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

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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