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
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Reference ID |
Created |
Released |
Classification |
Origin |
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
(21 VIEWS)
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