Precision may not last long in the air, auditors now warn

Tuesday December 03 2013

A Precision Air carrier. The airline’s ambitious expansion plan has proven costly. FILE

Auditors have raised fresh doubts over the future of Tanzania’s largest commercial airline, Precision Air, given its surging losses and liabilities while the government dithers on approving a bailout plan.

An audit report paints a gloomy picture of the loss-making firm, saying its liabilities had exceeded its assets by Tsh83.14 billion ($53 million).

It has also for several years not remitted its statutory deductions and indirect taxes to the government amounting to Tsh19 billion ($12 million) as of March 2013, says the report prepared by the airline’s auditors, Ernst & Young, and tabled at the annual general meeting on November 20.

The airline has been facing serious cash flow challenges occasioned by an overambitious expansion plan that saw it add new aircraft. This has hurt its competitiveness, especially as it struggled to stave off competition from budget airline Fastjet, whose relatively affordable fares have had a big impact on the local market.

The bad shape of Precision’s finances saw it apply for a capital injection of $32 million from the government a few months ago, a bid that has not borne fruit. In the year ended March, the airline posted a Tsh30.4 billion ($18.7 million) loss.

Precision, which began scheduled flights 14 years ago, is further faced with lack of working capital to support its operations and loan repayments, said the auditors.


“These conditions indicate the existence of a material uncertainty that may cast significant doubt on the company’s ability to continue as a going concern,” said the auditors.

The entrance of Fastjet has seen the Dar es Salaam Securities Exchange-listed Precision halt flights to other local destinations and suspend all foreign routes since the new managing director took over last year.

The airlines’s chairman, Michael Shirima, who is the majority owner with a 42.91 per cent stake, said in mid October that the government had asked for the shares to be revalued before taking a decision on the capital request. He also revealed that Precision was in contact with other carriers interested in taking up a stake in the airline.

The auditors said while the directors and management believed their actions would mitigate the situation, the assumption used in preparing its consolidated and separate financial statements for this year, there could be no absolute assurance that they will be successful.

They added that the airline may be unable to realise its assets and discharge its liabilities in the normal course of business.

Since 2006, Precision’s passengers increased from 340,000 to 896,000, or close to five million. However, Mr Shirima lamented, that did not translate into growth in profits and the latest loss brings down the average net profit margin for the eight years to just one per cent.

Saying currency mismatches in the airlines’ cash flow were partly to blame for the losses, he added that a large part of its income was in Tanzania shillings while most of the expenditure — such as aircraft purchase, spare parts, fuel and large repairs — was in foreign currency, causing forex losses.

Other reasons for the poor performance included leasing costly Boeing aircraft, rising fuel costs that could not be passed on to passengers and weak credit controls leading to significant allowances for credit losses.

The directors have decided to return the leased aircraft, cancel related maintenance contracts and retain an all-ATR fleet. The cancellation of the contract cost Precision Air $2 million.

Precision’s second biggest shareholder, Kenya Airways, with 41.2 per cent of the shares, posted a Ksh7.86 billion ($89.4 million) loss after tax for the year ended March.

The national carrier was hit by a drop in passenger numbers after several foreign governments advised their citizens against travelling to Kenya over security concerns.