Putting KQ back on track won’t be a walk in the park

-Kenya Airways’ Sh25.7 billion historic loss has sent shockwaves across the corporate world with analysts giving varied opinions on what led the carrier to fly into such a turbulent path.

While the airline management blames competition and a slump in tourism for the loss, analysts and investors are divided on what went wrong.

However, one thing is clear: attention should now focus on how the airline can regain its balance and be the true ‘Pride of Africa.’

KQ management got the flak from investors who questioned the logic of fleet expansion and its relationship with Dutch shareholder, KLM.

But as the queries on the KQ-KLM ties mount, Kenya Airways is welcoming yet another partner — China Southern Airlines — Wednesday. The Chinese carrier will be making its maiden flight from Guangzhou to Jomo Kenyatta International Airport (JKIA) tomorrow. This plan could see KQ lose its grip on the Asian market.

Standard Investment Bank analyst Eric Musau said for Kenya’s flag carrier to recover its lost glory, it may have to retrace its flight path to over two decades ago, when it was firmly in the hands of the government. This would enable it to obtain the much needed capital to put it on a sound runway, where it can take off to the profit-making territory.

Last Thursday’s release of financial results revealed negative capitalisation that begs for urgent attention.

Mr Musau said the government has no choice but to rescue KQ.

“Kenya has a lot to lose with the collapse of the national carrier than the allocation of the much needed capital injection of not less than Sh50 billion. The burden falls right on the back of the government, who is a shareholder and relies heavily on the strategic advantage of having a national airline,” Mr Musau said.

“It is Kenya’s brand at stake and with the need to revive tourism, the time to act is now or we all sink.”

Mr Musau says Kenya Airways Dutch partner KLM has had its share of challenges, which saw it merge with Air France. This is a pointer that the Dutch owners may not be there in the long run and the government input in KQ is critical.

The recommendation that the government should play a more robust role in KQ’s bailout will take the firm back to early 1990s when the State owned the carrier but it was forced to privatise it to spark growth and make profits. This, thus presents a daunting task of retracing steps in order to make a forward leap in a highly competitive industry.

PLAYING THE "BIG BATH"

Airline industry analyst Dr James Wanjagi blames the current management for failing to position the airline to compete both locally and internationally. Dr Wanjagi says while Kenyans are proud of KQ, the airline continuously pushes them to the doors of its rivals through pricing and poor customer service.

“Airline business is about passenger loyalty and that is why some people are diehards of specific carriers no matter what. Instead of getting new customers, KQ has chosen to cannibalise on the few they already have. Why should I even risk using an airline with very high chances of delay when I have to connect to another flight?” Mr Wanjagi told Smart Company.

“The management has to institute service level measurements and act on feedback from passengers especially having known that 90 per cent of their revenue comes from travellers. We cannot accept the same excuses every year.”

The analyst says the massive losses could also be a clever move to earn the new management credit for an improvement in the financial years to come. This, he believes, shifts the blame to the performance of previous CEO Titus Naikuni.

“Don’t be surprised that the management could be playing ‘big bath’ to demonstrate that they have brought KQ from its shackles, considering the many one-offs and the unrealised costs on fuel hedging and others already incorporated in the profit and loss statements last week.

Mr Ngunze is barely a year old (in office) and obviously these bad results are not his, so any rises will be attributed to his heroic ideas,” said Dr Wanjagi.

Big bath strategy is used by new managers to make poor results look even worse, especially in a bad year, to artificially enhance next year’s earnings. The big rise in earnings might result in a larger bonus for executives and improve staff morale that a possible recovery is in the offing. While announcing the results, chief executive Mbuvi Ngunze alluded to some internal challenges.

“Both agreements and disagreements do exist but by and large majority of the KQ staff are highly motivated. As a business we have some objectives we have to achieve, we are in conversation with the pilots union and we hope that we will get middle ground. We have had some disruptions from these disagreements but all that is passed,” Mr Ngunze said.

The airline has taken a beating from its unsettled staff, with pilots and crew occasionally involved in go-slows. A statement published by the Kenya Airline Pilots Association, which has been involved in a court battle with KQ over industrial relations, accused the management of going against a collective bargaining agreement.

While Dr Wangaji believes the staff, many of whom have served for a long time, should go through major renewals to transform work culture, Mr Musau says the union is too strong to allow such a massive change.

PRICE DISADVANTAGES

Kenya Airways has also blamed low revenue to low cabin ratios for its poor performance, implying that its fleet of 52 aircraft has either been flying low frequencies or getting few passengers.

A segment of the airline’s key clients in Africa — where price is key — have ditched the airline for cheaper competitors. KQ is believed to be expensive compared with other carriers, with some destinations varying by over 100 per cent in air ticket prices.

In a June 16 letter addressed to Kenya Airways, Kenya-Dubai-China traders’ chairman James Kariuki asked the management to consider reducing ticket prices to attract Kenyan travellers.

Mr Kariuki, who holds KQ’s platinum card for loyalty for frequently flying the national carrier for over a decade, raised the issue during an investor briefing. However, KQ has not responded to his requests.

However, Mr Ngunze has said the airline’s pricing depends on the time of booking and the guests’ flexibility and called on those seeking better rates to book early.

“We have a lot of people booking in the last day of travel, that has to come at a higher cost. We are trying to drive the market to book in advance because the early bird catches the worm. That is the trend everywhere,” Mr Ngunze said

A number of local travellers who use the Kenya–Dubai route admitted to Smart Company to using other airlines to cut costs. For instance, while Ethiopian Airways charges $230.14 to fly the route, KQ’s ticket costs $444.95 — almost double its Ethiopian competitor.

The Nairobi-Guangzhou route also shows a yawning difference in fares between KQ and its rivals. According to the rates seen in June, Kenya Airways flying through Lagos charges $1,080.16 and $1,434.76 through Accra while Emirates using the same route from Nairobi charges $718.

TICKET PRICES

Mr Kariuki says the airline has to accept that Kenyans will not be compelled to book early for a number of reasons. For instance, he says traders may need stock urgently and have to travel immediately.

The price issue was also raised during the April conference, where Kenyans in the diaspora asked President Uhuru Kenyatta to intervene for Kenya Airways to cut air ticket prices to at least match its competitors.

The President said the government had been in talks with KQ over the matter but added that the company operates as a private entity, making it difficult for the government to intervene.

A while ago, Deputy President William Ruto called on Kenyans to support KQ while asking the carrier to price competitively to attract local travellers and win their loyalty.

“As we promote and pledge to support Kenyan carriers, we must as a government make it clear that we will not tolerate unfair competition. Kenyan carriers must deliver high-quality service and attractive pricing,” Mr Ruto said.

Suspended Transport Cabinet Secretary Michael Kamau warned of a complete paralysis of the national carrier if Kenyans failed to support it.

“If you don’t support our national carrier, we will end up carrying it instead. Our aviation industry is at a crossroads and we have to determine the direction we will take going forward,” Mr Kamau said.

CARRY HE CARRIER
The government, which owns a 29 per cent stake in KQ, has since advanced Sh4.2 billion to support the firm. Mr Kamau may have been right after all, that Kenyans could be forced to “carry the carrier”.

KQ, therefore, has a lot of work to do to regain altitude from the deepest valley of loss in its close to four decades of existence. Competition is set to become stiffer with tomorrow’s entry of the Chinese carrier, which holds a record of having the largest fleet with the most developed route and largest passenger capacity in China.