Aviation industry in the doldrums

Dar es Salaam. Air Tanzania Corporation (ATC) was once the pride of the nation. It was vibrant and people jostled for plum jobs. However, years of poor administration and undercapitalisation have left it the ghost of its former self.

In the early 1990s and before, ATC was making profits. For example, the national flag carrier posted a profit of $650,000 (about Sh1.04 billion at the current exchange rate) in 1994.

In 1980s, it had eight planes, but now only one is operational. Attempts to energise it, which saw ATC change its name to Air Tanzania Company Limited (ATCL), have failed.

Recalls Tanzania Civil Aviation Authority (TCAA) director general, Fadhili Manongi: “By the time I left ATC in 1990s, it had eight planes of its own including two Boeings and some good aircraft that matched the standards of those days….it was a flouring airline that made one proud to be associated with.”

Those were the days when travelling by air was viewed as too luxurious to many and one would expect that with the air mode of transport becoming a preferred one, it is time for ATCL to post huge after-tax profits.

Mismanagement

Unfortunately that is not the case as mismanagement brought the airline on its knees.

“Slowly the company began to buckle under losses allegedly caused by mismanagement that included overstaffing,” explains Mr Manongi

That resulted in a decrease in revenue and market share. Corruption and nepotism exacerbated the situation. A chance for Tanzania to produce another airline that could become competitive at regional and international levels dawned in early 2000 when air charter company (Precision Air) -- which Tanzanian Michael Shirima established in 1993 -- came into partnership with Kenya Airways.

Precision Air ordered seven aircraft worth $136 million from the France-based French-Italian aircraft manufacturer Avions de transport regional in 2007.

However, six years later, analysts and policymakers are discussing ways of bailing out the once prosperous airline from its economic quagmire, putting over 700 jobs at stake.

Although Precision Air is still competing well with Fly 540’s successor Fastjet, analysts say ATCL and Precision Air scenarios are a clear indication that something is wrong with how Tanzania manages its airlines.

“This simply means that air operators in Tanzania fail to study the market trend and many challenges that characterise it,” says Mr Manongi. “The air business is very sensitive and it needs a lot of money and creativity as its profit margin is very limited due to high operation costs.”

Mr Manongi believes that much of the operation costs are spent on fuel (Jet A-1) whose prices have been increasing.

High operational costs

He estimates that in 2002, it was less than 10 per cent of total operation costs that went to purchasing of fuel. Currently, fuel accounts for over 40 per cent of total operation costs for an airline company.

Presicion Air board chairman Michael Shirima and Swissport chief executive officer Gaudence Temu share these sentiments.

“Fuel is hurting everybody in the aviation sector. Up to 40 per cent of the operating cost is on fuel,” Mr Shirima told BusinessWeek while explaining the company’s reason to return three leased Boeing 777 to their owners. Mr Temu says: “Airlines fail to analyse the cost structure...You find that operating costs are higher than profits, this automatically kills airlines in the country.”

Undercapitalisation is another serious problem. “The government has been injecting limited funds to revive ATCL... if we cannot pump enough funds, it is better we get rid of it, because pumping in limited fund is like wasting the money,” he said.

Competing for experts

According to Mr Manongi, aviation experts are few in the country and it is expensive to employ them from outside the country.

“Air operators are fighting for the very few pilots and air maintenance engineers who are expensively paid,” he said.

TCAA data indicates that local pilots and engineers account for only 40 per cent of the need while the remaining 60 per cent are hired from outside the country.

Another big challenge, according to Mr Manongi, is that airlines bring in old airplanes, “so you find that they spend a lot of money on operating them and on maintenance, hence end up obtaining very little profits.”

“The condition of our airports requires planes to operate only six hours, which is less than the maximum requirement of up to 16 hours every day. So this leads to underutilisation of aircraft regarding the fact that the unit costs are high.”

Bad partnerships

The list of factors that kill airlines in Tanzania is high fuel costs, but experts say, it will be incomplete without mentioning bad partnerships that the airlines get into.

Mr Manongi cites partnerships between ATC and South African Airways (SAA) as well as the one between Precision Air and Kenya Airways (KQ) as typical examples.

Air Tanzania, for example, came into partnership with SAA in 2002 with the latter purchasing 49 per cent of shares and promising to invest funds to invigorate Air Tanzania, which became Air Tanzania Company Limited (ATCL).

No investment was made. The company’s expansion plan flopped and so the planned services to Dubai, India and Europe never materialised as there was only Boeing 737-200s in the fleet.

As of Precision Air (PW), a joint venture with KQ proved helpful during the early days but some analysts say with the latter, having its base at Kenya’s Jomo Kenyatta International Airport, the idea behind the partnership might have been that of making sure that the former does not grow to compete with KQ.

This means that PW should be competitive only at national level so that it does not end up competing with KQ at international levels. Apparently, the marriage in 2003 might have been a strategy for KQ to outshine SAA which in 2002, bought shares in ATC.

A source privy to PW says KQ had promised to inject $12 million to support the operation of PW but that money is yet to be invested to date.

“These are the types of partnerships that our airlines need to be careful with….they should collaborate and do business with someone who regard them as equals who doesn’t use you them for his own benefits,” warns Mr Manongi.

Prof Elisante Gabriel of Strategic Marketing and Management shares says: “Strategic alliance is good for a short period of time. Otherwise one partner will learn from the other and employ strategies that will see the former benefiting at the expense of the latter.”

He urges local airlines to be careful when making alliances with international airlines because many airlines have failed to flourish because of strategic alliances.

But Mr Shirima is optimistic that despite KQ’s failure to inject $12 million as capital it promised in 2003, the partnership with it would continue “because there is value in it”.

The Kenyan carrier has enabled PW to connect its passenger traffic internationally through the former’s global routes.

He notes, however, that: “We have challenges. KQ is also in business. Sometimes they cooperate with us…the company has also been hit by a debt problem of late although it has ambitions to survive, it also has its own problems and would rather concentrate on fixing them.”

Lack of interest

TanzanAir director Abdukadir Luta Mohamed believes that lack of interest in the aviation industry by top government leaders contributes to the slow growth of the sector.

He said that during the 1980s, the sector was performing well because President Nyerere had interest in it. He used all means to ensure the sector’s growth.

“We have never seen the government buying a single plane recently,” said says.

He also noted that large entrepreneurs’ lack of interest in the aviation sector was another challenge.