Strange goings on at Air Zimbabwe

Air Zimbabwe has been on the deathbed for years now, with occasional periods of what look like resuscitation before the 'national airline' goes back to close to being comatose again. With hundreds of millions of dollars in debt it has no hope of paying and its pilots on the latest of many strikes, it has just been announced that the carrier is acquiring two new Airbus jets. What is going on at Air Zimbabwe?

There is the basic issue that most small countries have painfully realized over the years: an airline is hard to run profitably. The difficulties are heightened when government is involved in the shareholding structure or worse, in the operations. It is difficult enough for large commercial airlines to compete profitably in the cut throat business, let alone little government-controlled ones like Air Zimbabwe.

Add to these structural realities of the industry the fact of Zimbabwe's economic implosion and diplomatic isolation over the past decade. It is not hard to figure out why the airline has been in free fall after once having been a respectable, even leading carrier in the region and with many routes beyond.

Air Zimbabwe's debts accelerated during the worst of the country's economic crisis. As the country begins to pull itself out of that, the airline needed a large external capital injection to catch up with its debts and to retool. The sole shareholder, the government, didn't have the money and in any case couldn't be seen to be spending it that way at this time of lack in so many other areas.

So salary arrears have continued to climb, the old and pitifully depleted fleet of planes to deteriorate. This has caused the airline and the country public embarrassments too numerous to mention.

There have been many loud calls for the government to get out of the airline business and sell off the so-called 'national carrier.' It is, however, within the basic DNA of the Robert Mugabe government to believe fundamentally that wherever the government can control an asset or a process, it must do so. In almost every case in which it has been convinced to divest or to accept private co-shareholders, it has almost only done so when the company or sector in question is in severe crisis and the government feels it has absolutely no option but to privatize it, whether fully or partially. So we are dealing with a government which is at heart deeply suspicious of and sometimes even hostile to private business.

Government divestment has begun to slowly pick up in several sectors. But there is evidence that Air Zimbabwe, despite the embarrassment it causes its shareholder and the country, is considered a special baby. The responsible minister recently responded to increased calls to let the airline go by claiming no private investor would want it in its present state. This seemed a very strange contention to make without putting it to the test. Why not put it on the market and see the reaction? While the airline itself may be in shambles, many of the factors that once made Harare an important regional hub remain in place. In the right hands an airline based there could once again carve out an important niche for itself, somewhere between where Kenya Airways and South African Airways, the regional giants, leave off.

What may be more unattractive to an investor is not so much Air Zimbabwe's debt, few and old planes, etc but worry over whether a government with a penchant for belligerent interference in business would really allow a private operator to do so freely. A requirement to share equity with the government, rather than to be able to buy the airline outright, would probably be found particularly unpalatable by most prospective investors.

The vague, outdated 'prestige' factor of having a 'national airline' is probably one major reason the government continues to hold on to Air Zimbabwe long after any prestige has been replaced by perennial embarrassment over the company's many woes. It is known that the president considers it very important to his sense of prestige to land somewhere on one of his many trips with an airline emblazoned with 'Air Zimbabwe' on its sides, even if at the time the pilots and crew have had to be especially 'incentivized' to temporarily leave the picket line to do the so-called 'national duty' of ferrying Mugabe.

Is the very idea of a national carrier not outdated anyway, if it must mean government-owned? Kenya Airways is private and significantly foreign-owned, but it arguably 'carries the Kenyan flag' far more honorably and effectively than fully locally owned Air Zimbabwe.

Although it is claimed that the president and his entourage always pay their way, the way Air Zimbabwe planes can be commandeered at short notice, often greatly inconveniencing private passengers, is just one of many examples of how its status as a defacto 'official government carrier' makes its unattractive to a potential investor, and why the government insists on holding on to it long after it has ceased to make sense to continue doing so.

The purchase of two new planes by the airline has been rumored for some time, even though it is yet to be officially confirmed. There are surprised questions about how the government got the money or what sort of payment deal it was able to negotiate. Rather predictably, one of the rumors has it that payment through some kind of deal involving the cash-poor nation's hot new asset of diamonds is involved, which is not implausible.

But a more fundamental question than that is whether adding two aircraft to a now tiny fleet will be enough to change the airline's fortunes, or simply slightly delay inevitable collapse while significantly increasing the debt load in the meantime. Is a small and old fleet the airline's main problem, or are the bulk of its reasons for not thriving elsewhere? Is it poor management, too much political interference in operations, too many staff and costs? All these have been mentioned as causes of Air Zimbabwe's sorry state. Clearly if these other issues aren't also tackled the two new planes, an A320-200 for domestic use and an Airbus A340-500 for international routes, will make little difference to the company's eventual, long-delayed crash landing.

Perhaps the two new planes should be used not in a vain, possibly doomed effort to revive the airline while leaving all the other problem areas unattended to, but as a hook to now more realistically and attractively invite private takeover. Otherwise there is the danger of the new purchase keeping the company struggling along, but not doing well enough to really turn around. The only benefits then would be to keep a few people employed a little longer and the pretentious president with a 'prestige' plane always at the ready for his globe trotting, but at a continuing, greater net loss to the nation.

The new planes need to be accompanied by some realistic mass capitalization plan to pay off the existing debt to workers and many other creditors, to do whatever other retooling is necessary, in addition to tackling all the other operational and other problems.

Even then, the country's avalanche of bad publicity over the last decade means that an airline with the word 'Zimbabwe' in its name will for a while continue to be at a competitive disadvantage internationally, just on that basis. This may not matter much on routes where Zimbabweans are the bulk of the passengers, but on many others this country reputational issue would likely be an unavoidable factor, unless and until the airline provided an exceptionally good service, which in any case would take time to build up and for the word about it to spread.

As is the case for many other businesses, how they are received internationally will often unfairly but unavoidably be linked to the country's reputation for having what is in many circles considered an unusually controversial government. This is an issue that will affect the airline's prospects in many markets, but is one completely beyond its control. It is just one more argument for letting Air Zimbabwe sink and letting a new entity under new hands rise in its place.

A somewhat amusing line of current speculation is on whether Air Zimbabwe's purchase of Airbus planes is not in contravention of EU sanctions on the government and many of its subsiduary companies. Those sanctions suggest that the planes where bought from EADS through some indirect means, speculated to be by the brokering efforts of either China or Malaysia.

Implacable government critic John Makumbe is quoted as saying, “This is clear sanctions busting. If China, for example, is involved then they are putting their EU relations at risk by contravening the sanctions.”

An EU company is not going to turn down $500 million for planes it needs and wants to sell because it is coming from 'sanctioned' Zimbabwe! Even if China or Malaysia are involved as intermediaries on behalf of Air Zimbabwe, that would not be without the knowledge and okay of EU authorities. Besides, several EU governments have been making noises making it very clear that even though they remain wary of the Mugabe government, they realize Zimbabwe is back in business and they want to be part of the action.

'Sanctions' may formally remain a a talking point between the politicians, but there are many sheepish efforts by the EU to find ways of re-engaging with Zimbabwe. No one in the EU, China or Malaysia is going to get into any trouble by selling or facilitating a $500 million business deal with Zimbabwe because of the now  increasingly irrelevant issue of sanctions!

Finally, it is strangely never the chief executive officer who publicly speaks on behalf of Air Zimbabwe, but Jonathan Kadzura, the non-executive board chairman. Where and with whom does the buck stop? It may be these sort of messy corporate governance signals that account for the continuing poor performance of the once prestigious but now embarrassingly floundering carrier, rather than just an old fleet and a big debt load.

The Zimbabwe Review
http://www.thezimreview.com

August 26:

According to the Financial Gazette, Air Zimbabwe board chairman Janathan Kadzura has said, "I have heard these rumors but I don't know anything about the purchase of new planes; that's absolute nonsense. It is stupid and malicious. How can the airline afford to purchase new aircraft when you all know the problems at Air Zimbabwe?"