Sale of prime assets may sink KQ deeper into financial hole

Saturday March 5 2016

Kenya Airways Chief Executive Officer Mbuvi Ngunze addresses the media in the past. A lobby group wants the top management of Kenya Airways disbanded within seven days, citing lack of confidence in its ability to oversee the troubled carrier’s recovery from a massive financial loss. PHOTO | SALATON NJAU | NATION MEDIA GROUP

Kenya Airways Chief Executive Officer Mbuvi Ngunze addresses the media in the past. Kenya Airways has long enjoyed what the aviation world calls grandfather rights to London Heathrow. PHOTO | SALATON NJAU | NATION MEDIA GROUP 

In what it touts as a move to improve efficiency and utilize its assets better, Kenya Airways last week announced changes in its Nairobi-London Heathrow flight schedules to take effect this week.

KQ 100 will now be departing Nairobi at 9.10 am and arriving London at 4.15 pm. The return flight will be later the same evening to arrive Nairobi in the morning, thereby utilizing one aircraft instead of two.

To the uninitiated, the move looks sensible on the surface but it has left aviation insiders and travellers aghast.

Alarm bells, now familiar since the airline announced a Sh28 billion loss in March, 2015, are ringing everywhere.

This should be easy to understand. Just as an example, let’s say you are a business traveller going to London.

You have an option of two carriers: one is departing JKIA around 11 pm to land at Heathrow at about 6am. This will save you a night’s hotel expense and allow you a full day for work.

The other departs JKIA at 9.10 am and arrives Heathrow at 4.15 pm. So you will have to sleep twice in a 24 hour day and pay extra for it.

Which would you prefer? Kenya Airways mysteriously believes more people would prefer the latter, hence the glowing spin it has put on this confounding move.

But the market has already started voting with its feet. Flight cancellations from desperately needed customers have started flooding in.

As of this writing, more than 3,000 summer bookings on KQ London Heathrow flights are reported cancelled.

Yet there is a lot more to this than meets the eye. The morning slot at London Heathrow is one of the most coveted in world aviation.

Last month, the Sunday Times of London reported that Oman Air had set a new record by buying “a highly prized early morning arrival” slot to Heathrow for $75 million (Sh7.5 billion) from Air France-KLM.

“The price beats the $60m (Sh6 billion) paid by American Airlines for a slot a year ago, bought from the Scandinavian carrier SAS,” the paper said.

SLOT PRICE
Kenya Airways’ early morning arrival slot in London Heathrow is now being used by Oman Air arriving from Muscat.

Its old departure slot is now being used by Emirates who bought it from KLM-Air France for an undisclosed amount. That will make it Emirates’ sixth daily departure from Heathrow.

The question is: how much of the $75 million paid by Oman Air to KLM-Air France went to Kenya Airways, in that this has been its slot since it was born?

Some industry insiders have put the value of that slot to as much as $100 million (Sh10 billion).

Meanwhile, Arabianbusiness.com reported that “struggling Kenya Airways is reportedly planning to enter a sale and lease back agreement with equity partner KLM over its sole London Heathrow slot."

"The move is aimed at generating much needed cash for the Kenyan national carrier but risks veto from a government, which is already weary of management and its relationship with the Dutch airline."

This would be like a taxi cab operator selling his car and hiring it from time to time for a price and availability determined by the new owner and still considering himself in business.  

Efforts to get KQ to disclose to the public how much it got from the Heathrow slots sale have not been successful. This is one of the reasons alarm bells are ringing.

Fears abound that at best the airline, given its dire financial straits, could have been arm twisted by its long-term partner, KLM, to accept a pittance for the slots. Only a full disclosure can allay these fears.

Kenya Airways has long enjoyed what the aviation world calls grandfather rights to London Heathrow.

Its predecessor, East African Airways, flew Queen Elizabeth II Nairobi-Entebbe in 1952 from where she boarded a BOAC flight to London to start her reign.

That set the foundation and on a weekly basis since 1959 EAA flew to Heathrow. Kenya Airways inherited this slot when it was founded in 1977 upon EAA’s collapse.

Yet the question of how much the airline sold its prized Heathrow morning slot is only the beginning of a plethora of uncomfortable questions that come to mind whenever even the smallest of facts surface about the relationship between Kenya Airways and KLM.

ABUSIVE MARRIAGE
The agreement between them, sealed in the mid-90s, was sold as the panacea for the then ailing national carrier and for a while, it seemed to be actually so.

The former matatu airline became the pride of Africa, acquiring an increasingly young fleet and maintaining high standards of time keeping and in-flight service.

Last year’s Senate report that documented KQ’s woes had this to say: “When the Government of Kenya privatised Kenya Airways in 1996, it was dubbed as the most successful privatisation process in the country’s history.

The coming on board of a strategic partner, KLM Royal Dutch Airline in 1995, and the subsequent listing at the Nairobi Securities Exchange was viewed as the beginning of a new era of vibrancy, transparency, profit making and national pride in the carrier.

Subsequently, the airline dominated the skies of Africa and beyond. Unfortunately, just this November, the airline announced a half year loss of close to Sh12 billion and this follows a Sh28 billion loss for the period ending 31st March, 2015.”

The report categorically recommended that a new management team for KQ (old hands are still at the controls) “reviews the Joint Venture with KLM, especially on the provisions of code sharing, revenue management and sales tracking to ensure equity in revenue sharing.”

This has not been done. To the contrary, KLM is still reaping big from its ailing partner. The opaque nature of the Heathrow slot sale does not help matters.

Just as in unions between individuals, the abusive nature of the marriage between KQ and KLM was apparent even during the honeymoon period only that it was insiders who knew it.

Saturday Nation has in its possession documents dating back years that show Kenyans were hurting, even as the image of a world-class airline was marketed to the public.

Shareholders at large, and the public in general, now know what insiders put up with.

The Kenya Airline Pilots Association (Kalpa), is a well-known in the trade union sector.

If you talk to its older members, they will tell you the two greatest battles they have won in the last 10 years is stopping KQ’s management from hiring foreign pilots and warding off attempts to break up their union.

THE HARD QUESTION

This took place when the loftily-named Project Mawingu - Swahili for clouds - that flew KQ into the financial crater it currently sits in, was at its height.

If the project worked, KQ would have needed about 1,600 pilots by the year 2022. It then had only 400. Management put a lot of pressure on Kalpa to accept pilots from KLM who at that time had a surplus of them.

Kalpa instead asked management to train Kenyans in readiness for the increasing size of the fleet. Management flatly refused.

At one point, management suspected that Kalpa was thinking of a strike. It obtained court orders to pre-empt the suspected strike - a curious legal decision, but it happened.

The result of all this was terribly frayed industrial relations. Passengers were the major casualties of this dog-fight.

The pilots withdrew their professional goodwill, meaning they worked strictly to their barest obligations; if somebody called in sick, there was no replacement. Flight delays and cancellations became the order of the day.

The pilots eventually beat back their management’s efforts to introduce KLM air crews in their ranks but the effects of this fight are being felt even today.

The benefits that KQ and KLM were supposed to bring to their new life together were clear – at least as Kenyans believe they know the story.

Both Kalpa and Aviation and Allied Workers Union, which represents cabin crews, made detailed presentations to the Anyang’ Nyong’o-led Senate Committee on KQ’s woes.

The part of the report that deals with KLM-KQ partnership, from Kalpa’s presentation reads: “KQ and KLM had an MoU, in terms of sharing profits though Kalpa was not privy to its terms. They presented that under normal circumstances, two airlines would agree on (a) hub concept where KQ would fly passengers destined to European routes from Africa to Amsterdam and KLM flies them to their final destinations while KLM would fly passengers plying the African routes from various destinations to Nairobi and KQ would fly them to their final destination.

The Committee was told KLM flew to most African routes, denying KQ this opportunity, while KQ flew to minimal European routes (Amsterdam, Paris and London) from Nairobi. The prevailing circumstances deny KQ the opportunity to share profits with KLM.”

This lopsided equation provoked the question: what is in this for KQ? Unless there are benefits that the company for whatever reason is unwilling to share with its shareholders, the following questions come to mind:

If you come to my backyard to compete for my customers, what do I need you as a partner for? And if you are not here to induce my death so that you can inherit all I have, what are you here for?

COMPENSATION
Unfortunately, it gets worse. If you read some documents, the inescapable conclusion you come to is that KLM understands this MoU in two ways that can be framed as follows:

On the financial side, my profits are mine, your profits are ours and your losses are yours. On the technical side, I will service your aircraft, at your cost, in Amsterdam and wherever else I land with Air France, including Africa, but you will not touch mine – even in Nairobi.

In some old correspondence at the height of Project Mawingu, you read of a pilot complaining that “KLM has a very well equipped training centre with flight simulators but have you wondered why we don’t train there? In fact, we go to the extent of out sourcing such services from our competitors such as ET, Egypt Air, SAA, etc., since we get a better deal from them!”

And another one laments: “KLM maintains our aircraft in Amsterdam, London Heathrow and Mumbai. (But) no reciprocal arrangement is done in Nairobi to turn around KLM aircraft.”

In one of other such instances, Kenya Airways paid Sh18 million in compensation to passengers who missed their connection flights in Amsterdam after their flight from Nairobi arrived there one hour behind schedule.

The delay was caused by holding the KQ plane in Amsterdam that would make this return trip from Nairobi. It was waiting for KLM’s passengers.

On learning of the pay-out, the bewildered captain wrote to his boss: “I always believed that the money came from the combined fortunes of both KLM and KQ alliance. It now seems that we share the profits, but KQ shoulders the losses.

Cost-cutting is meant to be a priority in our company. But the policy sounds hollow when crew witness the company throwing good money away, just to please an unappreciative parasitic partner. KLM is the parasite and KQ is the host.”

PANEL'S FINDINGS
The massive evidence of incompetence and mismanagement that the Senate committee unearthed during its five-month probe resulted in a scathing conclusion:

“The committee was not persuaded that the Kenya Airways management understood the environment and market they were operating in so as to maintain a competitive edge, make strategic decisions in key areas that required constant vigilance in studying global and regional markets and destinations, the vagaries or ups and downs in the oil industry, planning of routes and networks, leverage partnerships with KLM and the Sky team, sale of tickets, capitalizing the potential and dynamic of its own local and regional base where it had inherent hegemony in Kenya and Africa.”

To its credit, the committee declined to make a much sought-after recommendation that the public picks KQ’s turn-around tab.

It also thoughtfully declined to recommend the company’s dissolution citing its importance to the Kenyan economy.

Instead, it soberly put the ball in the court of the shareholders to whom it recommended make a capital injection but only after heads rolled at KQ headquarters.

It is surprising, given the evidence that is readily available, that no steps have been taken to end the relationship with KLM.

Since it came on board, the Dutch carrier has maintained powerful Kenyan gatekeepers at KQ’s headquarters whose zeal at enforcing its interests boggles the mind.

But the time has surely come for the shareholders to drop everything else and call their marriage partner and say: I want a divorce – now.