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Opinions of Thursday, 4 March 2004

Columnist: Adomako-Gyimah, Julian

Ghanair-Another economic mishap?

I read with disgust, the article by a Ghanaian economist based in the UK and I totally agree with most of the points he made. There is no point travelling by air if the plane isn't full as in accounting terms, this is an expense. Every business is out there to make money but it sounds like Ghanair is just in the aviation business just for the fun of it. This is really incredible considering the fact that, our dear motherland is blessed with a huge amount of intellectuals who have proven themselves to be capable. Alvin Toffler was probably right when he said that, some organisations are still hovering in the first and second waves of civilisation.

Well, let's analyse events at Ghanair from an accounting and economic point of view. Every organisation works with the view to getting a good value for their money(investment) and this means that, whatever service or product they provide must be economical, efficient, effective and equitable and believe it or not, any organisation that fails to see the running of its affairs from this point of view is bound to increase debt and thus reduce equity and net present value for that matter. I am not quite sure as to what the accounting rate of return of Ghana Airways is but it might be extremely low( ARR=Annual profit/initial investment).

It is costly for an airline to travel to another place without it being filled to capacity and this always brings in marginal cost which every organisation must try to avoid at any given time.Inflation, the cost of capital and risk are three things that Ghana Airways officials need to consider carefully if they really want to stay in business. The current trend in this organisation cleary shows a very low weighted average cost of capital. For the sake of the run of the mill, this is simply the amount of revenue obtained in say year 1 divided by revenue for year 1 and 2 mulitiplied by the rate of investment for first year plus revenue for second year divided by revenue for years 1 and 2 multiplied by the rate on investment for year 2.

Officials of this airline will have to consider the cost of running their airline for say a month and compare it with how much revenue they get and if it happens that the cost of running is more than profit, then gearing is too high and this means that business must stop. The financial status of Ghana Airways clearly points to the fact that gearing is very high and thus, every flight must either cease with immediate effect ofras I've always said, they should declare the national airline bankrupt and then repositioning can take place. In countries like America, Bankruptcy is a normal thing and believe it or not most of the big organisations we read about in the States have all been declared bankrupt at one point or the other. Marconi were there and Worldcom were there only for Michael Capellas to rescue them.

We might have to overlook the legacy of the British whereby Bankruptcy is seen to be a failure. In the corporate world of business, Risk can be managed but not eliminated completely. We would have to try and make the best decision; if not, we will continue creating the environment for capital flight and it will only reduce the internal rate of return of organisations at home not forgetting the net present value. As Ghanaians we are all obliged to help support our nation but the question is that, are we given the chance to share our ideas at all? Macro-economic factors are not very positive as far as Ghanair is concerned and maybe, professional managers should be made to head most of the key organisations instead of people who only seem to have the potential. Organisational behaviour teaches a lot about human behaviour and its effect in organisations and maybe this is something we will have to utilise in organisations together with the financial wisdom that managers might have.

There is no need spending more money on a "dog"( an organisation that has no potential of yielding positive returns) because this will only increase expense and to be frank with my fellow Ghanaians, flying an empty plane is a mere accumulation of expense. Wealth =asset +liabilities but in the case of our national airline, liabilities might surely overcome the assets thus negative equity might be very high and that means that, it isn't viable for us as a nation to run services as far as Ghanair is concerned. Ghanair runs on variable cost(step category) whereby there are so many peaks and troughs in the financial setup and this can be very deadly for an organisation operating in the third world.

British Airways and most of the renowned airline do not only generate money from their frequent flights and this is something Ghanair might have to pick up. There is the need for the 5P's in marketing( product, price, promotion, packaging and position) to be considered carefully before a final decision is made on a merger or take-over(50+1shares). The business and financial gurus of African descent are always prepared to help our nation so please give them a chance.

Toffler, A (1980) "The third wave".London: Collin Williams Sons and Co Ltd

Julian Adomako-Gyimah M.InstBA
President and Founder of Ayudar International
United Kingdom

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