The future of Alliance Air hangs in the balance as negotiations continue to find new shareholders. We take a look at what led to the carrier's suspension

Alliance Air may yet take to the skies again. Talks are under way between majority shareholder Transnet and interested parties to take a share in the suspended airline.

The airline, a joint venture between the governments of Tanzania (30 per- cent), Uganda (30 percent) and South Africa's transport parastatal Transnet (40 percent), was grounded in October last year as a result of shareholder problems and high running costs. Transnet Company Secretary Theo Barkhuizen confirmed that negotiations with potential shareholders were under way but would not say who the patties were.

Two of the companies involved are believed to be private Ugandan cargo airline Dairo Air Services and Inter- Invest Ltd of Tanzania.

Reports from Uganda say that all three shareholders are looking to offload their entire stakes in Alliance.

However, Barkhuizen would not comment on what was being discussed, saying only that the two companies were not the only shareholders involved in the talks. He said if the negotiations were concluded successfully, the airline could be relaunched, otherwise its affairs would have to be wound up. However, it was impossible to put a timeframe on this. 'Things are still in a state of flux. We hoped to have this wrapped up last year already but there have been a lot of delays."

Delays and problems of process appear to have been the main factors undermining the successful running of the airline.

Alliance Air was launched in 1995 under the auspices of African Joint Air Services with the aim of combining the small markets of the participating countries into a single and more viable market harnessing economies of scale and sharing resources.

Initially the Zambian government was part of the grouping but a lack of funds led it to pull out, It was relaunched by Uganda and Tanzania with an invitation for an external partner. This was taken up by Transnet.

The airline suffered higher than expected losses in its first two years, with a loss of S9.9 million in the first nine months.

Although the situation improved in time, the airline never broke even in its five years of operation.

It was also plagued by the inequitable relationship between the participating countries and some conflict of interest between Alliance and the national carriers involved. This led to accusations of protectionism which some parties believe constrained Alliance's expansion. Players have also cited an over-dependence on South African Air- ways (SAA).

SAA had a commercial contract with Alliance under the AJAS Accord, in terms of which it managed and operated Alliance Air's cargo and passenger ser- vices on a commission basis.

Alliance also wet leased a Boeing 767-200 from SAA for its long-haul operations and a Boeing 737-200 for its Rwandan subsidiary, Alliance Express, Initially Alliance had its own branding as part of an agreement with SAA. However, in the last few months before it was grounded, it flew in SAA's livery.

On March 31, 2000 Transnet, which had financed Alliance's operations, announced that it would cease funding for the carrier as of April 1, 2000. It asked regional governments to fund Alliance proportionally to true value of shares held and open up market access.

It advised its partners to find alternative revenue sources by selling some of their shares to private sector players. This did not happen.

In October, a decision was taken to suspend the airline because of the high operational losses being incurred. With each delay in implementing plans to put the airline on a profitable footing, the operating costs mounted.

When Alliance was suspended it owed Transnet $50 million. Barkhuizen said this was just a "ballpark" figure and in fact, it had already been reduced. The issue of how the outstanding debt will be dealt with is a factor in the current negotiations.

According to airline sources, Tanzania appeared to be the main problem as the government's attention was divert- ed by the parliamentary and presidential elections held at the end of October. Even when it sent representatives to meetings, they were often not mandated to take decisions.

However, there was also the question of financial contributions towards the airline's operational costs. Neither Tanzania nor Uganda were fully paid up shareholders although Uganda had paid a portion of the amount owed.

The two governments have said some of the losses incurred were because SAA had imposed on them an inefficient, fuel-guzzling aircraft.

According to a statement from Alliance Air announcing the suspension of its operations, in March 2000 there was an opportunity for Alliance Air to expand its presence in the region and reach a level of critical mass to enable the airline to become profitable through additional funding and route rights.

"This required the successful negotiation of the new Shareholders Agreement which was not achieved as Uganda and Tanzania, as shareholders, were unable to fulfil their obligations."

SAA had, in the interim, provided bridging finance.

However, after several months, SAA terminated it because of the delays in setting up shareholders' meetings.

"The problem was mostly a problem of process," says an SAA spokesman. "The financial situation could have been resolved given the plans on the table to help the airline break even." However, in the end the process proved to be too costly to sustain.

The suspension was not without its problems, key among these being staff demands for payouts. SAA said that as no decision had been taken on the fate of the airline, staff were not paid out following the suspension.

In Uganda, court action was instituted against Alliance as well as its MD, Chris Zweigenthal, and in Tanzania, SAA's aircraft was attached for five hours while routing through Dar es Salaam.

An order preventing Zweigenthal, who now works for SAA, from leaving Uganda was issued although by that time, he had already left for South Africa for discussions on Alliance's fate. The order also included the freezing of Alliance's assets. It was challenged by South Africa and finally dropped.

Workers also accused Alliance of colluding with SAA to grab the former's slots at London-Heathrow. SAA has denied the charge and said the slots had been withdrawn as they were not being used.

London slots

However, an airline source said the dormant London slots, held by Uganda in terms of its bilateral agreement with Britain to allow British Airways to fly to Entebbe, were part of the drawcard for South Africa taking a stake in Alliance in the first place. Alliance's Deputy Managing Director, Fred Ochieng-Obbo, speaking in Kampala, said most of the blame for the airline's failure lay with the regional governments.

"They invited a foreign partner in the form of Transnet but did not resolve fundamentally the relationship between the regional airline and national air- lines," he said.

"Governments were the principal culprits in the delay because they failed to take prompt business decisions."

He accused the Tanzanian and Ugandan governments of seeing Alliance as a threat to their national carriers and effectively blocking its expansion plans into areas where they saw a conflict of interest despite the region's open skies policy.

"They were willing to liberalise for everybody else but not for Alliance," Obbo said.

He says another problem that affected Alliance had been the unsuccessful bid by the consortium of SAA and Alliance for a 49 percent stake in Uganda Air- lines. He says the final negotiations were scuppered by members of Uganda's parliament, allegedly with encouragement by top members of the government, which was another indication of their protectionist stance.

"In attempting to protect Uganda Air- lines, the government lost both (Uganda Airlines and Alliance) and left Uganda at the mercy of foreign airlines," Obbo said.

SAA says the issue relating to Uganda Airlines is a completely separate one and has no bearing on the problems around Alliance.

However, in December it kicked off a three-weekly service to Entebbe. It previously had no service to Uganda.

Some aviation industry observers in East Africa have said the situation was also negatively affected by the perception of dominance by South Africa in the relationship, particularly given that the aircraft, funding and various sup- port services were all coming from South Africa. This was exacerbated by the later decision to have the Alliance flights undertaken by aircraft painted with SAA's livery.

Says Obbo: "For an organisation doing business in Africa, they were too impatient, they were too aggressive."

Meanwhile, the operations of Alliance Express, an offshoot of Alliance, are continuing. The airline, which is primarily a regional carrier but also flies to Johannesburg, is 49 percent owned by Alliance and 51 percent owned by the Rwandan government.

Alliance Express approached Transnet to keep the airline going after the suspension of Alliance Air. It agreed to do so and a contract to this effect was signed.

However, SAA is poised take up Alliance's 49 percent stake in Alliance Express. This will form part of an agreement offered to Alliance not to hold it to any debt owed to SAA which was incurred in respect of Alliance Express's operational expenses. Subject to approval by the Alliance board, the share transfer is to take place regardless of whether Alliance flies again or not.

Reporting Byjoseph were in Uganda and Dianna Games in Johannesburg