A government report has recommended that if Uganda Airlines is to be revamped, they should consider buying brand new aircraft instead of leasing. The report conducted by several government agencies including the Uganda Development Corporation, Civil Aviation Authority and National Planning Authority, recommends that having leased aircraft may be more expensive in the long run.
“The option to build equity through buying our own aircraft is looked at from a point of view of harnessing state-of-the-art technology by acquiring brand new aircraft as opposed to second-hand leasing alternatives, which are difficult to customise to the country specifications,” the Presidential Economic Council Paper on the Revival of Uganda’s National Carrier reads. It was tabled to Cabinet in September, after starting the study in April 2015.
What leasing is
In aviation terms, leasing is where the aircraft is transferred to an operator without the title. The title remains with the manufacturer or the lessor. In the industry, leasing is done by operators to avoid high costs of purchasing new aircraft. In lease arrangements, an operator can either get aircraft and crew members or just aircraft from the lessor.
In its report, government notes that the revamped national airline would be spending about $45.2m (Shs156.6 billion) annually on leasing expenses for six aircraft.
“Over the cash flow analysis period of 15 years, the annual lease costs translate into a net outflow of $678m (Shs2.3 trillion) in nominal terms. This makes leasing an undesirable option for the launch programme of the aircraft. Therefore, leasing is discouraged for the investment period for the initial investment period,” the report adds.
The case for freedom
The report cites high operational costs involved in the leasing process and also the need for the airline to have the freedom of choosing its own routes and strategy. Also, if it owns the aircraft, Uganda Airlines can stake them as collateral for borrowings in the future.
On Sunday, Daily Monitor reported that government will spend $400m (Shs1.4 trillion) as the initial investment required to fly Uganda Airlines again. Of this, the government will inject equity of $70m (Shs238 billion) for operating the airline as start-up and working capital.
“Government will purchase the aircraft using loan finance sourced internationally at an interest rate of 5 per cent per annum and over periods of 7-10 years (One A330-200 cost is estimated at $109.5m (Shs372 billion). Two are required, while a CRJ900 at $27.96m (Shs95b), with aircraft needed under the plan,” the report points out.
Government proposes to borrow $331m (Shs1.1 trillion) for the purchase of six aircraft to ply both regional and international routes. One of the possible sources of the borrowed funds is the PTA Bank which, the report notes, has shown the intention to finance the project.