The Best Economic Model for a National Airline – EAZ

THE Economics Association of Zambia is a membership-based advocacy platform with the mission to contribute to the Economic Development of Zambia through the promotion and advocacy of sound economic policies. One of its objectives is to enhance awareness of, and interest in, economic and social development issues in Zambia.

The Government of the Republic of Zambia has been working to develop a plan for the establishment of a national airline. In January 2018, Government announced that they would soon launch the national airline. To give stakeholders an opportunity to debate the subject matter, the Economics Association of Zambia organized a public discussion on 22nd February 2018 to discuss the topic ‘A National Airline? What is the Best Economic Model?’ The event was held at Pamodzi Hotel and close to 300 people attended. The panel included the Secretary to the Cabinet Dr. Roland Msiska, Transport and Communication Permanent Secretary Eng. Misheck Lungu and Independent Consultant John Kasanga. Other speakers were Captain Alick Sakala and Center for Trade Policy Development Executive Director Isaac Mwaipopo.

The Need for National Airline and Best Business Model

The Secretary to the Cabinet, Dr. Roland Msiska, was among the speakers who discussed the topic. Giving his opening remarks, Dr. Msiska said the establishment of a national airline will assist in the economic diversification drive. The SC said if Zambia is to compete for high quality agricultural exports to developed markets such as the EU, the national airline will be a critical vehicle to achieve that feat. He then handed over to his Permanent Secretary, Eng. Misheck Lungu, to give a full presentation on the subject matter.

Transport and Communications Permanent Secretary, Eng. Misheck Lungu, said there is an air transport gap which the airline is expected to fill. He said the national airline will cost $30 million to set up. He began his presentation by outlining the common causes of national airline failure, among them high fixed costs, over-regulation, safety issues and foreign exchange related costs. He then went on to explain the various business models and said the Hybrid model best suits the planned national airline. The Hybrid model, which combines the Legacy Model and Low Cost Carrier, will adopt the Low Cost Model to service routes that are less than 1.5 hours, and for flights that are more than 2 hours the national airline will adopt the Legacy (Full Service Network Carrier) Model. The Legacy Model focuses on providing a wide range of pre-flight and on-board services, including different service classes, and connecting flights. The Low Cost Model focuses on cost reduction in order to implement a price leadership strategy on the markets they serve.

Eng. Lungu emphasized that the Country really needs a national airline. The Permanent Secretary stated the need to make Zambia a regional hub as one of the reasons why the country needs a national airline. He further stated that the potential to facilitate social development, the need to bust local and overseas tourist movement at less cost and time also provide a compelling reason to establish the national airline. He added that trade with neighboring countries will also benefit from the national carrier.

On why the national airline will succeed, Eng. Lungu said Zambia is a natural hub in Southern Africa and this will enable the national airline to fly to more than 13 regional cities within a radius of 1,500km. With domestic air transport and international air transport projected to grow at 13% and 5% respectively, the Permanent Secretary is upbeat that the national airline will attract non-aviation travelers to shift from road and railway to air transport due to affordable fares that the national airline will stimulate. Other reasons why the airline will succeed include Infrastructure investments, strong market penetration strategies, strong strategic partner and independent management structures.

Funding and Partnership with Ethiopian Airline

Justifying why Ethiopian Airline is the best strategic partner, the PS said Zambia would benefit from an already established airline with worldwide reputation. He added that Ethiopian Airline would give Zambia access to better resources such as specialized staff and better technology which will come at no cost to the new airline. Eng. Lungu said there is room for Zambia to opt out should the partnership prove unsuccessful. He was, however, positive that the chances of the airline succeeding are higher as Zambia airways will ride with an already established brand.

The PS revealed that the Industrial Development Corporation will contribute USD16.5million while Ethiopian Airline will contribute USD13.5million towards the establishment of the national airline, bringing the total to $30million.

Government Interference a Threat

Reacting to the presentation by government, an independent consultant, John Kasanga, said it is impossible for government not to interfere in the operations of the national airline. Mr. Kasanga said the former Zambia Airways faced a lot of challenges. He recounted how Zambia Airways focus was more on national and international presence, and on movement of passengers, rather than on export of cargo. He bemoaned how management ignored cost benefit issues by allowing a workforce of 2 900 workers to run a fleet of 7 aircrafts. He added that ZA wasted resources by maintaining costly unproductive assets such as offices and houses even in places they rarely flew, adding that of all the destinations the national airline serviced, only London and Johannesburg were profitable. Other challenges faced by the airline included high cost of maintaining crew abroad, high fuel costs, poor costing of tickets and government interference. The lack of adherence to cost saving measures resulted in costs exceeding revenues, leading to a situation where government began to subsidize the airline to a tune of $3.6 million per month to cover accruing IATA clearing house bills.

Airline Business Environment has changed

Mr. Kasanga narrated how there was a stronger argument for setting up a national airline in the past than in the present airline business environment. He said a lot has changed which makes a national airline today difficult to find a market niche. The setting up of regional airlines, the establishment of more flexible structures for air routing will make it difficult for Zambia Airways to compete without state subsidies. On the proposed partnership with Ethiopian Airline, Mr. Kasanga expressed fears that ET will most likely use the partnership to foment a dominant position to service its other airline routes against current competitors in Zambia. He called for an independent analysis of the feasibility study, if it is available.

Another speaker, Captain Alick Sakala, said the proposed national airline can succeed if government finds the right strategic partner. He said the partnership should be based on a Public Private Partnership arrangement. And Center for Trade Policy Executive Director Mr. Isaac Mwaipopo said the national airline is not a priority for the country, given the debt burden that Zambia is currently carrying.

Government, through the Secretary to the Cabinet, will soon make another appearance on the EAZ platform to share the feasibility study of the national airline project.

The Economics Association of Zambia is deeply indebted to the Secretary to the Cabinet for finding time to dialogue with the people on this very important economic issue.

Questions and Comments

  • Has there been any market research done to be able to understand our market niche? How long as a nation do we have to wait to expect a return on the national airline investment?
  • What is the actual proposed plan for the government to raise the 11 million dollars contribution towards the setting up of the National Airline? Is it going to be debt, are we going to source equity or are there other stakeholders?
  • What is the purpose of this National Airline? Why did the government think of re- establishing a national Airline? Is it to make profit?
  • The government chooses a business model which is a low cost carrier. How did the stakeholders involved arrive at a low cost business model? Economic theory suggests that for you to operate at low cost, you must invest heavily and attain economies of scale. At what point are we going to attain the economies of scale for us to operate at low cost?
  • Government officials are already flying all over the world. What will happen when there is a national airline?
  • Why is it that the private sector was never consulted when the government was planning the reestablishment of the national airline? If we start flying domestic and regional routes using a national airline, what will happen to our domestic airlines? Are we going to throw them away? Let’s remember that Zambians have invested heavily in these domestic airlines?
  • Did the Zambian Government engage a wide range of stakeholders in the reestablishment of the Zambian Airline?