Should the govt retain ownership in Airzim?

AROUND the world, the aviation industry has mostly moved away from state-owned airliners, to privately-run plane companies.

This is, particularly, true for most advanced economies, such as, the United States of America (USA) and the European Union, which also account for the largest share of global airline passengers. Privatisation was mostly driven by the fact that aviation is rarely profitable, such that, even in the mentioned advanced economies, privately-run airliners depend on government assistance (subsidies), every now and then.

Operating a commercial airline comes with extremely low profit-margins, with the global industry estimated to generate an average of only 2,6% in returns, annually.

The capital-intensive nature of the industry, extensive competition from an increasing number of airliners, fluctuating demand (from passengers) and fuel prices, are some of the factors, which contribute to these low margins.

Zimbabwe also finds itself in a place where it needs to determine if it can continue with an acutely loss-making stateowned airliner (Air Zimbabwe), or to privatise, or even liquidate it.

Nevertheless, policy-makers and all stakeholders will need to have an excellent understanding of the aviation industry, in order to make the right decisions. Some key matters, which should assist in guiding decisions on the future of Air Zimbabwe, are outlined below.

Benefits of a flag carrier

In aviation, a flag carrier, is an airline company, which enjoys direct government support and privileges, whilst it also represents its home country, internationally.

Examples of such are Air China, Air Zimbabwe, Rwandair, Saudia (Saudi Arabia), Emirates (Dubai and UAE), Etihad (Abhu Dhabi and UAE) and Air France-klm (France and the Netherlands).

A national carrier can be particularly important for servicing routes (local, regional, international), which do not have a direct air connection with the country's main hub, which is Harare, in the case of Zimbabwe.

The flag carrier will then develop routes, which connect the distant and isolated areas to the hub, in order to increase trade (imports and exports), tourism, cultural integration and foreign direct investment (FDI), by enhancing the hub's accessibility via air travel.

For instance, in the case of Zimbabwe, China has turned out to be the largest source of FDI. If there are no direct flights, which link China's major cities with Zimbabwe, that may also mean that the country is likely to receive less than optimal levels of FDI from China.

This is because some investors will not be able to visit Zimbabwe or to follow-up on their investment proposals, due to challenges pertaining to air links to the country (Zimbabwe), such as the lack of direct flights. The argument is the same, for tourist arrivals also.

In other countries, flag carriers are even willing to incur loses on certain international routes, as long as total tourist and FDI spending from the particular market (for example, China) are significantly higher than the airliner's loss.

For example in 2017, South African Airways was making a minimum yearly loss of R360 million (about US$24 million, at that time) on the Johannesburg-beijing route.

However, for the same period (2017), FDI from China was even more tremendous, injecting about US$15,2 billion in the South African economy.

Bilateral trade between the two was also a massive US$39,17 billion in 2017. This implies that the country benefited from jobs and some of the losses were indirectly offset by current and future taxes and fees on the foreign spending (such as VAT, corporate and income tax).

Clearly, no private airliner would be willing to incur a loss as it supports such a developmental agenda. Nevertheless, it can be justifiable for a state-owned airliner to play that role.

In that case, the government subsidies (debt guarantees, cash injections, etc) to the airliner would be viewed as a necessary part of the overall strategy to develop the country.

State of Air Zimbabwe

Zimbabwe's flag carrier, Air Zimbabwe, has struggled since the early 2000s and continues to get support from government due to its inability to keep up with competitors and operate profitably.

In June 2021, the government had to eventually take ownership of its debt, which had risen to a staggering US$380 million in order to make it possible for the company to continue operating.

This transferred debt will add to the government's already huge debt burden, and reduce options for funding to other economic sectors, such as infrastructure and export development, since it (the debt) will need to be repaid from the very little available government resources.

The Ministry of Finance's national budget will have less flexibility to fund more productive sectors of the economy due to the failures at Air Zimbabwe.

The airliner inherited 18 aircraft at independence. However, reports indicate that, as of January 2024, it has only three functional planes.

Audit reports by the chief government accountant, Auditor-general, show that the company is being extremely poorly run. Air Zimbabwe's accounting books had a gaping mismatch between the closing and the new year's balance sheet figures, by as much as US$92,4 million, in the 2018/ 2019 period.

Corruption and mismanagement are not new at the company since 2015 when two senior executives were sentenced to 10 years in jail each for fraud and unethical conduct (corruption).

Since the early 2000s, the company's brand has been badly affected by events, such as employee strikes over unpaid wages, confiscation of aircraft over unpaid debts and restrictions from flying into the European Union (EU) over safety deficiencies.

Air Zimbabwe has also been operating with an inefficient structure. In 2013, for example, there were 799 employees for only three operational aircraft, which became 232 employees for one aircraft, at some point in 2019.

For the audited 2019 financial year, the Auditor-general (AG), highlighted additional deeply concerning issues, with the company's accounting books. For instance, cost of sales for the reviewed period (2019), included US$1,8 million in expenses, which did not have supporting documents, to prove that the transactions are authentic.

Additionally, an understanding of the aviation industry shows that the company is not likely to make a profit from its operations, within the next three years.

That means it will continue to add more debt and losses, which will have to be funded by the Treasury, as it takes away from resource allocations to other economic sectors.

The case for genuinely open skies

It is possible that the country can liquidate Air Zimbabwe and still have strong FDI, trade and tourist flows. Instead of continuing with an incompetent state-owned airline, the country can choose to introduce an authentic "open skies" policy.

That would mean that Zimbabwe would welcome any Iata-compliant (competent) international airline that wishes to fly to, from or within (domestic) the air gateways of the country.

Singapore and Chile are already implementing a viable form of "open skies", which might be worthy to emulate since there are different types of open skies policies in implementation around the world.

Open skies will enhance Zimbabwe's airlinks and also attract the more competent and reputable international and low-cost airliners. This will be crucial because it is unlikely that Air Zimbabwe can comparably compete with major brands, such as Qatar Airways, Etihad, Emirates and Turkish Airways of the Arabian gulf, for instance.

Those foreign airliners are likely to be getting fuel at discounted prices since their countries either produce oil or are close to oil producers. Also, for the Uae-based airliners, corporate and income taxes are either extremely low or non-existent, owing to their domestic governance system.

The Arabian gulf is also somewhat centrally located from the furthest parts of Europe, USA, Asia, Australia and Africa, than almost any other region in the world.

This makes it more affordable and efficient for those foreign airliners to reach passengers from their headquarters in the gulf in any territory at a reasonable costs than would be the case for Air Zimbabwe, which operates from a rather isolated Robert Gabriel Mugabe (RGM) International Airport.

Additionally, the mentioned airliners are in the same time-zone with Zimbabwe. This means that, Air Zimbabwe has to compete for clients alongside those giants (airliners).

Clearly, it is likely to be outcompeted in terms of ticket prices, technology, product quality, efficiency and costs of production. Thus, if the government understands that the country does not have competitive advantage in the airline business, it would then be advisable to liquidate Air Zimbabwe and implement a genuine open skies policy, instead.

Other scenarios

The government may also need to consider a possible merger between Air Zimbabwe and South African Airways (SAA). Currently, the South African flag carrier is also in need of an equity partner (shareholder with cash), whilst it is struggling with viability, even after a recent business rescue, in 2019.

However, if Air Zimbabwe chooses to be an equity partner, and also gets the added advantage of consolidating Zimbabwean and South African routes, it is likely that profits will be made.

Zimbabwe has 13 airports, of which only RGM International, Bulawayo and Victoria Falls, are practically available to commercial airlines.

The other 10 airports are either out of commission or not well maintained to support sufficient air travel. In order to boost trade, economic activity and tourism, the government can subsidise the renovation of some of these airports or even feeder planes from these isolated regions, as they feed traffic (passengers) to the main airports.

This will likely be profitable through making trade more efficient, enabling increased FDI and improving tourist visits to the more secluded areas, such as Hwange, Chiredzi and the Eastern Highlands.

Feeder planes can be paid an amount between US$30-US$50 for each passenger connected to the main airports from those areas, for instance. The funds, which were subsidising Air Zimbabwe can also be more beneficially used in this area.

To make the concept practicable, the government can start with only three outlying domestic airports and then cap the number of subsidised travellers to 500 per day (to or from each airport).

This would work out to 1 500 subsidised travellers for each of the three outlying airports each day. At a subsidisation rate of US$50 per passenger, the three airports would only need US$27 million in annual government funding (US$50× 500 passengers × 3 airports × 30 days × 12 months).

Freeing up funds, which were supposed to support Air Zimbabwe's yearly losses can also provide room for advancement of the local air force, which can be gainfully used in crime prevention, maintenance of law and order, civil protection (disaster response and relief efforts), and defence against foreign threats.

It is worthy to emphasise that although the advanced economies mentioned earlier have ceded control of civil aviation, they have increased their commitment to their respective air force, thereby advancing their aerial military capabilities.

Conclusion

In the end, it is clear that Air Zimbabwe has proven incapable of being competently run in the past few years. This, therefore, means that the government needs to seriously consider funding retrenchment costs for the remaining employees as they go on to liquidate it.

An alternative may be to sell it to a private player, although its balance sheet and struggling brand (reputation) imply that it can be sold for a very small return.

For more independent and authoritative comments on the matter, the government may also request the opinion of other credible experts, including the World Bank's aviation consultancy division.