Uganda Airlines is projected to make financial losses in the first two years of operation and to break even in the third year, according to the feasibility study on the revival of the airline.
“From year four onwards, profitability improves as the airline gains traction in its markets and cements its brand with customers, resulting in modest increases in load Factors and yields,” says the study that was approved by the Chairman of the National Planning Authority (NPA) Prof. Kisamba Mugerwa alongside the Executive Director Dr Joseph Muvawala.
Government recently ordered for two A330-800neo aircraft and four new CRJ900 regional jets to in preparations to kick- start Uganda Airlines aviation business.
The plan to revive the airline was based on the assumptions that; government would inject equity of US $70 million (about Shs259 billion) required in operating capital for the airline. Of this, US$20 million (about Shs74 billion) would be intended to serve as start-up capital for the airline.
The additional amount of US $50 million (about Shs185 billion) would be utilized as a contingency or buffer for “working capital”, being the amount equivalent to three months’ expenses in the first year at zero revenue, it was assumed.
Government, according to the feasibility study, would purchase the aircraft using loan finance sourced internationally at an interest rate of 5 per cent per annum and over repayment periods of 7-10 years.
The study then quoted the costs of Airbus A330-200 estimated at US$109.5 million and CRJ900 at US $27.96 million.
Maximum daily utilization for the A330 aircraft is 15 hours per day while the utilization for the CRJ900 is 10.7 hours per day
“As mentioned in the sections above, the plan assumes the generation of Load Factors of between 40 per cent and 65 per cent with an average of 62 per cent across all three product lines in the initial three years… The airline will be adding routes in the first three years reaching its full schedules in year four especially on the regional routes.
From year four onwards, results improve as passengers and cargo volumes increase and the airline benefits from economies of scale across all routes and product lines. It is in year four that we expect to have a full hub structure for the national carrier at Entebbe International Airport,” the study reads in part.
The study points out Kenya Airways as Uganda Airlines’ immediate strong competitor because it is a full member of the Sky Team Alliance and is the fourth largest carrier in Africa by scheduled capacity. The alliance provides Kenya Airways’ passengers with access to the member airlines worldwide network and passenger facilities.
The second competitor is Ethiopian Airlines wholly owned by the Government of Ethiopia and is a member of the Star Alliance. Currently it is one of the continents leading carrier, serving over 76 international destinations through its hub in Addis Ababa.
Rwanda Air currently operates a fleet of six aircraft and it has code share agreements with Brussels airlines, Ethiopian airlines and Precision Air.
More in the NPA report
Losses incurred by Uganda as result of lack of national airline
Currently, the study says, Uganda loses about US $540 (about Shs 2 billion annually, in form of higher transport costs (extra charges) to passengers originating and terminating at Entebbe International Airport, due to absence of a National Carrier.
“The best-case investment scenario (combined regional and international aircraft purchase) would generate a direct Net Present Value (NPV) economic benefit of US $580 million, after taking care of all the investment and operating costs, over a 15-year period,” study says.
For greater focus and highest efficiency, the study also recommends the airline should undertake its own ground handling, without immediate plans to diversify into ground handling of other airlines.
It urges government to undertake full capitalization of the national carrier during the initial years and later divest through public listing, to avoid challenges of risk transfer between government and private sector.
“This capital structure will also enable the airline to build from modest equity provided by government to self-financing from operations thereafter,” the study says.
Leasing the airline
The study says that the options of leasing aircraft should be considered after the airline has built sufficient assets for the necessary credit worthiness.
“This is necessary because the airline requires capital assets (aircraft fleet or cash equity) to be used as a basis for code sharing and receiving other airline services on credit that are billed monthly,” it says.
In the case of Uganda’s National Carrier Business Plan developed in this study, a total cash equity of US $140 million will be required to replace the option of using aircraft as the asset base, it says.
Airline not for financial benefits
The study also recommends that the investment in the national carrier should be considered as an infrastructure for enhancing the country’s global connectivity and competitiveness, beyond the direct financial benefits, adding that the carrier will play a critical catalytic role in tourism development and promotion, export growth, investment in various priority sectors and global networking.
Despite lacking audited financial statements for 1992 – 1995, the Auditor General established in 1998 that the corporation’s current liabilities then were Shs20.8 billion with assets valued at Shs10.7 billion.
It had investment shares in: African Joint Air Services (AJAS) of 10 per cent, Entebbe Ground Handling Services Limited (ENHAS) of 50 per cent and Uganda Inflight Services of 25 per cent.
It had a large workforce of 325 employees and fixed assets valued at only Shs5.1 billion. The Airline was technically insolvent, and coupled with the many challenges it faced, it became ungovernable in that state and ceased to be a going concern. The airline by then operated on weekly subventions from Government.
On February 16, 1999, government agreed to the divestiture of Uganda Airlines Corporation, with government taking up all the corporation’s liabilities. This was expected to attract a Strategic Equity Partner through negotiations with other international airlines by a successor company, Uganda Airlines Holdings Limited (UAHL).
Through an international tender process, government embarked on identifying a suitable strategic partner, and engaged in several negotiations that were unsuccessful, including those with South African Airlines, British Airways and the Uganda Airline Management Team who proposed an Employee Buyout of the corporation.
The failure to attract a strategic partner subsequently led to the liquidation of Uganda Airline Holdings Limited in 2001, which resulted in the sale of the Airline’s remaining assets to settle the Corporation’s debts and other liabilities. This effectively left Uganda without a national carrier. As a result, airline fares and services were left to foreign airlines who have used high pricing to the detriment of travelers to and from Uganda.
The study says the absence of a national carrier has also affected the country’s competitiveness due to poor air transport connectivity and high cost for travel of passengers and cargo. And the realisation of the gap created by the absence of a national carrier has led to various attempts by Government and other stakeholders to re-introduce a semblance of a National Carrier.