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Why Kenya Airways’ nationalisation may mean its death

Thursday August 1 2019

By LUIS FRANCESCHI
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In December 1995, KLM entered a Shareholders and Master Cooperation Agreement with Kenya Airways (KQ). This triggered an efficient and consistent expansion of an airline that was, until then, just one of the many small and inefficiently ran airlines in Africa.

The airline fulfilled Kenya’s sky dream for almost 20 years, with the Pride of Africa as its motto. It was a success story. This dream came to a sudden halt in 2012. From then KQ has been on a downward spiral of net losses. The reasons KQ gave for such a shortfall were not coherent…and it has been on a freefall since then.

It is a well-known principle of business that debts must be paid. The challenge lies in examining who should pay them. KQ is a ‘private venture’ in a lay man’s language, both profit and loses are born by the investors. Why should the tax payer bear the burden of a loss when he or she does not take part in the joys of a profit? Government bailouts of a private venture is a sort of contradiction, unless it is done to prevent a domino effect in the country’s economy.

The only bailable corporations are state corporations. Often, they are designed as non-for-profits whose aim is to satisfy the common good or fill a necessity gap. Thus, the bailout of such corporations or parastatals will not raise eyebrows.

QUICK FIX

This week, Parliament found a quick fix for Kenya Airways by giving a green light to the company’s nationalisation. The company has been making consistent loses; if we nationalise then we can bail it out. It seems a quick solution. But, is it good?

We have opted for the ‘easy way out’ though it is not the most intelligent one. What Parliament has done justifies shifting the burden from disgruntled investors to the tax payer, whose pockets will sink deeper and deeper?

The airline business is a risky and stressed one. Its procurement is complex and marred by shortcuts. It is always on edge. It demands instant decisions, permanent precision, huge contracts and large cash movements, where small margins result in massive gains or loses.

A good and efficient airline is strategic for the country. Our geographic location and network has greatly benefited from the growth of KQ. But running an airline is not necessarily a priority, and trying to revive a dilapidated venture is certainly not a must for the government.

Kenya Airways is sinking deeper and deeper. The company lost most of its best performing staff and the quality of its service is crashing. Flight delays, cancellations and mergers are an everyday occurrence. Little attention is given to details, refinement and maintenance is wanting.

What turned KQ’s beautiful dream into a nightmare? Could it be a drop in the number of travellers? Terrorism? African political and economic instability? Corruption and conflicts of interest? Or perhaps all of them?

Some years ago, I wrote about the financial situation of KQ, comparing it to other Airlines in the region. KQ is among the top seven airlines in Africa along with Ethiopian, South African, Egypt Air, Tunisair, Royal Air Maroc and Air Algerie.

Ethiopian Airlines is the largest airline in Africa based on fleet size. As of June 2019, it had more than 120 international destinations. According to CAPA (a leading provider of independent market intelligence), Ethiopian Airlines registered a record net profit of $228 million (Sh22.8 billion) in the financial year 2018. This is more than all the Africa airlines combined. In the same year KQ recorded a $75 million (Sh7.5 billion) net loss up from $64 million (Sh6.4 billion) in 2017.

The next question we ask ourselves to analyse this quagmire, is how could this happen? Is the challenge the fleet size? Destinations covered? KQ and Ethiopian share 53 destinations in Africa. Ethiopian Airlines has a total number of 69 planes, against 40 of KQ. In terms of the number of passengers transported, in 2018, KQ carried about 4.46 million passengers, while Ethiopian Airlines carried slightly above 10.6 million. Also in 2018, South African Airways carried 3.5 million passengers to about 38 destinations around the world.

NOT CHEAP

KQ tickets are not cheap by any means. A KQ ticket for a direct flight between Nairobi and Addis Ababa is much more expensive and has far less options than the equivalent ticket in Ethiopian. The cheapest KQ ticket from Nairobi to Addis costs roughly $220 (Sh22,000) while a similar kind of ticket aboard Ethiopian would go for about $190 (Sh19,000).

This is not different when we compare the cost between Nairobi and Johannesburg. The cheapest ticket from Nairobi to Johannesburg is offered by Ethiopian at $400 (Sh40,000), followed by SAA at $615 (Sh61,500) and finally KQ at $750 (Sh75,000), almost double what Ethiopian Airlines price.

So, what happened? Again, after several years of consistent loses the arguments we hear are inconsistent. The numbers do not add up. The reason is not recession, terrorism or tourism drop. The reason is simply mismanagement, corruption and negligence.

Five years ago, I suggested that a thorough audit on KQ systems would reveal conflict of interests in procurement, services and leases. Math is painfully simple. It makes no sense for KQ to make such losses with the number of passengers they transport, the number of flights, the plane occupancy ratio and their ticket prices. It just does not add up.

Nationalisation will not resolve the real sickness within KQ. It will actually open a Pandora’s box. Profit making will not be important anymore and the tax payer will always be at hand to suffer and bear the consequences of corruption and mismanagement.

So, the painful truth of such loss points is the misuse or misallocation of funds, unethical and undeclared conflicts of interest, poor hiring of staff…or possibly a combination of all the above. Shouldn’t we reconsider the arrangement with other airlines and investors and give them a greater stake and more decision-making power?

Will nationalising the airline solve the crisis at KQ? Or are we officially burying our heads in the sand?

Prof Luis Franceschi
Founding Dean – Strathmore Law School
[email protected]