If we must have Uganda Airlines, let us for heaven’s sake get the thinking right

Thursday July 26 2018

Daniel K Kalinaki

Daniel K Kalinaki  

By Daniel K Kalinaki

I am one of the skeptics about the viability of Uganda Airlines. It is not that I think airlines in general cannot be run profitably: American airlines are mostly back in the black; Ethiopian Airways is profitable year-in, year-out, thanks to ruthless cost-controls and the likes of Easy Jet, Ryan Air or Air Asia have shown that the no-frills flying model can keep the tills ringing. It is just that – to put it politely – we cannot be successfully accused of having previously managed, profitably and competently, a capital-intensive low-margin business with many moving parts.
But seeing as the decision has been made, I recently spent a couple of sleepless nights reading through what my source swears is the feasibility study and business case.

Now, let’s be clear right from the onset. I have some limited business experience here and there: For instance, I know a bit about FMCGs having once sold off a full pick-up of chickens at Nakawa market in an hour.
At Busoga College Mwiri, my side hustle selling cigarettes during class breaks involved delicate route-to-market logistics planning past nosy prefects and through unfavourable terrain, below-the-line marketing in a hostile regulatory environment, and gave me an average annual return on capital of 187 per cent. But I know next-to-nothing about running an airline, which I suppose qualifies me to make some common sense observations – and I will not even join the aircraft-type debate. Let’s take three at random.

First, the plan appears extremely optimistic. There is an assumption of capturing 30 per cent market share of the 1.6 million passengers who fly through Entebbe every year, a load factor (seats on bums) of more than 50 per cent rising to about 90 per cent by 2026, and a positive operating cash position on regional routes from year one!
In one case, the plan projects an annual saving of $550 million currently ‘lost’ to foreign operators – a number arrived at, from the look of things, by taking an assumed $360 ticket price to Nairobi and multiplying it by the aforementioned 1.6 million passengers. I hope my reading of the document is wrong and will be swiftly clarified.

Secondly, the plan is alive to the challenges of the airline business but, like an empty ambulance crew side-stepping a car wreck, doesn’t address them. It, for example, correctly identifies under-capitalisation as the main airline killer, then recommends building from “modest equity” from GoU ($70m, of which $20m is start up and the rest three-months working capital) before quickly self-financing from operations.
There is, of course, a debt component to buy the planes on top of this, but this level of capitalisation is equivalent, in absolute terms, to the level Uganda Airlines enjoyed in the 1970s. In an industry that burns fuel as fast as it burns cash, this level of capitalisation appears to be grossly inadequate to a layman – and even to someone who knows more about costing chickens than gearing working capital ratios.

One of the cash management assumptions is that Uganda Airlines will collect debt in 30 days and pay creditors in 60 – laughable for a company eyeing government travel contracts in a country where utilities at government ministries and agencies go unpaid for years! It can’t end well.
Lastly, the plan leaves many questions unanswered. It speaks of a 15-year strategy, but recommends a strategic management team tenure of only three years. The feasibility study says Uganda Airlines will do its own ground handling, but not that of other airlines, without showing whether it is profitable or even desirable to have most of the ground handling at the airport held by a private firm.

An airline can lose money, but still help sectors of the economy such as tourism. This is one of the arguments made in favour of restarting it, but the sorely needed investment in domestic infrastructure and last-mile passenger services is left wistfully to the private sector to take advantage of the increased throughput, as if setting up an airline automatically increases the number of passengers.
If we must restart Uganda Airlines, we should get the thinking and the capital right, including partnerships with more established operators to spread our wings farther, faster. On current reading, it looks like we shall be flying on a wing and a prayer.

Mr Kalinaki is a journalist and a poor man’s freedom fighter. [email protected]
Twitter: @Kalinaki.