Which business model?
Over the past few months, there has been an impassioned public discussion around the revival of the Uganda Airlines. The avid debates have centred on: Whether Uganda should revive the airline in the very first place; whether the country has the capacity to run an airline or not; and whether with the ostensibly high levels of corruption in the country, the airline will survive or will just sink tax players’ money into some dark abyss.
All of those though important questions seem to be behind us now. It is without any doubt that the business case for reviving the Uganda Airlines is more than compelling; there is a strong business case.
The real and most important question that Ugandans need to ask and debate, however, is what business model the new Uganda Airlines should take. A business model is a statement of direction and identity of a business. It is the underlying theory of business; how an entity proposes to bring value/money to its owner.
The question is should Uganda Airline be run on a private airline model, driven by profit-making and generating dividends for its owner(s)? Or should it be modelled as a national interest airline that is built as part of the national infrastructure intended to support the country to grow its gross domestic product (GDP)?
In this latter case, the airline would not necessarily take the burden of keeping its eye strictly on profits and dividends to the owners. Rather its focus would be on facilitating business in the country to grow the GDP. If the airline can do both, even better, but that would be very ambitious for a re-start like Uganda airlines.
If it is a national airline, its value addition would not be in making direct profits per se, and paying dividends to its owner (the government of Uganda), but to contribute to the growth of the country’s GDP, as a piece of national infrastructure, much like the standard gauge railway or roads and bridges.
If Uganda Airline makes Uganda an accessible tourist destination, and drives tourism numbers to tens of millions every year, generating millions of dollars. That will be value added. Equally, if it contributes to lowering the cost of doing business by making the country accessible to the world in the shortest time, and that drives investment and business activity in the economy, thereby driving up the volume of business in the country that is value addition. The airline may also make Uganda a favoured destination for international meetings and conferences, this way, making the country’s hotel rooms fully booked most days of the year that is still value addition.
In that sense the airline may not break even or even make profits from its operations, but its contribution to the growth of the GDP would be phenomenal; its value addition would be growth of the economy. With a booming economy, government would then be able to raise revenues from taxes in tourism, imports and exports, personal taxes, etc. from these national revenues, government would be able to subsidise the airline.
Indeed most airlines operational in the region take this model. Rwanda Air, Emirates, Gulf Air and even Ethiopian Airlines, all run this model. Their core business is not so much to make profits, but to support growth and development of their country’s GDP in various ways.
Take the Ethiopian airlines for example. Started in 1945, it has stayed a national flag carrier fully owned by the government. With the highest number of destinations in Africa and the African airline with the highest connections to destinations outside Africa, the airline drives millions of passengers annually through its hub in Bole international airport in Addis Ababa. The airline also conducts joint marketing events with other relevant agencies. For example, the Ethiopian airline together with Ethiopian Tourism Organisation co-conduct tourism-marketing events in Europe and other places, with the aim of providing attractive travel and tourism packages to travellers/tourists to Ethiopia. This way the airline drives tourism numbers into Ethiopia, and in the process, generates its own ticket sales to Ethiopia and other destinations.
The airline has been successful in its role as a national flag carrier, but also making profits. In 2017, Bloomberg News reported that the airline made a profit of 3.53 billion birr (US$ 165.4 million) the year before. For this reason, the government of Ethiopia has for many years passed a regime of policies aimed at protecting the national flag carrier. For example, in Ethiopia private airlines by policy are restricted from purchasing aircrafts of capacity more than 50 passengers. In other words, only the national carrier can purchase bigger aircrafts and therefore do international destination from Bole.
Rwanda Air is not known to make profits since it was established a few years ago, but the government of Rwanda keeps subsidising it for its strategic usefulness in breaking borders of “landlocked-ness.” Over the last few years, Rwanda has packaged itself as a choice destination for international events- conference, meetings, etc.
In May (2018), the International Congress and Convention Associations ( ICCA) named Rwanda as the 3rd most favoured country to host international events in Africa. Rwanda government sources reported that in 2017, Rwanda received 28, 308 delegates up from 23,804 the year before, contributing 15 per cent of that country’s tourism revenues.
Rwanda has a MICE (Meetings, Incentives, Conferences and Exhibitions) strategy aimed at attracting international events to the country. The national airline is at the centre of this offer.
The second model that Uganda Airline could take is to be a fully-fledged business chasing for profits. If it takes this model, its operations will have to be built around ensuring that they maximise their routes to carry enough passengers to make profits. In east, south and central Africa, Kenya airways is the only one currently taking this model. This way, the airline would be a fully private entity.
Before its recent woes, following which the government of Kenya invested heavily (up to US$ 750 million in guarantees), the company was listed on the Nairobi, Dar es Salaam and Uganda stock exchange, and run like any private business in Kenya, although it carried the national flag.
The company is regulated by the Capital Markets Authority meaning its transparency, accountability, reporting have to be public. Its employees are private employees, not state employees, and therefore they are able to negotiate their salaries and terms, form trade unions, etc. That is why it is common to hear about strikes by Kenyan Airlines pilots, and not those of Ethiopian airlines. The reason is that the Ethiopian serves the interest of the country, not the shareholder.
There are advantages and disadvantages for either model. The advantages with the national airline model is that the country’s economy gets integrated. The same way the SGR and roads are taken, the national airline is not necessarily preoccupied by making its own profits and paying its own dividends, but its preoccupation is to ensure that it services the other sectors of the economy; mining, tourism, agriculture, processing, services, thereby helping to grow the country’s GDP.
The problem with this model is that the airline will always fall back to the national coffers to finance/subsidise its operations. However, given that it contributes to the growth of the economy in its own way, this is not necessarily a challenge as long as the airline actually contributes to the growth of the economy. The country will have to come to terms with the fact that there is need to keep the airline in the sky by funding it from the national coffers as it is a strategic enabler of economic growth.
The private business airline on the other hand will be tasked to build its operations around making profits. Some of the decision it takes will not actually be in support of the growth of the national GDP, but short term profits. In the end, the airline will focus on its own sustainability and forget the national duty to improve the GDP.
The trouble with this business model is that it is governed by private sector rules of the game. The employees are hired and paid according to market forces; employees are free to form trade unions, the airline had to declare its performance publically as required by private sector rules of the game. The burden on the Airline is therefore huge, as the recent example of Kenya airways has shown. In fact the new CEO of Kenya airways is trying to get the Kenyan government to tread toward the national airline model