AIR MALAWI PRIVATIZATION REDUX

UNCLAS SECTION 01 OF 02 LILONGWE 000799 SIPDIS SENSITIVE SIPDIS E.O. 12958: N/A TAGS: EAIR KPRV MI SUBJECT: AIR MALAWI PRIVATIZATION REDUX THIS MESSAGE CONTAINS PROPRIETARY BUSINESS INFORMATION; PLEASE PROTECT. ¶1. Summary. Privatization for Air Malawi is again being discussed, this time through a liquidation and sale of assets to COMAIR of South Africa. Finance Minister Gondwe has supported the plan, but potential divestiture of the flag carrier has drawn fire from Air Malawi's board and from some opposition leaders. Privatization and/or further opening the aviation market could potentially lead to expanded services and lower prices, but only if the GOM manages regulatory policy skillfully. End summary. ¶2. Privatization for Air Malawi has once again become a hot topic in Malawi. Recent newspaper reports, confirmed through Embassy contacts, indicate that the GOM has been in discussions to sell the national carrier to COMAIR of South Africa, a franchisee of British Airways. The potential sale has caused controversy over the modality of the sale, the appropriateness of selling the national carrier, and the prospects for the future of air service to and within the country. PRIVATIZATION OR LIQUIDATION? -------------- ¶3. Air Malawi has long been on the government's list of state enterprises to be privatized. Past administrations have in fact attempted to sell the carrier on three separate occasions unsuccessfully. The small size of the airline's fleet (three aircraft, one of which is currently leased out), and its unprofitability were major reasons these efforts failed. According to recent reports, COMAIR was invited to do due diligence on the airline with a view to buying it, but having done so found that in its present form Air Malawi was not viable. The current proposal would be to liquidate the airline and sell its assets to COMAIR, which would then reconstitute it as a new company under the name COMAIR Malawi Limited. ¶4. The Privatization Commission has been handling the negotiations with COMAIR under its mandate to divest Air Malawi. According to a source with the Commission, the details remain to be negotiated, but the government is committed to the sale. The fate of Air Malawi's catering, ground handling, and maintenance units, as well as its ATR turbo-prop aircraft, which would not be part of the COMAIR deal, remains undetermined. BOARD, OPPOSITION AGAINST SALE -------------- ¶5. News of the potential liquidation/sale of the national air carrier has sparked opposition. The Air Malawi board opposes the sale, arguing that recent restructuring has made the airline profitable after years of losses. Other observers have objected to the sale on the basis of national pride and the exposure that the carrier brings to Malawi internationally. ¶6. Some opponents have charged that COMAIR as a prospective buyer has a strong incentive to underestimate the value of Air Malawi, but the airline board's claims of profitability also cannot be taken simply at face value. Landing and parking fees in Malawi are high, and it is unclear whether Air Malawi, as a state corporation, pays the same charges as its foreign competitors. One reliable source described the claim to profitability as "rubbish," noting that it ignores debt service and depreciation. The airline also continues to receive subventions from the national budget and its viability without state support remains to be proven. ¶7. The immediate proceeds a liquidation of Air Malawi would bring the GOM would be relatively modest. COMAIR's offer to buy one of the airline's two Boeing 737's for 9 million USD would only be enough to cancel the airline's debt and cover closing costs. The government might expect to earn more on the sale of the functioning airline, but the past record demonstrates that a buyer has been be difficult to find. IMPLICATIONS FOR AIR SERVICE IN MALAWI -------------- ¶8. If Air Malawi is liquidated as proposed, the future of air service in the country becomes murky. Theoretically, privatization of the aviation sector could lead to increased competition, improved service and reduced fares. ¶9. Liquidation of Air Malawi is a bit of a gamble, however, since the airline is the only carrier operating scheduled flights within the country. To date COMAIR has not indicated LILONGWE 00000799 002 OF 002 publicly which domestic destinations the proposed COMAIR Malawi would serve on what schedule. Industry sources suggest COMAIR intends to service only the Lilongwe/ and Blantyre/Johannesburg routes. ¶10. Regulatory issues will impact the scenario. Although several foreign carriers operate flights to Malawi, the country does not have Open Skies agreements with anyone. Any expansion or change of service would need to get government approval. Nyasa Express, a start-up airline that has not yet received formal permission to operate, plans to offer expanded domestic and regional flights on routes not currently served. Nyasa representatives believe that there is untapped potential in the market. Nyasa's current application for a license to operate has been made in partnership with another South African firm - South African Express. A local Nyasa representative indicated that Nyasa Express would be part of a larger East African regional network of "Express" firms with interlocking board membership. COMMENT -------------- ¶11. Air service within Malawi is limited and international fares are expensive. As a state corporation, Air Malawi has been a drain on the government budget for years, and it is doubtful that recent restructuring has made the airline profitable. Malawi could clearly benefit from the increased competition and better service that might come with privatization. State ownership of the national airline is not the only problem with the aviation sector in Malawi, however. Ultimately whether a liquidation or sale of Air Malawi would result in an improvement or a deterioration of air service will depend heavily on the regulatory policy that the government adopts. Many observers will also be looking to market the case of Air Malawi as an indicator of how seriously the GOM intends to pursue additional privatizations. EASTHAM