DAR ES SALAAM, Tanzania-The Tanzanian shillings mismatch with the United States dollar has caused cash flow problems for Precision Air, one of the fastest growing airlines in the region.
Explaining to East African Business Week how the airline posted a Tsh30 billion (about $18.67 million) loss during the year ending March, 2013, the airline’s Board Chairman, Michael Shirima said currency mismatch, lack of capital and some internal manageable factors are among the factors that contributed to the loss.
Shirima said businesses with narrow profit margins are highly sensitive to external shocks affecting either revenue stream or cost elements.
“This loss is further complicated by the currency mismatch. The revenues are mainly denominated in local currency while larger percentage of costs (fuel and maintenance) is in foreign currency,” he said during the Annual General Meeting.
He gave the example of a large part of Precision Air’s income being in shillings, while most of the expenditure such as aircraft purchase, spares, oil and large repairs are in foreign currency.
He said there is always the possibility of losses arising due to falls in the value of the Tanzanian shilling against the US dollar.
He said, “Management foresaw these challenges and acted proactively to steer the company clear of turbulences.”
One of the steps deployed was seeking long-term capital inviting new shareholders through Initial Public Offer (IPO) and subsequently listing ordinary shares on the Dar es Salaam Stock Exchange (DSE) in 2011.
“We did not succeed in raising the amount we needed and this shortage raised many problems,” Shirima told shareholders during the AGM in Dar es Salaam.
The lack of adequate capital put the airline in a compromising position because the aircraft had already been ordered in advance. Since aircraft orders require earlier placements and fifteen percent (15%) deposit of the price, this money was paid.
“Cancellation of the aircraft orders would have attracted heavy penalties and also slowed the company’s growth plans,” he said.
As a result, he said the company experienced pressure on its cash flow and eroded the company profitability but despite the above, the value of shares in the DSE market, although rarely traded, have held steady at a price of Tsh475 ($0.296) per share.
Shirima who is also the founder and part owner of the airline said external factors also played part in this dismal performance.
However, he admitted that there were some internal manageable factors that had a significant share on the reported results. “After thorough performance review for the past few years, the Board has noted key possible source of trouble,” he said.
These are: inefficient network, costly fleet type, low productivity, lack of cost control and un-optimized ancillary revenue opportunities, he said.
“The lesson has been learned. The Board made significant change in management and is optimistic that these problems present an opportunity to drive back the company to profitability for the days ahead,” he said.