Analysis: PwC projections for proposed national carrier unrealistic


Projections in an initial pre-feasibility report by transactional advisors for a proposed national carrier casts doubt over its success.

The projected financial outlook, passenger throughput and take-off time of the proposed national airline have all been questioned and described by some industry players as “too ambitious and unrealistic”, following a submission of the draft pre-feasibility report to government by the transaction advisor, PwC Ghana.

A copy of the draft pre-feasibility report submitted to the Ministry of Transport dated December 4, 2014 titled “Transaction Advisory Services for the establishment of the new Ghana International Airline” and sighted by the Business and Financial Times (B&FT) projects that the new national airline will record an operating profit margin of 10.1 percent in the first year of operation; 10 percent in year two; 7.5 percent in year three; 11.6 percent in the fourth year; and an astounding 13.8 percent in the fifth year.

However, a number of operators in the aviation sector have raised serious doubts about the key financial ratios and timelines raised in the report, as they depart from industry standard and what pertains in the aviation industry as endorsed by the International Air Transport Association (IATA).

For point to point operations in the airline industry, the rule of thumb and generally accepted principle is to operate a route for at least 18 months to be able to determine its profitability or otherwise.

Indeed, the current margins in the industry in the best markets are much lower than the projected margins cited in the report.

An IATA analysis in June 2014 showed that in the North America market the margin was 4.3 percent; 2.6 percent for the Middle East; 1.6 percent for Asia/Pacific; 3 percent for Latin America; 1.3 percent for Europe; and just 0.8 percent for Africa.

Over the past two years, the Africa region has been rated as the weakest place to operate airlines in terms of profitability. Profits are barely positive and represent a margin of just 0.8% on revenues. This is why some airline operators contend the operating profit margin cited in the pre-feasibility study is unrealistic.

The project implementation plan cited in the said report portends that the new national carrier is to be registered in August 2015 and acquire its Air Carrier Licence (ACL) and Air Operators Certificate (AOC) in the same month.

This is, before now, unheard of — given the rigorous certification processes new airlines are taken through by the Ghana Civil Aviation Authority (GCAA) in compliance with international laws.

Meanwhile, the Deputy Minister of Transport Joyce Bawah-Mogtari is reported to have said that a new national carrier will be in operation by March 2015.

Indeed, some airlines operating in the country had to go through registration and other certification processes with the Ghana Civil Aviation Authority for more than a year before taking to the skies.

This indicates powerful political players being committed to seeing the realisation of a national carrier at all costs.

Another issue that has raised eyebrows in the aviation sector is the assumption about growth in passenger traffic as raised in the report. The report projects a passenger growth rate in the mature state of the airline at 3 percent. It also assumes that after reaching the mature state passenger numbers will grow by 3 percent per annum, and further projects an 80 percent maximum load factor — a figure called into question by aviation analysts.

At its peak, the erstwhile Ghana Airways had a maximum load factor of about 65 percent. “Going by the current feasibility report, the new national airline is set to fail if not reviewed,” an aviation sector player told the B&FT.

Since the demise of Ghana Airways and the subsequent utter failure of Ghana International Airlines — a joint venture between the government and private investors — the idea of a new national flag-carrier has been mooted by various government functionaries.

Government, through the Ministry of Transport, last year indicated its readiness to establish a new national carrier on a public-private-partnership (PPP) model to take advantage of the aviation sector’s burgeoning growth.

The Ministry of Transport, after a tender process, selected PwC — an international consulting firm — as the transaction advisor for establishing the new national carrier. PwC is expected to undertake various business studies to determine the viability, ownership structure; develop various models and evaluate bids for establishing the new flag-carrier.

Ghana has since independence established two national airlines, both of which have collapsed largely as a result of mismanagement.

The erstwhile Ghana Airways was founded in 1958 and for decades was the national airline with the Kotoka International Airport (KIA) as its hub. However, the airline — ridden with debt, ceased operations in 2004. Attempts were made to revive its fortunes but to no avail, and in June 2005 the airline was liquidated.

Government with the support of private investors then established Ghana International Airlines (GIA). The airline faced difficulties and eventually suspended its operations in May 2010. Some loose ends in the liquidation process are still being tightened.

Comments:
This article has 0 comment, leave your comment.

Comments