KQ's dilemma over delays in Boeing aircraft delivery

By John Njiraini

After flying through turbulent skies over the past two years, the worst is now over.

This was the message national carrier Kenya Airways (KA) top brass delivered to shareholders during its annual general meeting last week.

Unlike the past two years when shareholders did not conceal their anxiety as KA plunged into losses, this time round the mood was relatively calm.

This is because KA has bounced back from a massive loss of Sh5.6 billion in the year-end March last year to post Sh2.6 billion pre-tax profit in the same period this year.

The failure by Boeing to deliver nine 787 dreamliners is threatening to undermine KQ’s recovery and expansion programme.

The airline’s shares at the Nairobi Stock Exchange (NSE) have also rebounded, soaring at an average of 40 per cent from a low of Sh29 last year to Sh46.75 last week.

Granted, the anarchy witnessed in the aviation industry due to the global financial crisis is over and airlines that withstood the crisis are back on a strong footing.

The industry’s global umbrella body International Air Transport Association (Iata) says airlines stand to earn a staggering $8.9 billion this year.

unprecedented turnaround

"The industry recovery has been stronger and faster than anyone predicted," said Giovanni Bisignani, the Iata Director-General in a statement. Yet even as the industry taxis the runway with anticipation, the situation at KA is not ebullient.

In recent weeks, KA board has been having sleepless nights contemplating on how to tackle its protracted problem with aircraft manufacturer Boeing.

Boeing has told the airline that delivery of nine 787-dreamliner aircraft would be delayed and the airline should expect the first aircraft sometime in 2013.

Considering the firm ordered the aircraft in 2006 and was expecting delivery in December this year, the move has angered KA prompting the airline to consider canceling the order and dumping Boeing for its rival Airbus.

The airline may have been incensed more because even the six aircraft it had made commitments to procure cannot be delivered on time. For the other three, the firm had the option of canceling delivery.

"We will make a decision before the end of December," KA Chief Executive Titus Naikuni has repeatedly said.

Addressing shareholders last week, he said negotiations between KA and Boeing are on but no conclusive decision has been reached. Naikuni says discussions with Airbus have also commenced.

But unknown to most people, making the decision on whether to cancel the order and terminate relationship with Boeing is shaping up as the hardest the airline must make.

A highly placed source told the Financial Journal that a number of factors are making it difficult for the national carrier to decide on the way forward, issues that could force the airline not only to stick with Boeing but also to wait for delivery of the dreamliners at the whims of the manufacturer.

Top on the list is the size of the aircraft. In ordering for the Boeing 787, KA was basically impressed by its long range, mid-sized and wide-body.

Though depending on client needs, the dreamliner can have a capacity of 210 to 330 passengers, KA had served Boeing with an order for 250 passengers.

cutting costs

The 787 is the best alternative in cutting fuel costs, something that has remained a headache at the firm, accounting for 40 per cent of total costs. Compared to other aircrafts, the dreamliner consumes 20 per cent less fuel.

Boeing says the aircraft would provide travellers with "a glimpse into a new flying experience." But with the American manufacturer delaying delivery, apparently after a decision to experiment on carbon composite body proved problematic, KA’s first alternative at Airbus is the A330 while the second alternative is A350.

Boeing says the delay has been due to technical problems with its engine suppliers. And herein lies the big problem for KA. Though the A330 shares some similarities with Boeing 787 in size, (it’s a bit bigger), the aircraft is not fuel-efficient.

The second alternative, A350, is in the development stage and Airbus projects it will come on board in 2013. The A350, according to the European maker, should offer stiff competition to Boeing 787 in terms of fuel efficiency and operating costs.

"It is difficult to decide on the best option. The feeling is why not wait for a few months for Boeing to deliver for long term benefits," says a source.

But the fear, added the source, is Boeing is incapable of providing a bid timeline to deliver the aircraft considering the number of airlines that have placed orders for the dreamliner, many of which are facing the same predicament as KA.

Another factor that is causing indecisiveness at KA is the economies of running and operating the aircraft, the Boeing 787 and the Airbus A330.

Then there is the other headache of retraining of pilots known as conversion of pilots in the industry.

The carrier must retrain its pilots to fly the Airbus as they are used to Boeing aircraft.

The training takes time and costs. However, the national carrier was once an Airbus client and used to operate Airbus A310 aircraft before shifting to Boeing for its long-haul fleet.

Though these factors are delaying decision making, observers have not ruled out KA ditching Boeing for Airbus. Its major partners, KLM and Air France, are Airbus operators, after all.

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