Project QU: In answer to Wolfgang and Paul Busharizi

January 5, 2016 in Business, Editorial, Finance, Investment, Opinion, Policy by Editor

I used the long holiday season to read my professional colleagues, Paul Busharizi and Dr.Wolfgang Thome’s, writings on a subject we share an equal passion for – pathways to the development of Uganda’s air transport sector or to be more specific, the proposed revival of a Ugandan national carrier or airline. We are ranged on opposite sides of the debate with the duo opposed to throwing good money down a bottomless pit in the name a flag carrier while I, possibly in panglossian delusion, remain firmly rooted for a national airline.

Writing just over two years ago, in July 2013, Busharizi almost angrily asserted that “Reviving Uganda Airlines is money down a black hole.”

Writing more recently in the New Vision’s outlook for 2016, Wolfgang was more moderated reflecting on an “uncertain future for a national carrier.”

Busharizi and Wolfgang’s opposition to “Project QU” revolves around four basic concerns: that setting up an airline is expensive business that Uganda can ill afford or lacks a reasonable chance of success at in the current configuration of circumstances; the market is already flooded with well established foreign carriers against whom competition by the nascent “Uganda Airlines” would be a steep order; the anticipated dividend from a homegrown carrier – can be derived or is already being delivered – by the current players in the market and; the airline business is not a bed of roses with many African carriers in perpetual loss.

Wolfgang goes on to reason that by making significant investments in an expanded and modern fleet, Rwanda has in effect sent the signal that it would be futile for Uganda to start her own airline because Rwandair is there for them. Kenya Airways is also already well entrenched in the marketplace and as long as these two can offer fares to match the Gulf carriers and the European legacy carriers, there is nothing that a new national carrier is going to do better or at a lesser cost than the market is offering today.

Wolfgang also makes the point that the much touted multiplier effect of the national carrier for sectors such as tourism is already being enjoyed because to bring traffic to Uganda, these airlines do promote Uganda as a destination.

Besides suspecting the motives of the proponents of the new “QU”, Busharizi argues that the money that would be wasted on what he sees as a futile venture would rather be spent on enhancing the delivery of key social services such as education and health.

Busharizi helpfully quotes Ali Adel who helped Air Arabia a man he describes as someone who “knows a thing or two about setting up airlines.” Adel told Paul that it takes $50 to $200m to set up a budget airline. Setting up a regular airline therefore would cost multiples of that.

“When asked what he would tell someone trying to start an airline he said, “I would say don’t do it,” going on to explain that an airline is more than just airplanes, having seats and ticketing.

“Your number-one challenge is to gain credibility in the marketplace from the customers because there are a lot of airlines and you’re coming in new, so why should people travel with you or trust you? That’s always going to be the biggest challenge. Second, is traffic rights. Traffic rights are already allocated to all the airlines, people on the slot and everyone else, so why should you be getting a share of that cake when you don’t have it now? Another challenge is the ability to bring in so many different components of this business under one roof. One other challenge is finding the right talent to help you run the business. You need a very strong team to take this forward.”

While I take Adel’s view as perhaps the most valuable piece of free advice to us who support “Project QU” Busharizi represents a school of thought that for good reason appears to also be informed by our well documented failure to pursue a national project to a logical conclusion without hiccups and cost overruns (read embezzlement) in the past and Murphy’s Law which states that if anything can go wrong it will.

At the end of the day, Wolfgang and Busharizi ask the same question: What would a government backed Uganda Airlines do for travellers that is not being done for them now by existing players in the market?”

However unflattering Busharizi and Wolfgang’s views might be, they cannot just be dismissed especially when looked at against our track record of messing up even the most well intentioned and straightforward national projects. You just need to look over your shoulder to see the inflated cost of our roads, power projects or the coming SGR to fully appreciate Ugandans lack of sense of vision and sacrifice.

I must confess that I also develop goose pimples when from the grapevine I hear of how wrong things are already going wrong with behind the scenes selection of cadres to run the proposed airline outside public procurement rules. One can safely argue that things will probably get worse when – “foreign investors” with only empty briefcases to their worth join the mix and fleet procurement is hijacked by politically connected “jack-pot” billionaires.

Yes, I share all Busharizi’ concerns about what could go wrong with this national carrier thing but ask the question: Suppose those factors were removed would there still be a case for a national carrier? Suppose it was up to someone or group of people immune to all those maladies to make the call would they see a business case for an airline operation out of Entebbe?

Somebody thought so eight years ago and even with some strategic mistakes, Air Uganda had with a fleet of just three small regional aircraft captured close to ten percent of the Ugandan air transport market is six years of operation. At the time of their exit they had smoked north of $50 million – a significant portioned of it occasioned by an ill-thought fleet strategy at the start.

If they had not surrendered to the false hope of selling equity to government in a scheme that promised handsome returns and focused on growing the business, Air Uganda would be a completely different story today and would be about to receive its first directly purchased aircraft from an original equipment manufacturers.

By the time the curtain fell on Air Uganda, the airline directly employed 207 people. Fares on the Entebbe-Nairobi sector, at the time one of the most expensive in the world, had fallen by almost 50 percent thanks to the moderating effect of a Ugandan carrier.

I have brought Air Uganda into the conversation to demonstrate two things: that Uganda’s air transport sector is a market opportunity that can be exploited with the appropriate financial and management resources and there are direct benefits to the economy. All the foreign airlines plying our airspace come here because there is traffic and that traffic is still below potential.

Some 1,460,000 passengers passed through Entebbe in 2014 and it is important to remember that those numbers are partly a function of availability of frequency. The CAA in its Entebbe Airport Master plan projects that traffic will have grown to 2,377,100 passengers in 2018; 3,810,700 in 2023 and 7,667,700 by 2033.

Supposing this were a resource such as oil, would we be happy to see foreign multinationals come and take it away while we settled for the best pump prices?

If starting a national airline were just about market size and the number of players in that market, then Rwanda whose air transport market is just about a fifth the size of Uganda’s would not have dared embark on setting up a national airline. It has taken them 14 years of trial and error but they are finally getting there.

Rwandair’s case is actually instructive for Uganda because that airline was started at a time when the Rwandan market was just about 50,000 passengers a year served as usual by the hawkish Kenya Airways, the ever patient Ethiopian and SAA.

Rwandair joined the fray first because Rwanda needed to have a foothold in the strategic area of airlift but it was also looking at the future. African airspace if slowly but surely opening up and with less than 10 percent of continents population travelling by air, the future actually promises a lot. So Rwandair, Kenya Airways and others don’t need to die for a Ugandan carrier to take off. All we need is to make the correct fleet and network decisions and fortunately, for a little money, the data tools to aid that call exist in the market.

Also, airports need traffic to survive as businesses and traffic is generated by airlines. Entebbe is expanding but you cannot premise that investment on the goodwill of foreign airlines that are at best fair-weather friends. As the recent reaction by foreign airlines to the crisis in Bujumbura demonstrates, a home grown airline will be there for you for better or worse.

The Ethiopian Case

Finally, it might be useful to look at those who have succeeded in the face of adversity. Wolfgang rightly points out that Ethiopian was the only African major to post a profit last year. But Ethiopians performance has to be looked at in the context of Ethiopia as a country. Ethiopia presents a unique example of the dividends of clear-headedness and a national strategy driven by discipline.

At the risk of being locked out of the international trading system, Ethiopia has resisted neo-colonialism by refusing to open up critical sectors of her economy before her locals have the capacity to meaningfully participate. Run diligently, Ethiopian Telecom posted a profit of $1 billion in 2014. If that performance was repeated last year, just imagine what a government can do with $1.17 billion in profit from its enterprises. Would you lend that to the roads or energy sector at decent interest rates or invest in schools and healthcare? I bring this up to demonstrate that it is possible for a government run enterprise to be run profitably. All we need to do to make a national carrier work is to fix the governance issues. Otherwise there is nothing fundamentally wrong with the current market for air transport from Uganda.