“The Revival Airline: Critical rethink & potential sequencing needed” – Dr. Enock Nyorekwa Twinoburyo

By Dr. Enock Nyorekwa Twinoburyo (Economist)

DAILYNEWS UG Commendably there has been an attempt to address the “Budget and then Plan syndrome” through the establishment of the National Development Plans.

The six – 5 year National Development Plans are expected to deliver the Vision 2040. Uganda is now implementing its second national plan (NDPII) which is due to expire in 2020. In the certificate of NDP II compliance for the annual budget for FY 2017/18 assessment report by the National Planning Authority (NPA), it is indicated that due to existing weakness in planning in general particularly at sector level, macroeconomic targets continue to perform at dismal levels as plans are not translated into budget interventions necessary to achieve NDPII macroeconomic targets.

Broadly, this has led to a continued disconnect between the planning and budgeting. This disconnect becomes more pronounced with weak execution of the NDPII core projects and the emergence of non NDP II key projects like oil roads and the revival of national carrier.

With a political cornerstone – the Presidential Economic Council (PEC) directive, the NPA carried out a feasibility study for the airline revealing that it is feasible to purchase aircraft – CRJ 900 and Airbus A300-200 series (below) respectively for both regional and international operations.

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The economic return (also known as the Economic Internal Rate of Return) is projected at 70% which is 60% higher than the expected financial capital cost. This would be resoundingly a very feasible investment. However, it is not consistent with the financials of the top 10 national airlines in Africa that post unpropitious numbers.

Each of these top 10 including Ethiopian airlines (4 star airline) and Kenya airways, each carry passengers in excess of the current arrivals at Entebbe airport – estimated at 1.5 million passengers a year. 8 of these top 10 have nearly twice the number of arrivals to Uganda every year.

Even South African Airlines established in 1934 (arguably oldest in Africa yet still operational) has had its recent struggles and had to receive a government bailout. The airlines like refineries are complex and expensive. In the current proposal, it is expected that government would capitalize the operations of the National carrier in short run with USD 70 million but majority of financing is expected to be sourced through debt.

Image may contain: Enoq Omwanawomwanawomuntu Etwino Sabitiira, standing

 Above: Dr. Enock Nyorekwa Twinoburyo (right) right with the European Union Boss

Eventually the intention is to offload it to the stock exchange market for capital. The latter should be a long term undertaking as airlines even well managed – take long to break even. This means in the short-term, the fiscal burden on Government will be immense as is already the case despite having a low debt to GDP ratio.

While sharing the general perception that national airlines are strategic undertakings as given prominence in the said comprehensive feasibility study which is based on sound methodology, it is important to understand and unbundle the some of these assumptions.

First, the assumption that it will espouse the key economic linkages and value chains would be true for mature investment and trade ecosystems. This is still work in progress in Uganda. The existing industrial parks are producing at less than half potential and the economic free zones are only at a take off stage. The realization of the 23 parks (if feasible) is long term. Additionally, the trade statistics indicate Uganda’s trade is increasingly and dominantly to the East African Community (in order Kenya, DRC, South Sudan and Rwanda).

These trade links are also used to justify the feasibility of the Standard Gauge railway. The substitutability assumption for trade and passengers may be to a great extent over estimated. Rwandans will continue to fly Rwanda Air, respectively with Ethiopians, Europeans, Kenyans, and others to their own national airlines.

As indicated in the same feasibility, the majority of the passengers are international who will be skewed towards their own. In this space, the first mover advantage is likely to continue to work against us. Again, arguably so, tourism potential is immense but the domestic constraints are equally substantial.

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Above: CRJ 900 Series

Lastly, while feasibility does a risk assessment, the risk of history is not given the due attention and yet adaptively as well as rationally, history is present with us. Over the last 2 decades, the failed airlines in the same target space of Uganda airlines include former Uganda Airlines (2001), Africa one (2002), East African Airlines (2003), Alliance Air (2002), Victoria International Airlines (2006), and Air Uganda (2014).

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In the long run the national airline makes absolute sense – subject to addressing the trade, investment and tourism challenges. Matching its revival to the economic realities will be optimal. Uganda credit rating is only a B – further front loading would likely dent economic prospects of attracting credit as also exhibited by the protracted negotiations on some large pipeline projects.

Dr. Enock Nyorekwa Twinoburyo

(Economist)

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