AirZim deal collapses

By Shame Makoshori

Plans by the country’s beleaguered airline, Air Zimbabwe (AirZim), to lease modern passenger aircraft from Malaysia Airlines have hit a brick wall after the two parties could not agree on terms underpinning the multi-million dollar deal, the Financial Gazette can exclusively report.

Zimbabwe had made giant strides in negotiating the acquisition of Boeing 787 Dreamliners from Malaysia Airlines to turn around the fortunes of the troubled AirZim, which is wallowing in debt estimated at about US$300 million.

The two parties had opened discussions on the deal after President Robert Mugabe had led a delegation to Kuala Lumpur, the capital of Malaysia, last year to scout for opportunities for the landlocked southern African country.

His delegation comprised Transport and Infrastructure Development Minister Joram Gumbo and aviation experts from AirZim who used the visit to the south-east Asian country to engage Malaysia Airlines with a view to either acquire or lease long-haul planes while parallel efforts back home focussed on identifying routes that would help the national flag carrier return to the black.

Government had shown interest in the Boeing 787 Dreamliners, which are basically long-haul, mid-size wide body, twin engine jet airliner manufactured by the United States’ Boeing Commercial Airplanes.

AirZim board chairperson, Chipo Dyanda, could not be drawn into commenting on the latest development saying: “This is a shareholder matter. I refer you to the Minister of Transport and Infrastructural Development.”

Gumbo confirmed this week that the discussions with Malaysia Airlines had fallen through and that AirZim had since shifted its focus elsewhere.

“I am still talking with potential airlines and we may agree soon,” said Gumbo. “At the moment I do not want to say who they are. We were talking to 11 airlines in Singapore, in Ethiopia and other countries and there was nothing special about Malaysia. I only mentioned Malaysia (last year) because I went there to see planes that they were not using but we could not agree on certain issues,” he added.

A new and efficient fleet would be crucial in AirZim’s struggle to return to profitability after meddling by government and years of mismanagement pushed the airline into its current crisis.

It has been operating old aircraft that have been guzzling fuel and piling up expenses.

AirZim has battled to compete for market share with regional competitors such as South African Airways, among others, which have invested in modern aircraft to save costs and attract the industry’s demanding clientele.

Sources said AirZim was making progress on acquiring at least four Boeing 777s (B777s) aircraft from an undisclosed supplier.

It also emerged that the AirZim board was exploring the possibility of establishing a new company to house the new fleet and start on a clean slate.

Although this idea has not been officially communicated to government, the new airline could be called Zimbabwe Airways and would have the four aeroplanes as its first major assets.
AirZim’s debt burden is one of the impediments to its ability to acquire new planes, as well as reaching agreement with a technical partner to steer the parastatal out of the woods.

A new company is therefore seen as the most viable alternative to circumvent the problem, and even insulate the new planes from seizure by creditors.

It was not immediately clear if the deal involves an outright acquisition or a lease, although indications are that AirZim would take delivery of the first batch of the B777s planes in the coming few months.

If the national flag carrier is to acquire the planes, it could spend almost US$1 billion.

The lowest priced model of the 777 family, the Boeing 777-200ER, costs US$261,5 million, while the Boeing 777-300ER goes for US$320,2 million.

This, apparently, is costly for AirZim, whose shareholder, government, is broke and has spent the past year battling to pay its bloated civil service. It therefore does not have the financial wherewithal to fund the acquisition.

The latest information appears to suggest that the AirZim board has ignored recommendations from consultants that it acquires two Dreamliner B787s and Brazilian assembled Embrear jetliners.

The Embraer was briefly operated by AirZim on domestic and regional flights under a lease agreement three years ago.

A report by audit consultants, EY, on the airline’s operations three years ago had recommended that AirZim should acquire or lease two B787 jetliners, which are smaller than the B777s.

This was in addition to AirZim’s existing fleet.

A feasibility assessment committee report came up with similar recommendations, according to sources familiar with the discussions.

The committee had recommended that the airline procures a fleet of the Brazilian assembled 60-seater Embraer jetliners for domestic and short regional routes to significantly reduce costs on domestic routes, where AirZim has been operating the B737s, or even the much bigger B767s.

There have been reports that AirZim has been flying with as low as three passengers on the Johannesburg-Harare route.

The 150-seater Airbus A320 has also been flying on domestic and regional routes.
AirZim is currently leasing two Airbus planes, one of which has been grounded ever since its delivery to the parastatal.

Currently, AirZim has been grappling with declining load factors, and chief executive officer, Ripton Muzenda, has ordered that flights on the Harare-Kariba-Victoria Falls route should immediately be discontinued.

A Chinese made MA60 plane, which is fuel efficient aircraft but costly to maintain, had been servicing the route.

Passenger numbers have plummeted to about 230 000 per annum in the past few years, from a peak of one million in 1996, as travellers opt for other airlines on the four domestic destinations it services.

The airline, currently flying into South Africa, Zambia and Tanzania, has been planning to re-launch the cash-spinning Harare-London flights, but airline executives have warned that without modern jetliners, it would be a waste of time because it would most certainly face stiff competition.

AirZim’s aged fleet comprises of two Boeing 767s, three B737s, three MA60s and two Airbus A320s.

Out of these planes, only four are flying – one airbus, one Boeing 767, one 737 and an MA60.

Only two were in operation last week.

The airline came close to liquidation when it stopped flights in 2011 before its sole shareholder took the decision to resume operation in November 2012.

AirZim was also struggling due to a debt overhang; outstanding salaries/wages; collapsed administration systems; bloated staff complement; top-heavy management and limited route network consisting of local and two regional flights, namely South Africa and Tanzania that would inevitably affect its revenue.

The Dyanda-led board has addressed the top-heavy management by putting in place a lean structure.

Currently, a staff audit and restructuring exercise is underway to ensure the right people are in the right places and the airline carries a wage and salary bill it can afford and for the right kind of skills, knowledge and technical expertise.

“We have also restructured the executive to ensure efficiency and reliability and to also upgrade and modernise systems that had collapsed and were outdated. Two new posts of chief operating officer and an executive manager (systems and administration) were created to achieve efficiency, reliability and modernisation of airline systems. We have also appointed an executive with the right technical skills, commitment and vision that the airline can be revived, can be viable and profitable to enable it to significantly contribute to national development by complementing road and rail transportation,” said Dyanda.

“Above all, we are crafting a new three-year strategic plan with a different operational and business model so that we redirect the company to become a competitive airline in the next three years. In addition, these proposed changes are being done in a holistic, forward-looking and visionary manner to give the airline a new robust foundation for growth and development. In crafting this strategic plan, we have engaged our stakeholders to understand their needs and expectations from the airline, re-engaged the shareholder on the airline mandate as the national carrier and re-engineered the business model and systems.

“As for the payment of retrenched workers’ packages, they are being paid monthly to the capacity of the airline. As a board, we are cognisant of their struggle to fend for their families, but we are limited by the funds available from a limited route network and the need to balance their needs with the operational requirements of the company. Some of them, with the right skills and expertise, may be re-absorbed in the company through the restructuring process currently underway. In addition, as the airline begins to have a good footing, more manpower may be required and more will be absorbed. The business model being proposed has the capacity to grow the business, but in some cases human resources will need upgrading to cope with the new demands.”

Regarding EY’s recommendations, Dyanda said these were being considered as part of the 2017-2020 strategic plan.

“Some recommendations from this report will be integrated with other strategies that have since come on board due to the developments in airline management, viability and profitability,” she said.

Dyanda said no single solution was the magic wand for the revival of the airline, adding that money was not the only solution to the problems besetting the airline.

“There are several strategies that are being put in place among them searching for a strategic partner by the shareholder, upgrading employee skills, knowledge and attitudes, changing the culture of the organisation, modernisation of the airline systems, rebranding to change the negative perceptions the airline has earned over the years and energising commitment and the vision of those running the organisation,” she said.

The planned acquisition of B777 planes has already sparked heated debate within the airline, with questions being raised over the rationale behind purchasing long haul airliners during at a time when debts in London have meant that the national flag carrier cannot operate on this most lucrative route, for instance.

“The bigger and the more the planes, the more cash those behind the acquisitions would get…. This has nothing to do with AirZim’s requirements. It only needs two big 787s. But four planes will give them more kickbacks. They want to make money out of aircraft acquisitions,” said a source. Financial Gazette