Serial British entrepreneur Sir Richard Branson was once asked how to make a million dollars. “Start with a billion dollars,” he reportedly said, “then buy an airline.” I don’t know about the provenance of this particular story, but the underlying message holds true: The airline industry is notorious for wafer-thin margins and lots of small moving parts.
A shift in your base currency against the dollar, a rise in oil prices, low load factors and reputational risk can all turn healthy cash positions into negative equity. We don’t have to go far to see examples: Here next-door Kenya Airways for years chest-thumped as the ‘pride of Africa’. New planes rolled in, new routes opened. KQ was going places. Then a fuel hedge went very badly wrong, management reportedly grew long fingers and almost overnight the airline became technically insolvent. It started out with billions, went into millions, hundreds of thousands, thousands and so on, until it lay in a pool of blood on the floor.
This column has been critical of the Uganda Airlines II project for several reasons. There are the systemic airline industry risks. There is the concern over the lack of robustness in the project planning, financing and management. The fantastical business plan – to use the term loosely – which projected high double-digit load factors right from take-off and breakeven in a few years should be used in business school – in how not to do it.
Then there is the lack of clarity on ground handling and the lack of transparency in the corporate governance structures. The list goes on and on.
These concerns remain even after Uganda Airlines took to the skies. In fact your columnist’s heart sank when it was announced that the first flight would carry politicians and other busybodies, including journalists. But it is here, and it is ours, even those of us who critique it. So here are a few commonsense thoughts to dull the pain.
One, it was nice to give the politicians, et al a joyride, but that should end. All government agencies and officers should pay to fly and do so in advance. Domestic arrears do not pay foreign suppliers.
Two, get the handling contract back, and urgently. It will cut Uganda Airlines’ costs and even bring it some revenue. We know who has it.
Three, sort out the corporate governance, and quickly. This isn’t just to protect the taxpayers’ interest in this adventure, but also to protect the venture itself from its ghosts and our living demons. Anyone laughing at Tanzania losing one of its recently acquired aircraft to a South African farmer should remember the $10 billion we owe the Democratic Republic of Congo and other monies owed to shadowy foreign suppliers. Planes are soft targets.
Four, yes in our culture you have to serve visitors food and other folklore stories, but this is a business. Uganda Airlines has no business offering free food or drinks on short-haul flights.
Reduce the extortionist costs charged in the airport cafeteria instead – we also know who owns that and the equally extortionist Uganda Duty Free.
Five, focus on the domestic market. The roads are dangerous and many people would pay a bit more to fly to Karamoja, Arua and Kabale. Done right, this could even make the gorilla tracking more price-competitive – the demand is already there with long waiting times for permits.
Six, focus on cargo. The folks growing vegetables or exporting fish would benefit from having a reliable and competitively priced way of getting their produce into markets abroad quickly. But this requires further investment in cold storage facilities.
Seven, nationalistic pride is no substitute for the cold reality of competition. Tying up a partnership with another international carrier will help and allow us to focus on the domestic and regional markets. You do not have to fly to New York to send people to New York. Ask KQ.
Finally, brace for impact and manage expectations early. Uganda Airline will not make a profit even in 10 years – and I am happy to take bets. Prepare for annual supplementary budgets that will be painful and feel like throwing good money after bad. Many of them will be.
Knowing that the airline won’t make money and fixing the auxiliary services that will allow it to be an enabler will help a bit, but a dollar lost is a dollar lost. Ask Branson. His Virgin Atlantic airline has just posted a $34 million pretax loss, for the second straight year and projects a loss for next year. In this industry small losses can feel like big wins! Good luck, Uganda Airlines; you will need it.
Mr Kalinaki is a journalist and a poor man’s freedom fighter.