Kenya Airways facilities. The inability to carry out such basic activities had serious implications on operational efficiency.

To go around this problem, the Airline resorted onto asset build up using the only available assets then: the routes and Ground Handling services.

The air routes as an asset

In order to explain how routes acted as an asset, it is important to understand how route structures are regulated in civil aviation.

Take an example of Entebbe/Nairobi. This route is co-owned by Uganda and Kenya. For any operator to pick and drop air traffic (cargo or passengers), say, from Entebbe and drop them in Nairobi or vice versa, that operator must be designated (licensed) to do so by either government.

Where a single designation policy is at work- and this was the case then- a third party would have to pay loyalty fee to the designated carrier. Through this channel, Uganda Airlines was able to raise revenues that were used to establish some of the basic maintenance facilities.

Unfortunately, this source was stopped by government without any respite as part of liberalisation policy. This constituted one of the modes of asset stripping.

Ground handling services

The other strategic asset that remained was the ground handling services that the Airline was offering to herself and other airlines operating into Entebbe. The Airline had a department called Ground Operations dedicated to this activity covering cargo, passenger and aircraft handling.

After the stoppage of loyalties from the routes, the revenue from ground handling constituted about 65% of total revenue earned by the Airline. The Airline decided on a strategy of building the transportation component (acquiring Aircraft through lease arrangements) using funds from ground handling services.

With this strategy, the Airline was able to acquire two B737s that were plying regional routes. Unfortunately, in the mid-1990s, before the Airline had acquired a self-sustaining Aircraft fleet composition, the department of Ground operations was privatised.

This was additional asset stripping that dealt a fatal blow to the fleet development strategy contributing to the eventual collapse of Uganda Airlines.

Faulty privatisation process

For a period of four years, the Airline had privatisation deadlines on a monthly basis. This unending privatisation process was a latent killer given that airline operations, by their nature are futuristic in terms of promises made to the clientele.

A client has to be sure that once he picks your documents you will be there in the near future to fulfill your promise. The impaired assurance meant that the clients became reluctant to procure Uganda Airlines services. This state of affairs meant that the airline was offering uncompetitive service operations with attendant cash-flow difficulties.

Another negative development arising from this faulty process led to inability to interline with other airlines because of poor dependability arising from the constant uncertainty.

Fuel prices

In airline operations, fuel constitutes 25% to 36% of total costs and Uganda Airlines because of the aged fleet and actual fuel price at Entebbe this figure was about 40%. The fuel at Entebbe Airport was more expensive compared to the bases of competitors.

Given the already cash-flow difficulties faced by the airline, this could only make matters worse. Attempts to have this addressed, by way of subsidies, did not yield desired results.
Current industry analysis

Given the desire to set up a national carrier that is to be commercially run, the current industry analysis has to be addressed. The competitive forces include suppliers, rivals, buyers, substitutes, and threat of new entrants.

There are few major Aircraft suppliers in the industry, notably, Boeing and Airbus and this means that airlines are forced to make purchases in advance, which can significantly distort their cash flows. The alternative is to engage third parties with attendant stringent contractual terms.

The suppliers of spare parts are equally limited in number. This precipitates a situation where the Supplier’s bargaining power, as a threat to profit in the airline industry, is highly intense.

Rivalry in the airline industry, globally, is very intense and poses a high threat to profit. Revenues are sensitive to numerous factors and the actions of other carriers in the areas of pricing, scheduling, promotions and interline capabilities.

In the EAC market, Uganda Airlines would have to contend with the intense competition from existing major carriers who currently enjoy high economies of scale and advantages accrued from a learning curve.

The airlines industry is sensitive to conditions beyond its control. These are political stability, security, changes in consumer preference, perceptions, spending patterns, and demographic trends. In most cases customers can choose among many different airlines with a low cost of switching.

When buyers have less money to spend, they use air travel less frequently, which poses a high threat to the profit in the airline industry. An Airline based at Entebbe will be looking at Entebbe to Nairobi, Kigali, and Juba as important regional routes with potential surface transport as a substitute.

However, the efficiency and convenience of air travel is tough to imitate by other forms of transportation especially long-haul journeys meaning that the threat of substitutes is very low.

The airline industry is very tough to enter because of very high capital outlays required and existing worldwide mega-alliances. The capital cost to purchase aircrafts and specialist machinery, hanger and other airfield space, skilled labour and to satisfy stringent safety requirements are very high and make entry very hard.  For example, a single modern jet for long-haul operations cost between US$200 – 258m while its spare engine ranges US$17-19m.

Medium range Aircraft suitable for regional operations cost US$75-110m with a spare engine costing US$6m to 8m. Because of the global nature of Airline business, there are, basically, three worldwide mega-Airline alliances: Star Alliance, SkyTeam and Oneworld.

An International airline has to network into these alliances in order to tap into worldwide passenger flow; otherwise, it is almost impossible for new entrants to win business, even after massive capital outlays. This means that Uganda Airlines will need a Strategic Partner; otherwise, major airlines can use economies of scale to undercut her on price and delivery speed.

Membership of Mega-Airline Alliances

SkyTeam

The members include Air Europa, Air France, Alitalia, Aeroflot, Aeromexico, Continental Airlines, Czech Airlines, KLM, Delta Airlines, Korean Air and a few other carriers. The alliance covers a large number of cities in every continent of the world.

StarAlliance

The members of this alliance are Air Canada, Air China, Austrian Airlines, BMI, Lufthansa, South African Airways, Singapore Airlines, Swiss International airlines, Turkish Airlines, US Airways and United Airlines. Star Alliance has reached destinations  in US   and Canada, South America, Central America, Mexico, The Caribbean, Europe, Middle East and Australia.

Oneworld

The members of Oneworld include British Airways, American Airlines, Cathay Pacific, Finnair, Iberia, LAN, Qantas, Japan Airlines, Malev and Royal Jordanian Airlines. Oneworld serves destinations in US and Canada, Central America, South America, The Caribbean, Europe, Middle East, Asia, Africa and Australia.

Rationale of a National Airline

While the debate on reviving a national Airline there is the question about the necessity of the Airline. To appreciate the need of a national airline, one needs not only to focus on the airline as an entity but also to consider the externalities arising from the existence of the Airline.

The externalities cover tourism industry, agricultural industry, job creation, the strategic implications for a land locked country as Uganda and National pride (a flag carrier).

There is empirical data that shows positive correlation between aircraft fleet size of national carriers, Tourism revenue and GDP. It is also well known that it is those countries that have strong national carriers that have excelled in tourism.

There are good examples of Kenya, Singapore, and South Africa to mention but a few. Of course, a boost in tourism has its own externalities in terms of creating a population with enhanced purchasing power, which is an essential input into the drive for industrialisation.

It is important to note that a home based airline plays a big role in marshalling tourist because passengers abhor stopovers, which have to be there because designation rights the world over in the Airline industry.

A national airline would boost the Agricultural industry especially the horticulture and Fresh food sectors. Without a home-based international Airline, it is difficult to sustain horticultural activities  such as flower industries, fish industries and other products that have to be delivered fresh to final consumer.

The other significance is the strategic implications given that Uganda is a land-locked country. A national Airline will become handy in emergencies. This may due to issues of national sovereignty, medical supplies, natural disasters that require flexibility for the national interest.

A national airline would contribute directly and indirectly to Job creation and resource utilisation. The direct contribution would be employment opportunities of staff to run the Airline.

The indirect aspect would be through boosting other sectors such as hotel industry, cultural industry and most important the revival of the under-utilised Soroti Flying School.

Key success factors

In order to strategise for a successful national carrier, it is important to identify the key success factors in the current Airline Industry. The key success factors that need to be addressed include capacity utilization, fuel cost control, labour cost control, maintenance capabilities, delivery to market and customer service and satisfaction.

Capacity Utilisation

Because of the high fixed costs that are inherent in the airline industry, the ability of airlines to utilise every seat on the aircraft is crucial. This means that the Airline must acquire appropriate Aircraft fleet size and combination for optimum capacity utilisation.

To determine this, careful route analysis has to be made and necessarily Entebbe would be the hub with regional operations being the spokes fed by and feeding into the long haul. Focusing on regional operations is not sustainable because it is uncompetitive. As an example, assume that there is a passenger in Entebbe flying to Dubai and he is given two options charging the same fare on similar aircraft.

One of  the airlines (operating regional flights) flies him/her to Nairobi and wishes him/her well for onward flights and another can take him/her from Entebbe via Nairobi to Dubai –  the choice would obvious all other factors being constant.   The more seats that are filled on a flight, the more profitable the flight will be for the company.

This explains why the capacity to interline is important. However, this capacity will be greatly enhanced by Uganda Airlines networking into one of the mega-alliances through a strategic partner and membership of IATA Clearing House. The optimum capacity utilisation also requires investment in revenue management system.

Effective fuel cost control

As mentioned earlier, for an airline fuel cost may constitute up to 40% of total cost. This means any cuts in this area have substantial impact on the profitability of the airline.

The cuts may be realised through actual enjoyment of low fuel price fuel uplifts or having a cost saving uplift management plan of acquiring fuel efficient modern aircraft. In the case of Uganda, this factor may have to be taken into account as oil refinery plans are being considered.

It would constitute a crucial competitive advantage for an Airline based in Uganda. It suffices to note this issue would also be a comparative advantage for Entebbe Airport as a regional hub.

Effective labour cost control

Airline labour force is highly technical and guided by international standards and can be expensive. A revived Soroti Flying School would act as a sustainable source of trained manpower of national character that is cheaper than expatriate staff whose wage bill can be exorbitant.

Effective maintenance capabilities

Ideally, an aircraft should keep in Air because an aircraft on ground does not earn. Therefore, aircraft maintenance is about the capability to efficiently repair aircrafts when there is a problem and return them into flight as quickly as possible. This means that there should be appropriate maintenance facilities, including sufficient inventory of spare parts and qualified technical employees workers to manage the fleet.

This is an area where a lot will have to be done in the case of a national carrier. Currently, there are no maintenance facilities to talk about. A modern Hangar (Aircraft Maintenance facility) with basic facilities to handle maintenance of long haul and medium range passenger aircraft costs about US$8m–US$10m.  This financial factor has to be factored into the capitalisation programme of the contemplated national carrier.

Prompt delivery to market

In aviation, time is of essence. This means the frequency and reliability of flights are critical factors for competing airline in airline choice. On-time performance, builds brand loyalty, which translates into sales and profitability. No airline can survive in the current environment without appreciable reliable services.

Part of the consideration in the interline decision making considers reliability because its implication to the perceived service quality. For the national airline, this key success factor will be addressed through deliberate financial outlays in staff training and Aircraft ground handling capability at Entebbe, the home base.

Apart from enabling the efficient facilitation of her flights, the airline will earn revenue from handling other airlines that operate into Entebbe.

Customer service and satisfaction

Customer service and satisfaction includes ratios to measure mishandled baggage, customer complaints, delayed flights, and overbooking flights. To realise the benefits of this key success factor, in addition to training, the airline will have to invest in modern Airline management information systems including reservation and ticketing ICT.

Conclusion

The planned acquisition of 12 planes by the Government is a step on the right direction, however, there is a lot more to do in order to establish a viable international flag carrier.

The investment plan seems to be focusing only, on one key success factor of Aircraft capacity while giving little attention to other factors. A modest estimate of the value of planned fleet size of seven Aircraft for long-haul operations and five regional operations works out at a capital outlay of US$1.8b (seven Aircrafts at US$200m each and five Aircrafts at US$75m each).

Given that there are other essential infrastructural inputs, it would be advisable to scale down on the aircraft acquisition, initially, and invest in the other key result areas in order to have a flag carrier built on a strong foundation.

Due to rapid technological changes in the Aircraft industry, the Government may need to consider Aircraft acquisition through dry lease rather than ownership.

One advantage of this method is that there capital outlay is substantially less and there airline avoid obsolescence risks that may precipitate from radical technological innovations, as it happened with many Airlines when low-noise and more fuel efficient aircraft engines came onto the market.

The issue of routes is rather intricate given the policy of liberalisation and regional agreements regarding airline designation and route rights for member countries, especially, COMESA. The National Airline will be entering a mature industry where competition is stiff.

This means that the Government will have to support it for some time before it can break-even, may be a period of about two years.

The positive externalities of a National carrier are evident in terms of boosting tourism, horticultural, fishing and fresh food industries. There are other multiplier effects, such as job creation and a population with enhanced purchasing power, elements that are essential ingredients of industrialisation.

The discovery and impending oil production in Uganda could not have come at a better time. As part of the plan for oil refinery, the Government should consider production of Kerosene (Aircraft Fuel commonly known as Jet A1 in aviation parlance).

Apart from giving the National carrier a substantial competitive advantage, it will also make Entebbe Airport a competitive destination for Airline operators. As mentioned earlier, this is so because fuel cost constitutes a high percentage (25-40%) of total costs of an Airline.

Finally, the arguments made for passenger operations also hold true for cargo operations. The only difference is that cargo has less direct complaints.

The writer is a lecturer/head of department of Management Science, Makerere University Business School, Kampala. 
Email: dturinawe@mubs.ac.ug, hodmanagementsci@mubs.ac.ug
Tel: +256 772 505 729/+256 704 818 432


About the Author

Ugandan Diaspora News Team

Ugandan Diaspora News Online is an independent, non political news portal primarily aimed at serving Ugandans who work and reside outside Uganda. Our aim is to be a one stop shop for everything Ugandan and the celebration of our Ugandan heritage.

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