Airline mergers- the case of Air Tanzania with Alliance Air

Dar es Salaam. Kenya airways and South African Airways have signed a Strategic Partnership Framework that is set to establish a Pan-African airline in a future as near as 2023.

The proposed merger comes at a time when regional competition is hotting up from airlines such as Air Tanzania, Uganda Airlines and RwandAir.

The three airlines have strengthened in the past five years setting up price competition an area that was once a preserve of Ethiopian Airlines and Kenya Airways.

History, however, suggests that mergers in the region are not all a bed of roses, due to accumulated losses and selfishness (national pride). 

Failure of the mergers of the Air Tanzania Corporation (ATC) with other airlines and the death of the East African Airways (EAA) can attest to this.

The case of Alliance Air

In 1994, ATC, now Air Tanzania Company Limited (ATCL), joined with Uganda Airlines and South African Airways (SAA) to form Alliance Air.

As it turned out , this marriage of  convenience did not work,  ATC had a 10 percent stake in the venture.

Flights operated from Dar es Salaam to London–Heathrow via Entebbe on a Boeing 747SP initially, and then a smaller Boeing 767-200.

This venture ceased operations in October 2000, after accumulating losses of about $50 million.

The losses had been funded by Transnet, the parent company of South African Airways, through April 2000.

In February 2002, the Tanzania government began the process of privatising ATC through the Presidential Parastatal Sector Reform Commission.

Advertisements were placed in the local, regional, and international media inviting potential bidders.

The airline was wholly owned by the Tanzanian Government until 2002 when it was partially privatised as per the directive of the Bretton Woods Institutions to implement the country's Structural Adjustment Programme.

The government therefore reduced its shareholding to 51 percent and entered into a partnership with SAA.

However, the partnership lasted for about four years and had accumulated losses of more than $19 million.

The government repurchased the shares in 2006 and ATC once again became a wholly owned government company.

Over the years, it has served a variety of domestic, regional, and intercontinental destinations.

East Africa Airways

ATC was established on March 11, 1977 after the break-up of East African Airways (EAA), which had previously served the region.

The liquidation of EAA followed its accumulation of $120 million of debt.

Prior to its formation, EAA had served the region since 1946 during the British rule of East Africa.

After the dissolution of EAA, Kenya and Uganda also formed their own flag carriers: Kenya Airways and Uganda Airlines respectively.

According to Sir Andy Chande, the founding Chairman of the board, Tanzania and Uganda did not receive a fair share of the former carrier's assets despite being equal partners.

Airlines largely operate very similar businesses. As well as flying the planes, they run significant back-office functions including administration, support services for planes, and so on.

What others say

Some analysts are of the view that, if other things remain constant, by merging these together, they can effectively halve their costs due to economies of scale to be enjoyed by the duo.

Going by the International Civil Aviation Organisation (Icao), through mergers, acquisitions and operational integration, airlines in many parts of the world have pursued their quest to obtain gains from strengthened marketing capability.

 For them, the goal of this trend is to maintain market quotas and traffic rights, expand to new markets, reduce costs, avoid fierce competition, and enjoy a dominant market position.

However, Icao says, despite all the features and benefits of alliances and mergers in the aviation industry, which should be encouraged, there are some drawbacks and flaws which need to be addressed.

Mr Gaudence Temu, who has been the Swissport Tanzania ex-CEO  for 22 years,  says airline mergers or amalgamation is a strategy used by carriers to save cost and  to consolidate their market positions.

“Although not insurmountable, the process is complex due to legal requirements and overcoming the cultural differences of the merging Airlines.  There are also technological and employment issues to overcome as mergers can necessitate laying off some employees and change in the computerized systems,” says Mr Temu

Therefore, further study is necessary to maximize the benefits and advantages and minimize the adverse effects of these alliances.

It should be noted that these alliances have become more and more complex and interrelated in terms of their cooperation frameworks and enormous marketing powers, and that Icao has yet to undertake studies in this regard.