By Kalima Nkonde
There has been so much debate about the merits and demerits of re-establishing the national airlines since the PF came into power in 2011.The majority of arguments supporting the national airline, have been sentimental, very superficial, uninformed and lacking support of empirical evidence given the many struggling national airlines.
Now that the Government has decided to partner with Ethiopian Airlines (ET as it is called in aviation circles), it is important that Zambians’ expectations from the deal are tone down so that they do no get disappointed as the Malawians have been, when the tangible benefits they would have expected, are not there in the foreseeable future but instead, the National airline would have built up a mountain of debt and become a strain on the national treasury due to losses like other National airlines and State Owned Enterprises.
Ethiopian airlines are currently the preferred partner by African countries. Malawi has a joint venture with ET, Ghana has shortlisted the airline for re-launch of national airlines. Nigeria started negotiations with ET to manage Arik Air but negotiations fell through due to negotiations being complicated. The Chief Executive of Ethiopian Airlines Tewolde Gebremariam said, “We decided to stop the negotiations due to financial and legal complications”.
The fallacy for the clamour to partner with ET by governments is the mistaken belief that since it is a government owned airline and it makes profit, then teaming up with Ethiopian airlines will replicate its success and make a national airline successful and profitable. This is based on lack of a deep understanding of ET’s business model.
Ethiopian airlines business Model
It is important for the reader to have some background to Ethiopian airlines and why African countries want to partner with it in re-establishing their national airlines. To begin with, the airline was founded in 1945 and started operations in 1946. According to the International Air Transportation Association (IATA), the global industry body, the state owned airline is ranked the largest airline in Africa in terms of Revenue and Profits.
What people do not know is that Ethiopian airline’s profitability does not emanate from the sales of passenger tickets only. Apart from its efficient cost cutting measures, aggressive marketing strategy, ET’s other major revenue contributors are the seven profit centres: Ethiopian Express & Ancillary Services, Ethiopian International Services, Ethiopian Cargo Services; Ethiopian MRO Services, Ethiopian Aviation Academy, ET In-flight Catering and Ethiopian Ground Services.
The airline is virtually self sufficient by having all services it needs in house while at the same providing services to other airlines to earn a lot of extra revenue and saving costs which is reflected in the bottom line. In addition, all the different Ethiopian Government administrations including the Dictatorship of Mengistu haile Mariam despite being 100% owners have never interfered in the running of the airline. The short of it is that ET’s business model is difficult to emulate by Zambia and other African Government and has been built over a period of 72 years!
Why ET is teaming up with Zambia
Zambians should be aware that the Joint Venture between Zambia and Ethiopian Airlines is not an accident or a coincidence from ET’s point of view. As far as they are concerned, it is part of their long term strategy for growth. The airline is merely implementing a 15-year Strategic Plan called Vision 2025 which it launched in 2010 after successfully completing an earlier strategic plan-Vision 2010 in which it met and exceeded all its stated goals. Under the Vision 2025, the airline anticipates increasing its fleet to 120, the number of destinations to 90, carrying more than 18 million passengers and 720,000 tonnes of cargo and with 17,000 employees. The existence of Vision 2025 was confirmed by Mr. Tewolde Gebremariam, Group CEO of Ethiopian Airlines.
“In line with our Vision 2025 multiple hubs strategy in Africa, we are very happy that the discussions with the Zambian government have been crowned with success. The launching of Zambia Airways will enable the travelling public in Zambia and the Southern African region to enjoy greater connectivity options, thereby facilitating the flow of investment, trade and tourism, and contributing to the socio-economic growth of the country and the region,” he said in a press release when acknowledging the Zambian deal.
There is no argument that Zambia Airways will be loss making for quite a long time to come and Transport and Communications Minister, Brian Mushimba did confirm that but argued that the intangible benefits will be immense. There is no doubt that Ethiopian Airlines also do know from their heart of hearts that Zambia airways will be loss making like any other national airlines at least in the first 5-10 years. The question is: what is ET’s motivation to go in a venture that will be making losses for the foreseeable future and not paying them dividends? The answer lies in the benefits that Ethiopian airlines will accrue through providing services to the airline which will increase the Holding Company’s revenue in Addis Ababa.
The experience of Malawi who entered in a similar deal in 2014 and was promised by ET that the airline will breakeven in two years but this has not happened gives credence to this belief. The Malawians are now questioning the deal as there are not seeing the benefits and arguing that only ET is benefiting.
Ethiopian airlines’ benefits from Zambia National airline
Ethiopian airlines’ benefits from the joint venture with Zambia lies in the possible services that Ethiopian Airlines will be providing Zambia Airways 2014, which in itself is not a bad thing especially if services will be discounted. In view of the benefits to the holding company, ET is unlikely to bother whether the airlines will be making profits or not as the Group as a whole will still be making profits. Below is the possible revenue generating benefits ET is likely to enjoy from the Joint venture.
First and foremost, Ethiopia airlines have been acquiring Aircraft from Boeing, Airbus and Bombardier and have excess capacity of airplanes without routes. In June 2017, Reuters reported that ET had placed an order of 10 737 Max 8 planes bringing the total on order to 30.It also signed a purchase agreement with Bombardier for five Q400 turboprop aircraft. There is no doubt that ET is likely to provide Zambia airways 2014 with either these models but more likely older models on either Wet lease (ACMI) or dry lease and thereby provide ET with millions of dollars in revenue through finance leases charges.
Secondly, Zambia Airways 2014 does not have any maintenance facilities and for the airline to get the Air Operator Certificate (AOC) from Civil Aviation Authority of Zambia (CAAZ) as required by ICAO (International Civil Aviation organisation), it will need to sign an agreement with an MRO (Maintenance Repair Organisation). ET has a world class maintenance facility which is accredited to the American Federal Aviation Administration to maintain American registered Aircraft. There is no doubt that Zambia Airways’ aircraft will be maintained at ET facility and thus earning them more revenue.
Thirdly, Zambia Airways 2014 is unlikely to have Zambians qualified as maintenance Technicians or Airline Captains on Boeing Aircraft, Airbus or Bombardier but ET has a Training school for pilots established in 1964 and an Aviation Maintenance Technician School established in 1967 which provide specialist training for both Ethiopian and foreign trainees. The new National Airline will have to send its trainees there and pay for such training and this will be additional revenue for ET.
Fourthly, ET has simulator facilities. Pilots are required to undergo refresher courses at regular intervals by passing a simulator course. It goes without saying that all pilots in the new Zambia Airways 2014 will have to undergo simulator training at ET facilities Addis Ababa generating more revenue for ET.
Fifthly, there is no shadow of doubt that the new Zambian airlines will sign a management Contract with Ethiopian airlines. Management fees will have to be paid to Ethiopian Airlines at regular intervals.
This airline project will be a net exporter of foreign exchange whether we like it or not as the above services run in millions of dollars and they will not be recovered from ticket sales or the imagined tourist arrivals.
Is Government K 400 million investment in National Airline prudent?
For the record, the Zambian government will have invested a minimum of $40 million in the Zambian Airways 2014 project by the end of 2018. This is so because Government paid airbus $10 million deposit for aircraft acquisition about two years ago and nobody seems to talk about. This is a well known fact by all in Zambia aviation circles. This means the $10 million already paid to Airbus and the projected $30 million from the 2018 budget will bring the total investment to $40 million or K400 million by end of 2018. The question is: Is this the most prudent way of using scarce tax payer’s money? What is the real motivation of people behind this project? It does not make economic sense to start a non- income generating luxury project at this stage when the country has billions in debt to service, struggling to pay farmers for maize and inputs, has cholera due water and sanitation issues, Universities closed due to unpaid allowances to students, delayed civil servants salaries due to huge wage bill and the list goes on and on!
It is clear from the analysis that the bulk of $30million dollar invested by Government in the first year will find its way to Addis Ababa through services provided and there will be nothing much to show for it in terms of tangible benefits to the majority of Zambians in Chibolya, chimwemwe, Mpatamatu, Kanyama, John Lengi, Mongu, Mansa, Chamboli,Maramba,Mpika, Solwezi, Monze, Petauke, Mwinilunga etc.
And going forward, since the government is the majority shareholder and given that the airline will be making losses in the foreseeable future, the Government will either pump in more tax payer money to keep it afloat or provide sovereign guarantee for Zambia airways 2014 loans like the governments in Botswana, South Africa, Namibia, Zimbabwe and others do for their national airlines which they are stuck with and want to get rid of. There is no shadow of doubt that the new airline will start building a mountain of debt within the first two years of operations.
There is no argument about the need for Zambia to promote the Aviation sector but the national airline Full Cost Carrier (FCC) business model is the wrong way to go about as it amounts to doing almost the same thing as before and expecting a different result. The proper solution and business model would have been found if private sector aviation experts were fully involved rather than ZAF, Party cadres, Civil servants and Politicians with little knowledge about the complexity of the aviation industry who drove the process to start national airline.
The major impediments to the growth of the sector are the cost of doing business in the sector in comparison with neighbouring countries. 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. 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 ads 35% income tax, it means government takes 60% of an airline’s cashflow. This is no way to develop the industry.