Why KQ turnaround still faces turbulence

Kenya Airways Chief Executive Sebastian Mikosz at the firm's investors briefing and release of the financial results last week. [Wilberforce Okwiri, Standard]

Despite cutting losses by four times over the last two years, Kenya Airways’ (KQ) take off to profitability is yet to be guaranteed. The airline’s ambitious turnaround strategy still faces turbulence.

The national carrier has reduced losses to Sh6.1 billion in the nine-month period to December 2017 from the record Sh26 billion in the year to March 2016, setting the stage for a full recovery.

This is seen in plans by the carrier to start flying multiple new routes, including the Nairobi-New route in October.

It is also aimed at getting more from ancillary services, including the upgrading of some economy class seats in all its aircraft to create ‘economy comfort’ that will attract higher charges.

The airline is also relooking its other brands such as KQ Holidays and its Pride Centre training facility to grow revenues.

KQ, however, has to grapple with recurring demands from employees for a pay hike, growing competition with the move to open up Kenyan skies and the volatility of fuel prices.

These factors, though not entirely new, could dampen the spirits of the airline, which has barely gotten off the ground following the restructuring process that was concluded late last year.

New routes

The carrier will mid this year launch new routes, expected to lead to eventually flying into 20 new destinations over the next five years, a more cautious strategy compared to its 2012 plans to fly to every African capital.

The airline’s Chief Executive Sebastian Mikosz said they are working on what could be the biggest project this year - the direct flights to the US, noting that they are also considering other routes and would start marketing them later this year.

“I expect to announce new routes in the second half of the year,” he said. KQ has said the flights to and from New York excited the market and there has been “an influx of bookings since we launched the route on January 11 this year”.

The daily 15-hour flights are expected to increase KQ’s revenues by up to 10 per cent.

In addition, it is expected to grow the status of Nairobi into a hub for travellers connecting to other East African countries and in turn feed travellers to its flights to the region.

“We are in the phase of investing in the route. We expect that our revenues will grow eight to 10 per cent just because of having this long-haul flight but we will start seeing the impact in 2019. It will be a big operational and financial challenge; it is the largest project that we have at the moment,” said Mikosz.

“The success of the route will help our regional network when we bring customers to the Nairobi hub, that will be redistributed to other countries in the region.”

The airline has already started taking back aircraft that had been subleased to other carriers including Oman Air and Turkish Airlines, which will now be used on the new routes. The KQ is also revamping its other brands – KQ Holidays and its training facility Pride Centre – in a bid to get more value. The airline, however, has to grapple with a number of challenges with the key one being employees that have been clamouring for higher pay.

Other than the Kenyan employees, the airline has been haggling with employees in other jurisdictions including Ghana and Nigeria, where the relations have at times been as rocky as in Kenya.

The fight between the airline and its staff over higher pay and better working conditions has been a recurring and costly challenge. In numerous instances, the airline has paid dearly when employees that range from pilots to cabin crew and engineers have inconvenienced thousands of travellers owing to delayed postponed flights.

Over the last year, the airline has managed the industrial actions by the employees but still has an outstanding court case, including one with engineers who were fired following a go-slow but later reinstated by a court order. The airline has, however, sent them on leave.

“I expect there will be challenges with some union negotiations, but I am quite confident that we will resolve them. I believe that the pilots’ union that is very powerful understands that we are in this boat together. I am not sitting in a different boat and the challenge is growing their jobs and careers. When we start growing, it creates a positive mood because everybody sees there is a way up,” said Mikosz. Local staff have also been uneasy about the presence of expatriates on Airport North Road. Particularly unsettling is the team of consultants from Poland recruited by Mikosz and who, it has in the past been claimed, get better perks as well as easy access to the CEO.

KQ Board Chair Michael Joseph, however, dismissed the claims, saying the airline works with different consultants including the Polish team.

“There are several other consultants within KQ and we will continue to use external consultants like any other international organisation. We hire them on a need to basis,” he said.

“We are looking at people we need to help us improving, growing and changing the airline in a positive outside and we need outside help.” The airline will also have to deal with competition, as more airlines are expected to start flying on the Nairobi route.

Air France, which will soon be included in the long-running joint venture between KQ and Dutch carrier KLM, is among those set to bring competition to KQ.

It will start flying Nairobi-Paris route this month.

This is in addition to the aggressive Middle Eastern carriers whose push in all markets they fly being described as primarily marketing their countries and profit being secondary.

Other carriers planning to start to fly into Kenya will be aided by the recent deal by African countries to open up their skies. This could see the Kenyan airspace become competitive.

Regional hub

On January, 23, African States, including Kenya, South Africa and Nigeria launched the Single African Air Market aimed at increasing intra-regional travel and easing movement of people and goods within the region.

While the move might open opportunities for KQ, it will also stir up competition.

The issue of opening Kenyan skies has been divisive, with some quarters arguing that it could grow tourism as well as the status of the country as a regional hub. It might also slow down KQ’s turnaround plan.

Mr Mikosz said allowing other carriers to fly to Kenya with little restrictions is unwise and wants a level playing field.

This is because KQ is one of the airlines with little support and subsidies from the State, unlike her competitors such as Ethiopian Airlines and South African Airways. “I am not a big fan (of open skies). It is a good solution in theory but the reality is that we do not play on an even field among African airlines. In the region, we are the only listed airline and the only one that publishes our accounts,” said Mikosz.

“My experience from the European market is that it is monitored by heavy supervision on the anti-trust authorities on how airlines are financed. Any type of subsidy or support is closely monitored,” he said.

He noted: “Some of the considerations should be what support or state protection our main competitors in Africa have. Kenya is open and has been granting access to airlines to fly into Nairobi which is beneficial but has to be cautious not to assume that this is the ultimate solution.”

While oil prices are expected to remain largely stable in the course of this year, Mikosz said fuel prices were still a risk.

“Rising oil price is the biggest challenge to profitability,” he said.

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