Air Zimbabwe on life support


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 In the words of Peter Chikumba, Air Zimbabwe chief executive, the national airline was on life support in the Intensive Care Unit. Although the wholly government-owned flagship air-carrier of Zimbabwe has laid-off 30 percent of its workforce since February 2009 and had significantly reduced service, the airline still operated on a US$1.4 million monthly deficit.

 

In order to survive, Chikumba insisted the airline must further reduce costs and obtain government relief from its US$40 million debt, while the country must ratify a new constitution that provided guarantees to foreign investors.

Full cable:

 

Viewing cable 09HARARE837, AIR ZIMBABWE ON LIFE SUPPORT

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Reference ID 

Created 

Released 

Classification 

Origin 

09HARARE837

2009-10-20 14:06

2011-08-30 01:44

UNCLASSIFIED//FOR OFFICIAL USE ONLY

Embassy Harare

VZCZCXRO4688
RR RUEHBZ RUEHDU RUEHJO RUEHMR RUEHRN
DE RUEHSB #0837/01 2931406
ZNR UUUUU ZZH
R 201406Z OCT 09
FM AMEMBASSY HARARE
TO RUEHC/SECSTATE WASHDC 5043
INFO RUCNSAD/SOUTHERN AF DEVELOPMENT COMMUNITY COLLECTIVE
RUEHDS/AMEMBASSY ADDIS ABABA 3217
RUEHKI/AMEMBASSY KINSHASA 0537
RUEHGP/AMEMBASSY SINGAPORE 0007
RUEHBJ/AMEMBASSY BEIJING 0102
RUEHKM/AMEMBASSY KAMPALA 3265
RUEHNR/AMEMBASSY NAIROBI 5712
RUEAIIA/CIA WASHDC
RUEKJCS/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 02 HARARE 000837 
 
SENSITIVE 
SIPDIS 
 
AF/S FOR B. WALCH 
EEB/TRA 
CA/OCS/ACS/AF M. RAUGUST 
JOHANNESBURG FOR RCO K. MAY 
TREASURY FOR D. PETERS 
 
E.O. 12958: N/A 
TAGS: EAIR CASC ATRN ECON EFIN PGOVZI
SUBJECT: AIR ZIMBABWE ON LIFE SUPPORT 
 
REF: HARARE 228 
 
1. (SBU) Summary: In the words of CEO Peter Chikumba, Air Zimbabwe 
is on life support in the Intensive Care Unit. Although the wholly 
government-owned flagship air-carrier of Zimbabwe has laid-off 30 
percent of its workforce since February 2009 and has significantly 
reduced service, the airline still operates on a USD 1.4 million 
monthly deficit. In order to survive, Chikumba insists the airline 
must further reduce costs and obtain government relief from its USD 
40 million debt, while the country must ratify a new constitution 
that provides guarantees to foreign investors. End Summary. 
 
----------------------------------- 
Air Zim Analogous to an ICU Patient 
----------------------------------- 
 
2. (SBU) In a meeting with conoff on October 14 to discuss Air 
Zimbabwe's (Air Zim) operations and financial health, Chief 
Executive Officer Dr. Peter Chikumba outlined the airline's strategy 
by way of an analogy to an Intensive Care Unit (ICU) patient. 
According to Chikumba, Air Zim is on life support and in critical 
condition. Before the airline can be moved from the ICU to a 
regular hospital ward, the bleeding must be stopped through the 
airline generating revenues that equal costs. Although the airline 
has reduced 30 percent of its workforce since February 2009 and 
ceased operations on non-profitable routes, the airline is still 
operating at a net USD 1.4 million loss per month, further fueling a 
collective debt that exceeds USD 40 million. He said the company's 
high debt to equity ratio, aged fleet, and red ink, coupled with the 
country's political and economic uncertainty, make attracting 
foreign investors impossible. 
 
3. (SBU) For Air Zim to upgrade from the ICU and move to a ward, 
Chikumba stressed the need for immediate action on four pillars: 
Finance, People, Equipment, and Routes. In the financial pillar, he 
emphasized the need for the government to assume over USD 40 million 
in debt the company currently has on its balance sheet. He said 
that without debt relief, revenues would continue to be eaten by 
debt payments, making capital improvements impossible. In addition, 
the size of the debt in relation to the company's equity made 
attracting foreign investors nearly impossible. 
 
 
4. (U) Immediate action in the remaining three pillars is designed 
to control costs and improve profitability.   Chikumba said the 
single most critical goal of the airline is to equate revenues with 
costs. Toward this goal, Air Zim is looking at further personnel 
cuts, with a goal of reducing personnel costs 50 percent from those 
of February 2009. To improve profitability, he said the airline was 
analyzing all its routes and load factors, had just ceased service 
to Dubai completely, and had reduced London service to twice a week. 
 The airline is also trying to lower maintenance and fuel costs by 
upgrading its 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. Chikumba acknowledged it was unrealistic 
Qpercent savings in fuel. Chikumba acknowledged it was unrealistic 
to expect financing for new planes, and said the airline needed to 
end the mindset of procuring airplanes. Instead, Chikumba said the 
airline should lease planes and was scouring the used airliner 
market in an attempt to find two B737-300s as soon as possible. 
 
5. (U) Fuel costs continue to be a major hurdle for the airline. 
While the open market fuel cost is approximately, USD 0.45 per liter 
in London and Johannesburg, fuel at Air Zim's hub, Harare, is USD 
1.0 per liter. Harare jet fuel must be trucked from Beira, 
Mozambique, which doubles its price. To work around the high cost 
of fuel in Harare, Chikumba said the airline was purposefully 
loading more fuel than necessary on return routes from Johannesburg 
and occasionally using its long-range B767s to serve this 
short-range route. Admitting to the inefficiency of flying a nearly 
empty big jet on the relatively short route to Johannesburg, 
Chikumba said it was worth the savings in fuel when the aircraft 
returned to Harare nearly full, in preparation for its next flight 
to London. 
 
HARARE 00000837 002 OF 002 
 
 
 
-------------------------------------- 
Constitutional Guarantee for Investors 
-------------------------------------- 
 
 
6. (SBU) To insure the long-term viability of the airline, Chikumba 
said it was vital to improve the investment climate in Zimbabwe in 
order to attract outside investors. He said the drafting of a new 
constitution was particularly important, and that it had to include 
a "catastrophic clause" for foreign investors. Lamenting the 
current state of affairs, Chikumba said, "There are enough crazy 
people in Zimbabwe who will try to limit foreign investments to 10 
years. We must do the exact opposite and include a guarantee for 
investors in the new constitution." He said that without such a 
guarantee written into the constitution, efforts to attract outside 
foreign investment would be futile. 
 
7. Paralleling the constitutional reform, Chikumba hopes to 
eventually sell 60 percent of the airline, to create a 60/40 
(private/government) owned airline. Acknowledging that 
privatization was not currently possible, he stressed his belief 
that the long-term viability of Air Zim depends upon the sale of the 
controlling interest from the government. 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 remarked 
that attracting foreign investment and privatization was the 
airline's principal goal, once it moved out of the ICU. 
 
8. (SBU) Comment: With the economic and political collapse of the 
country, together with a worldwide decline in airline passenger 
demand, passenger revenue to Zimbabwe has plummeted. Since 2001, 15 
international airlines have suspended service to Zimbabwe and Air 
Zim's passenger load has decreased from one million to less than 
250,000 per year. Even though every day represents another day in 
the red, we expect subsidies to Air Zim to continue. In a country 
that has so many pressing needs in health care, education, 
agriculture, housing, transportation, and infrastructure, the loss 
in national prestige that would result from the failure of Air Zim 
appears to be a pill the GOZ can not swallow. End Comment. 
 
PETTERSON

(62 VIEWS)

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Charles Rukuni
The Insider is a political and business bulletin about Zimbabwe, edited by Charles Rukuni. Founded in 1990, it was a printed 12-page subscription only newsletter until 2003 when Zimbabwe's hyper-inflation made it impossible to continue printing.

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