Air Zimbabwe at crossroads

Four years ago Air Zimbabwe chief executive Peter Chikumba told United States embassy officials that the national airline was at a crossroads. After ten years of disastrous financial mismanagement, the airline had become an enormous drain to the government’s coffers, requiring continuous transfusions of working capital from the Reserve Bank of Zimbabwe.

To remain afloat, Chikumba said the airline must maintain international safety and maintenance standards, while convincing the government to sell its controlling share of the airline, increase the efficiency of operations through a fleet upgrade, and enter partnership agreements with other airlines.

Full cable:

Viewing cable 09HARARE228, AIR ZIMBABWE AT ROSSROAD TO SURVIVAL

If you are new to these pages, please read an introduction on the structure of a cable as well as how to discuss them with others. See also the FAQs

VZCZCXRO1340

RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN

DE RUEHSB #0228/01 0760852

ZNR UUUUU ZZH

R 170852Z MAR 09

FM AMEMBASSY HARARE

TO RUEHC/SECSTATE WASHDC 4235

INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE

RUEHDS/AMEMBASSY ADDIS ABABA 2827

RUEHKI/AMEMBASSY KINSHASA 0532

RUEHGP/AMEMBASSY SINGAPORE 0002

RUEHBJ/AMEMBASSY BEIJING 0093

RUEHKM/AMEMBASSY KAMPALA 2875

RUEHNR/AMEMBASSY NAIROBI 5314

RUEAIIA/CIA WASHDC

RHMFISS/JOINT STAFF WASHDC

RUEATRS/DEPT OF TREASURY WASHDC

RHEFDIA/DIA WASHDC

RUZEJAA/JAC MOLESWORTH RAF MOLESWORTH UK

RUZEHAA/CDR USEUCOM INTEL VAIHINGEN GE

UNCLAS SECTION 01 OF 03 HARARE 000228

SENSITIVE

SIPDIS

AF/S FOR B. WALCH

EB/TRA

CA/OCS/ACS/AF M. RAUGUST

JOHANNESBURG FOR RCO M. VEASY

NSC FOR SENIOR AFRICA DIRECTOR M. GAVIN

TREASURY FOR D. PETERS

E.O. 12958: N/A

TAGS: EAIR CASC ATRN ECON EFIN PGOV ZI

SUBJECT: AIR ZIMBABWE AT ROSSROAD TO SURVIVAL

¶1. (SBU) SUMMARY: Air Zimbabwe, the wholly government-owned

flagship air-carrier of Zimbabwe, is at a crossroads. After ten

years of disastrous financial mismanagement, AirZim has become an

enormous drain to the government’s coffers, requiring continuous

transfusions of working capital from the Reserve Bank of Zimbabwe

(RBZ). To remain afloat, AirZim CEO Peter Chikumba insists the

airline must maintain international safety and maintenance

standards, while convincing the GOZ to sell its controlling share of

the airline, increase the efficiency of operations through a fleet

upgrade, and enter partnership agreements with other airlines. END

SUMMARY.

—————————–

Safe, Professional Operations

Despite Financial Woes

—————————–

¶2. (U) Air Zimbabwe, based in Harare, operates a fleet that includes

two Boeing 767-ERs that serve London, Dar es Salam, Dubai,

Singapore, and Beijing, and three Boeing 737-200s that serve

Victoria Falls, Bulawayo, Lusaka, Nairobi, and Johannesburg. Its

Chief Executive Officer, Dr. Peter Chikumba, an aircraft engineer

with 30 years of airline experience with Ethiopian Airlines, Air

Namibia, and the International Air Transport Association (IATA),

spoke openly about the airline during a meeting with ConOff.

¶3. (U) Chikumba emphasized the airline’s unwavering commitment to

international operating and maintenance standards. Boasting of the

airline’s recent successful completion of an International Air

Transport Association (IATA) Operational Safety Audit (IOSA),

Chikumba said that in spite of chronic financial problems, AirZim

had never compromised on aircraft maintenance or crew training.

According to Chikumba, an airline’s success is directly dependent on

its reputation and public trust. “The moment you lose public trust,

all is lost… And the moment you try to skimp on standards, you’ll

lose the trust.”

¶4. (SBU) When questioned about the carrier’s chronic red ink, the

normally high-energy CEO became even more animated and passionate.

Chikumba said the airline’s shareholder was responsible for the red

balance sheet. When asked for clarification, he replied that there

was only one AirZim shareholder, the Government of Zimbabwe, and the

shareholder’s financial policies nearly killed the carrier.

Chikumba would not talk about specific numbers, but in December

2008, RBZ Governor Gideon Gono said the RBZ had provided AirZim over

US$95 million in 2008. Chikumba snubbed the role of the RBZ as

merely being an arm of the shareholder.

————————————–

Number 1 Goal – Real Private Ownership

————————————–

¶5. (U) Chikumba explained the situation he faced upon his return to

the airline in 2007. Already, the Zimbabwe dollar was in the midst

of an ever increasing spiral of decline, while 70-90 percent of the

airline’s operating expenses were in forex. Forced by government

policy to accept revenue in Zim dollars only, the airline was

Qpolicy to accept revenue in Zim dollars only, the airline was

constantly raising prices in an impossible chase to keep-up with the

hyper-inflation. “We were raising prices twice a week, yet the real

operating expenses were rising twice a day.”

¶6. (U) Compounding the situation were a 7-day turnaround period

through the RBZ for the conversion of AirZim revenue into forex

payments, and the Real Time Gross Settlement System (RTGS). “We

would transfer what we thought was the equivalent of 10,000 USD

dollars to the RBZ for payment, only to be credited one week later

with a 1,000 USD credit.” Intended to stem cash shortages by

facilitating electronic transfer of credited funds, RTGS transfers

became a vehicle for transfers that took advantage of an

exponentially rising parallel market exchange rate. Forced to

accept only Zim dollars in ticket sales, RTGS and the parallel

market rate led to grossly overvalued ticket revenue. According to

Chikumba, customers were effectively paying only 24 USD for a ticket

HARARE 00000228 002 OF 003

from Harare to London. “Of course we needed help.”

¶7. (SBU) When asked for the impetus that allowed business class

ticketing in forex beginning in September 2008, Chikumba shook his

head. “Well, it wasn’t the daily phone calls and 127 weekly reports

I made to the Ministers of Finance and Transportation… I guess it

was the 128th.” Chikumba described how he repeatedly pleaded with

both ministers for a change in policy and the fallacy of accepting

revenue in Zim dollars.

¶8. (SBU) While acknowledging that the change to forex ticket revenue

was a major victory for the airline, Chikumba says it’s not enough.

Explaining that AirZim effectively has zero cash reserves and

services its domestic and regional routes with 23-year old aircraft

(B737-200s), the airline is in critical need of both operating

capital and an upgrade in aircraft. He said off-shore banks are not

interested in funding capitalization projects because of the

shareholder’s poor creditworthiness. Instead, Chikumba believes the

success of AirZim depends upon the sale of the controlling interest

from the government. Chikumba remarked that the only viable means

of raising money for capital investment is through true

privatization. First, it would raise capital. Second, it would

create a corporate board focused on profitability. Finally, it

would shelter the carrier from inappropriate interference from the

government. Chikumba added that this was his number one goal in the

next 12 months.

—————————–

Immediate Imperative –

Decrease Costs, Upgrade Fleet

—————————–

¶9. (U) With the economic and political collapse of the country,

together with Western sanctions against the Mugabe regime, passenger

demand to Zimbabwe has plummeted. Since 2001, 15 international

airlines have suspended service to Zimbabwe and AirZim’s passenger

load has decreased from one million to less than 300,000 per year.

¶10. (SBU) To weather the current environment, AirZim is attempting

to cut costs. The carrier recently suspended service to Kinshasa

and Lubumbashi in the Democratic Republic of Congo, where fuel costs

are particularly high. Chikumba explained that jet fuel costs 0.54

USD per liter in London, Johannesburg, and Singapore, but that it

costs 1.76 in the DRC. Chikumba remarked that fuel was also a huge

problem in Harare. Although fuel is unloaded at Beira, Mozambique

at the world market rate of 0.54 USD per liter, it is trucked to

Harare, where transportation costs have more than doubled the rate

to 1.20 USD. To work around both the scarcity and cost of fuel in

Harare, Chikumba said the airline was occasionally using its

long-range B767s to serve its short-range route to Johannesburg,

simply to take advantage of lower fuel costs. Admitting to the

inefficiency of flying the nearly empty big jet on the relatively

short route, Chikumba said it was worth the savings in fuel when the

aircraft returned to Harare nearly full, in preparation for its next

Qaircraft returned to Harare nearly full, in preparation for its next

flight to London.

¶11. (SBU) The airline is also trying to reduce costs by reducng the

amount of fuel it burns. Chikumba said the airline was attempting

to upgrade AirZim’s B737-200 fleet with B737-300s (equipped with

more economical high-bypass CFM-56 engines) which would result in a

30 percent savings in fuel. Acknowledging it was unrealistic to

expect financing for new planes, Chikumba said the airline was

scouring the used airliner market in an attempt to lease two

B737-300s as soon as possible. Noting both the extra fuel burn and

mounting maintenance costs associated with the 23 year-old

B737-200s, Chikumba said arranging the lease for two replacement

B737-300s was an immediate imperative and on-going effort.

—————————

Growth Through Partnerships

—————————

¶12. (U) Chikumba’s vision for solvency includes positioning the

HARARE 00000228 003 OF 003

airline for the “reemergence” of Zimbabwe. Acknowledging the

carrier’s lack of working capital and negative credit worthiness,

the airline is focusing on revenue expansion through partnership

agreements with other airlines. He said a partnership ticketing

agreement was just reached with U.S. Airways that will hopefully

lead to a code-sharing agreement in the future. Describing the

agreement as a baby step, he said such agreements were a vehicle for

building trust and confidence in the world market. Through the

airline’s London service, Chikumba remarked the carrier didn’t have

to operate to the U.S. in order to profit from American travelers.

In Chikumba’s vision, the West will someday return to Zimbabwe and

he wants to position the airline through agreements reached today.

¶13. (SBU) COMMENT: Although privatization of Air Zimbabwe makes

financial sense, there’s no clear indication the new unity

government will go for it. Putting the airline up for sale might be

a difficult pill for some in the GOZ to swallow as they would view

it as a loss in international prestige. Nonetheless, every day

under the status quo represents another day in the red for AirZim.

In a country that has so many pressing needs in health care,

education, agriculture, housing, transportation, and infrastructure,

subsidies to AirZim represent an unfortunate GOZ choice. END

COMMENT.

MCGEE

(26 VIEWS)