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Revival of Uganda's national carrier consistent with Vision 2040

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Added 1st August 2018 02:11 PM

The revival of Uganda’s National Carrier is affirmation that Uganda is consolidating its drive towards attaining middle income status.

Revival of Uganda's national carrier consistent with Vision 2040

The revival of Uganda’s National Carrier is affirmation that Uganda is consolidating its drive towards attaining middle income status.

By Joseph Muvawala

The Uganda Vision 2040 sets the long-term aspirations as "transformed Ugandan society from predominantly peasant to a modern and prosperous country within 30 years".

This perspective vision aspiration means changing the country from a predominantly low income to a competitive upper middle-income country with a per capita income of USD 9,500 by 2040.

The revival of Uganda's National Carrier is affirmation that Uganda is consolidating its drive towards attaining middle income status. This move is not a policy gamble, rather a cautiously, intensively and comprehensively studied idea that has been nurtured over the years and fits perfectly within Uganda's development agenda. The idea was formulated in the First National Development Plan (2015/16-2014/15) and was developed further through the Second National Development Plan (2015/16-2019/20) where the Airline is highlighted as one of the flagship projects expected to drive Uganda towards its medium to long-term development goals.

Detailed independent studies were undertaken including studies by the Uganda Development Corporation, Earnest and Young and a more detailed feasibility study by the National Planning Authority (NPA). Broadly, the need for the National Carrier is based on the objective to enhance the country's competitiveness by reducing the cost of air transport and easing connectivity; the strategy to support faster harnessing of opportunities (tourism, agriculture-especially horticulture, minerals, oil and gas) in the economy and; the requirement to establish air transport infrastructure to meet the growing demand for both passengers and cargo. The expansion and modernization of the Entebbe International Airport provides a greater opportunity for the National Carrier to shrive.

The decision to revive the airline was based on Uganda's past aviation experience as well as lessons from the success and failure of airlines globally. Uganda's aviation history spans majorly from 1943 with the formation of the East African Airways from the former Wilson Airways that collapsed with the East African Community and the imposition of the Economic embargo in 1975/6. The first National Carrier for Uganda, Uganda Airlines, was formed with an airline fleet of 15 aircrafts linking the country to Africa, Europe and Middle East. However, the airline suffered from financial difficulties and in May 2001, Uganda Airlines (QU) was liquidated after years of losses.

There have been numerous unsuccessful attempts to establish a local based airline including attempts by; Africa One, East African Airlines, Alliance Air, Victoria International Airlines and Air Uganda among others. These airlines failed due to under-capitalization, old technology aircraft, political interference, and orphanage syndrome, lack of route rights, poor management and lack of appreciation of value addition to the airline. Focus should be on the airline's role and contribution to the economy rather than solely focusing on its financial operations. An analysis that only focuses on financial performance of the airline is only a partial equilibrium analysis, hence, the need to have a general/full equilibrium analysis of the airline in view of its total contribution to the economy.

Uganda's population of close to 40 million people offers a good market base with passenger growth at Entebbe averaging about 11 percent annually for the last 6 years. Out of the 1.5 million passengers in 2014, 60% were Ugandans, government being the largest traveler. More than 50,000 metric tons of Cargo was carried in 2014 with COMESA, Europe, and Middle East & Asia as the top cargo destinations. Uganda's economy will continue to grow to empower more citizens to fly. The attainment of middle income status means more air travel and need for more airlines. Uganda's potential market size is huge and when half the population as forecast attain middle income (potentially 15 million people flying by 2034) "who will provide air services to Ugandans and at what cost to the economy?

The National Carrier is expected to provide wider transport cost savings to Ugandans. For instance, before 2007, without a local based airline, the Entebbe-Nairobi route was costing an average of $420. After 2007, with Uganda Airways starting operations, prices went down averaging about $150. Between 2016 and 2018, prices average about $600. This implies that travelers on the Entebbe-Nairobi route pay an extra $360 per passenger. Therefore, the availability of a national carrier will provide consumer surplus (transport cost saving) to passengers.

Even when the concept for establishment of the National Carrier is financially compelling (especially the regional routes) with internal rates of return of 28 percent, the Airline should be viewed more as an infrastructure meant to offer wider economic benefits beyond the direct financial flows resulting from its operations. Indeed, despite the financial and operational difficulties of most airlines globally, countries have continued to operate National Carriers because of the value addition to the economy and the associated wider economic benefits just as they invest in roads, dams, railways and other supportive infrastructure. Moreover, it is very unlikely to find a middle-income country without a National Carrier.

Uganda has vast potential to further develop its tourism, which presently accounts for approximately 7.4 percent of total employment. Uganda is a preferred destination for adventure travel especially gorilla tracking, water rafting and mountain trekking. In 2012, Uganda was listed as the "best choice" holiday destination by Lonely Planet Magazine, the world's largest travel guide book. National Geographic lists the Virunga mountain range in Kisoro in their top 10 travel destinations. In addition, Kidepo National Park is also listed in the top 10 best parks by CNN Travel. Given the high travel times by road, establishment of a National Carrier combined with these positive elements will stimulate growth of air travel to the country.

In reference to domestic flights, NPA's assessments revealed that Uganda's short domestic distances make it less viable to operate air services with large size regional aircraft as the flight times are too short and would make it very expensive and costly to maintain. At the moment there is no international feed to justify investing in small aircraft to serve domestic routes by the private sector. This would only make sense if there is a national carrier with an extensive network to provide this feed. The only option for domestic air service growth is therefore to gradually strengthen the already existing system of flights by private operators to enable feeder and international connections within a seamless schedule between domestic and international flights. With the increased throughput, the local operators would find it viable to invest in modernizing their small aircraft fleets which are hitherto used mainly for charter operations.

With regard to Aircraft equipment selection, consideration was based on; efficiency (operating costs), latest technology (engine & cabin comfort), pricing, cargo & baggage compartment (stand-up cabin as opposed to belly), maintenance cost, design advantage - risk of engine foreign object damage, range/payload limitations, air stair on regional aircraft, and optimal aircraft capacity for Uganda's market size. In consideration of these parameters, the study by NPA identified that, the CRJ 900 next generation aircraft (with 76 seats), and the Airbus A330-200 (with 247 seats) were most suitable for Uganda's market structure. The Aircraft selection by the National Carrier Task Force Business Plan is in line with NPA's earlier recommendation on regional aircraft with some variation on the international aircraft where the Airbus A330-800neo (with 257 seats) was opted. Even with this variation, the business plan offers compelling justification especially that this is an improved version of the A330-200 that is equipped with new technology engines that leverage on geared fan advantages to lower maintenance costs and deliver efficiency in fuel consumption. It is also understandable that the preferred airline would cover the required range for instance to destinations like Guangzhou given its range of 7,500 nautical miles compared to 5,950 nautical miles of the A330-200 that would only reach Beijing. 

Indeed, the future prospects of the preferred airline type (the A330 neo) are strong. The A330neo order book has kept pace with industry norms. Since its launch in 2014, the A330neo has garnered 453 orders compared to 292 aircraft for the B787 variants in the same period. This occurred despite the B787s having been developed 14 years ago in 2004.  The trend for the majority of airline preferring the larger variant of the same aircraft type is almost identical for both manufacturers thus giving confidence in the A330-800 which has its first flight this year. More larger seat A330-300/900 are being sold by Airbus (359 as opposed to 94) for the smaller variant, while more larger seat B787-9/10 are being sold by Boeing (264 as opposed to 28) for the smaller variant in keeping with industry trends.

Uganda Airlines will be starting long-haul services for the first time and requires market entry long haul aircraft with a seat configuration that would give the most optimal economics for the airline. The A330-800 with 257 seats is the right size for operating the thin routes. The aircraft maximum range of 7,500nm out of Entebbe airport enables all the three key markets of UK, Dubai and Guangzhou to be reached with direct flights. The aircraft fuel burn of 172.3 kg per seat compares favorably with the 188.6 kg per seat for the B787-8 while the B787-8 is $43M more expensive to purchase for use on the same network. The A330-800 price advantage also gives favorable economics for the business plan with projected break-even in 4 years as opposed to 7 years for the B787-8 aircraft. Additionally, The A330 neo is an aircraft that works well in Africa. Air Mauritius, Rwandair and Air Senegal have already ordered the A330neo after deep analysis and comparison with the 787 in a similar manner. Rwandair will add 2 additional A330neo in February 2019 to their long-haul fleet. It will be a -900 variant since the -800 variant is set for first availability at the end of 2019 and will not yet be available in February 2019. The A330-800neo is especially suited to African markets and especially for airports at high altitude and with hot average temperatures.

The decision on whether to lease or buy aircraft, was based on the need to; (i) harness state of the art technology by acquiring brand new aircraft as opposed to second hand leasing alternatives, which are usually difficult to customize to the country specifications; (ii) the need to ensure sustainability of the airline by limiting operation and maintenance costs associated with a leased aircraft; (iii) the need to ensure that the airline builds equity in the aircraft which can be used for future financing (loans, sale and lease backs, trade-ins, among others). For a capital intensive and long-term investment industry such as aviation, it makes more sense in terms of Net Present Value (NPV) to build equity rather than working only for the advantage of the leasers; and (iv) the need for the airline to have the freedom to design its own competitive on-board product in line with its markets. And indeed, the option to lease aircraft did not pass the financial and an economic evaluation criterion hence it was recommended that purchase of aircraft was the most viable option for Uganda. For the Airline lease option, Uganda would spend a minimum of USD 45.2 million annually for the same profile translating into about USD 678 million in 15 years way above the cost of aircraft purchase.

Also, comprehensive risk assessment and mitigation measures were studied and among the critical risks included; poor management, political interference, and low regulatory quality. Therefore, it is vital that the management of the airline is strengthened with high professional standards and strict performance targets including among others, listing the Airline on the stock exchange for not more that 49% in the first five years of operation and management should be given utmost independence. Additionally, the regulatory capacity of Civil Aviation Authority (CAA) should be strengthened commensurate to developments in the sector with the ability to attract and retain competent human resource. Critical areas for strengthening include; legislation, licensing, operations, and air navigation services.

Therefore, the National Carrier should be supported and viewed as part of the National Inter-modal Infrastructure Network and just like all countries with National Carriers, supportive policies should be established. The Airline should undertake self-handling, have supportive licenses for aircraft maintenance and fixed base operator, there should be review of unfavourable polices on traffic freedom rights, and supportive government travel polices by restricting government travel on the airline. As planned, the airline has a significant role in enhancing Uganda's connectivity and competitiveness towards the attainment of Uganda's development aspirations. The phased approach that begins with harnessing the strategic positioning of Entebbe Airport through the regional network is critical in preparation to position Uganda as a regional hub with long-haul flights in the near future.

Joseph Muvawala (PhD), is the Executive Director of the National Planning Authority (NPA)

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