AVIATION
Low flying
Tomai Mirhe
Published: 01-JAN-02

Ghana Airways, having unsuccessfully taken the route of aggressive expansion, is now downsizing. Tomai Mirhe looks at whether this is taking the airline right back to where it was five years ago

For the corporate strategists at Ghana Airways, these are uncertain times. The country's national carrier has had two chief executives in the past year and it is currently being run by a task force, reaching decisions by consensus.

George Owusu recently completed his six-month contract as Chief Executive. His much longer serving predecessor, Emmanuel Quartey Jnr who, curiously, was sacked even after serving notice of his voluntary resignation, now resides in Britain from where he regularly defends his tenure at the airline's helm.

On the face of it Ghana Airways does have something to celebrate - it finally recorded a marginal $127,000 operating profit for September, boosted by a rise in passenger numbers. But even the airline's current management admits there is no solid evidence that this is sustainable.

Ghana Airways' problems go way beyond the issue of a chief executive. But the high turnover has done little for continuity and has left the airline with- out a clear-cut longer term corporate strategy.

The biggest dilemma facing the airline is its huge debt it owed some $119.3 million at the end of March 2001.

There are two schools of thought on how the airline should be run. One sup- ports the strategy adopted by Quartey, which involved rapid expansion in terms of fleet size, passengers carried and routes covered. It was designed to win market share, followed eventually by profitability.

The other school of thought belongs to the airline's current board and management which believes that in the face of its weak financial position, Ghana Airways cannot afford to expand. It has therefore taken the downsizing option.

The crucial question for the long-term management of the airline is whether expansion or downsizing will best serve its interests.

When Quartey became managing director in 1997, the company was already indebted but its balance sheet was still strong enough to allow for expansion.

The initial results were encouraging. Between 1997 and 1999, Ghana Air- ways expanded more than twofold. In 1996 the airline carried 199,000 passengers although the following year this dropped to 192,000 after the fleet was reduced to two aircraft and its regional operations had virtually ceased.

In 1998, Quartey's position was made permanent by the board, and expansion began in earnest. The number of passengers rose to 274,000 in that year and climbed by 15 percent to 313,000 in 1999.

Parallel to growth in passenger traffic was the expansion of the airline's fleet. This grew from two planes in early 1997 to seven by 2000; four DC- 10s and three DC-9s for regional services.

As result, flights no longer had to be regularly cancelled at short notice. With more aircraft and more passengers, Quartey went in for more routes. This proved to be a costly mistake.

First, twice-weekly flights were inaugurated between Accra and Baltimore-Washington International Airport in the US. Next, flights between Ghana and the Middle East were added on, with, Ghana Airways flying between Accra and both Beirut, Lebanon and Dubai.

This was in addition to an Accra-Harare- Johannesburg route, although South African Airways (SAA) has taken over one of the three services a week previously run by Ghana Airways. Al- though freight volumes did not rise in tandem with passenger traffic, Ghana Airways contemplated expansion in this regard too.

The airline had been carrying cargo in the belly of its passenger fleet but Quartey toyed with the idea of chartering all-cargo jets, especially for regional distribution in the short term, and actually owning an all-cargo fleet in the medium term.

While all this was happening, though, little emphasis was placed on load factors.. Indeed, these only rose marginally during the second half of the 1990s from 49 percent in 1996 to 54 percent in 1999.

But even this could not match the 1995 peak of 56 percent.

This was one of the crucial shortcomings; of Quartey's expansion strategy. While aircraft were being acquired, usually through debt financing, and put onto new routes, the airline was only operating at full capacity at the middle and end of the year when passenger travel normally peaks.

On average though, flights were less than half full.

Many tickets were also sold at discounted rates. About 100 discounted tickets were being issued each month at an average discount of 52 percent. This translated into about $78,000 per month in lost revenue. It was designed to draw in passengers who, in time, would become loyal to the airline and would not object to paying full fare.

Expansion also meant higher staff salaries and allowances bills.

Quartey managed to keep a lid on the overall staff strength of 1,200 by reducing the ratio of staff to aircraft from 600-to-one to about 200-to-one as the fleet grew. However, he also introduced the biggest pay rises in the airline's history with a view to motivating staff.

He claimed at the time that this helped to instill a new work ethic in Ghana Airways. However, any perception that this was the case was purely superficial.

The current management says ram- pant pilfering and corrupt practices such as ticketing, reservation and excess baggage deals, along with frequent abuse of official staff privileges, are largely responsible for the airline's sorry state.

Ghanaian staff were piqued by the outflow of corporate monies paid to the 40 foreign crew members recruited by Quartey to man the expanding fleet and fly the extra routes.

Quartey insists that he took Ghana Airways down the right path, but his employers were simply not patient enough to wait for critical mass. He has lots of support in his views although the evidence is far from conclusive.

"There was no other way to achieve the vision than to give Ghana Airways a certain critical mass or route network,"

argues Quartey. "Hence the expansion programme embarked on with the approval of the board and it is little wonder that profitability suffered in the short term. Historical precedent has been that Ghana Airways has always attained profitability on its newly developed routes after a period of initial losses. South Africa, New York, and the Sahelian being classic cases in point."

Quartey points to the experiences of other airlines to buttress his argument. For instance, he notes that Virgin Atlantic is expecting losses of about £35 million on its first year of operations to Toronto (Canada).

However, Ghana Airways, without the financial muscle to operate in a high cost environment, could not afford to wait for revenues to catch up with costs. The airline's many creditors got increasingly worried about repayment defaults in the face of rising losses.

In 1999, revenues amounted to $105,584 million, while operating" costs were $134.782 million.

Last year, revenues rose by nearly $20 million but costs rose by almost $23 million and so operating losses increased to $32.241 million and net losses climbed to $18.191 million.

Finally government ran out of patience and, spurred on by a critical media, Quartey was ousted.

When George Owusu became chief executive of Ghana Airways in April this year, he had a very different man- date but time was not on his side.

By the end of March this year, the air- line owned $61.8 million to lending institutions and another $57.5 million to trade creditors.

Out of the 10 loans owed, three, amounting to $9.07 million, had been due for repayment during the last quarter of 2000. Other loans of $4.59 million and The latest missed deadline was last October, with some C21.484 billion due.

Ghana Airways has been thrown out of lATA's clearing house because of a payment arrears of $7.365 million. Alitalia Maintenance is owed $6.175 million for maintenance services. Even JFK International airport, on the US route, said to be one of Ghana Airways most lucrative routes, is owed money.

Any strategy involving additional debt has been ruled out. Firstly, the air- line has no free assets to use as security. All its receivables have already been assigned to existing creditors. And Ghana Airways has only released unaudited accounts for the past two years, so there are no recent audited figures for potential creditors to look at.

The only option left has been to downsize.

Routes that have not been profitable, such as Dubai and Beirut, have been suspended. Also suspended are 30 percent of staff salaries, spending on overtime allowances has been substantially reduced and per diem allowances have been cut by 40 percent. Mobile phone bills have also been cut by two-thirds.

More importantly, the airline has restructured its organisational chart, trimming it in the process. Three deputy chief executives have been removed along with 12 departmental head positions. The number of foreign crew members has been slashed by half to 20, and changes in fuel policy have cut fuel costs by three percent.

Further staff rationalisation and cost cutting measures are under way.

However, initiatives to increase revenues have also been introduced. Excess baggage fee collection has climbed dramatically from These measures have helped to reduce losses. During the second quarter of this year, the first three months of the new management's tenure, net revenues amounted to $29.24 million while operating costs added up to $34.97 million. Operating losses were $5.735 million while net losses were lower at $4.26 million.

In March next year, a $4.1 million debt owed to Ecobank is due for repayment along with a $366,688 debt owed to the London-based Ghana International Bank. In 2004, more large loans become due for repayment.

Declining market share is likely to reduce revenues sooner than later in the same way that rising market share saw unsustainable growth in costs. If that happens, Ghana Airways will be back where it started.

The state-owned airline has become a national liability. In the past, the government has refused to subsidise it. There have been calls for the airline to be sold.

In its current state, despite its deter- mined efforts, Ghana Airways is the sum total of poor management, lack of financial resources, low technical skills and a poor work ethic.

An injection of new management, skills, training and finances may be just what the ailing airline needs.

• Imirhe is Business Editor of Ghana's Business ft Financial Times newspaper, a sister publication of Business in Africa Magazine





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