AIR ZIMBABWE ON LIFE SUPPORT

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.

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Air Zim Analogous to an ICU Patient
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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



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Constitutional Guarantee for Investors
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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