NOT only in Zimbabwe is the phrase “profitable airline” oxymoronic, but across the world the airline industry is known to be dogged by hopeless economics which accommodate only the very large and efficient airlines. While there are no permanent darlings in this industry, the ugly child “Air Zimbabwe” exemplifies a perfect case study on “how not to run an airline”. Air Zimbabwe owes its creditors, including staff a whooping US$150m, approximately 3% of the GDP of Zimbabwe.
Transport minister Nicholas Goche has admitted that Air Zimbabwe is a chronic loss- making entity that has toiled in the red for several years. As expected he has promised a restructuring exercise, but what he can perhaps learn from other such exercises is that a mere change in company structure and its roles barely cuts it in this ruthless industry.
Case for consolidation
For flag carriers belonging to relatively small countries such as Zimbabwe, continuous restructuring with no lasting solution is the order of day. Unless fundamental shifts in the areas of ownership and scale are effected, governments will continue to waste taxpayers’ money into these bleeding entities.
Despite overprotection of skies and incessant subsidies, smaller airlines such as Air Zimbabwe, Air Botswana and Air Malawi will always struggle to cover their operating costs. Their stark choice is either to consolidate or eventually face the auction block. This unfortunate and harsh reality calls for an industry evolvement, which in this case refers to consolidation and privatisation of national airlines.
Economies of scale
The airline industry is confronted by fundamental issues driven by globalisation, which include scale and ownership, role of national identity, competitive pressures and consolidation.
Because the marginal cost of an extra passenger is almost negligible, the industry has been reduced to a numbers’ game. Therefore, airlines which can put more and bigger planes in the sky, and fly more often, are able to bring down their per-passenger cost dramatically. With more occupied seats, large airlines are able to cover the industry’s notoriously high fixed overheads which include aircraft maintenance and leasing. Such costs are the reason there are small airlines compromising on safety and incurring losses year after year, despite government assistance.
Because of economies of scale gained from large markets, big airlines can price their tickets generously, drawing more passengers and making more revenue. It then follows that by allowing mergers and alliances in the African airline industry prices are likely to come down, operators are likely to make profits and more people will be able to fly.
In our case, Air Zimbabwe’s extensive cost structure which includes a staff complement of an estimated 1 360 workers, training school and office infrastructure is probably too large to be supported by the revenue generated from the number of passengers the carrier shuttles. With a bit of sprucing up the once respected engineering and maintenance unit (Air Zimbabwe Technical) could support more regional airlines at once without drastic increases to costs.
Over-protection of national skies and regulatory constraints among countries are preventing the regional airline industry from achieving the efficiency and performance levels reached in other parts of the world. A central recommendation is a merger or an alliance which brings several flag carriers together to form a much bigger and stronger regional airline taking the shape and identity of the region, perhaps with cross border-equity ownership.
Sadc’s ailing flag carriers
Performances of regional flag carriers confirm that small and state-owned airlines have a difficult time, owing to their ownership structure and small markets.
At the beginning of the year Air Malawi was reported to have incurred a loss of about US$7,1m in the 2010-2011 financial period and US$8,3m the year before. Early this year the Nyasa Times, a Malawian paper, reported the airline was in K7bn (US$26,2m) debt. Air Botswana has not been spared either. The airline lost an estimated P54m (US$6,8m) for the 2010-2011 financial year end period and P45m (US$5,7m) the previous year. LAM, the Mozambique flag carrier, has done worse. Apart from loss-making, the airline was banned from flying into Europe a few weeks ago on safety grounds. Continental giant South African Airways (SAA) has been posting losses for three consecutive years (2007-2009) and is expected to incur another loss in the current financial period. For the majority of the African airlines, profits are tighter than leg room in the economy class.
The cited cases bring out the argument that while Air Zimbabwe’s problems may largely be the result of internal issues, the common thread among loss-making flag carriers is ownership structure and most importantly, scale which is often worsened by overprotection of national skies.
The problem of limited scale is rooted in how fractured the African continent is, with 54 nations, each government determined to have its own national flag carrier.
Consolidation in Europe
Consolidation is not a new phenomenon in the airline industry. Both North America and European markets have experienced several cases of mergers and acquisitions in recent years.
For Europe, even the big four large flag carriers Air France, Lufthansa, British Airways and KLM had to adjust to the industry’s evolvement. In 2004, flag carrier Air France merged with its Dutch counterpart KLM. Coming from difficult backgrounds the merged entity realised an increase in operating profits by 32,5% on a 7,6% increase in revenues. In a 2005 merger of Lufthansa (Germany) and Switzerland flag carrier, Swiss, the combined company reaped US$530m from the financial synergies created by the deal. The momentum of consolidation has gathered pace in recent years, resulting in Iberia, the Spanish flag carrier, merging with British Airways in 2011.
Closer home, Kenya Airways, third largest airline in Africa and one of the very few profitable ones, is a privatised entity with the largest shareholder (KLM-Air France) owning approximately 26% of the carrier. Earlier this month, Kenyan Transport minister Chirau Ali Mwakere indicated that plans to merge or cooperate were underway among the three East African countries of Kenya, Uganda and Tanzania.
These chronicled mergers and consolidations show that it is possible for countries to merge their flag carriers with the good intent of saving and making air transport affordable to its citizens. This is a reasonable proposition for African governments — particularly those in Sadc — to consider a regional carrier.
Benefits of regional airline
Apart from gaining economies of scale and subsequently charging lower fares and keeping in the black, a consolidated industry will promote regional economic integration, trade and tourism. With reliable, cheaper and frequent flights there will be greater volumes of passengers and goods moved.
In a recent article, the Global Aviator reported that about 15 African airlines have been banned by the EU from flying into Europe on safety grounds. African airlines cannot expect to compete against continental giants such as British Airways, Lufthansa and Emirates without working together. A regional airline is the way forward.
With a combined population of 280 million people, Sadc should consider integrating its flag carriers to not more than three major airlines to become competitive. For Zimbabwe, a trip down memory lane tells of the existence of “Central African Airways”, a joint airline which brought together Southern Rhodesia, Northern Rhodesia and Nyasaland in the 1940s. Given this collective predicament it is worth revisiting that model.
- Ray Chipendo is a management consultant at a Johannesburg-based firm, as well as managing partner for Emergent Capital Management, a niche investment management company on the ZSE and JSE markets. E-mail: firstname.lastname@example.org