AIR ZIMBABWE AT ROSSROAD TO SURVIVAL

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