Will Jambo Jet polish or tarnish Naikuni’s legacy at Kenya Airways?

Kenya Airways CEO Titus Naikuni

By Macharia Kamau

Kenya: Kenya Airways’ announcement that it would be pulling out of the Nairobi-Eldoret route from April 1 was not unexpected.

After all, Jambo Jet, KQ’s wholly-owned subsidiary, is expected to “steal” customers from the mother airline on the routes that it plans to operate after it is launched next month. Aviation experts also expect the new kid on the block will cannibalise KQ’s current traffic on regional routes.

And as Titus Naikuni exits as chief executive later this year, the low-cost carrier could end up being his last hurrah and substantially grow KQ’s profits as many travellers upgrade their bus tickets to air tickets.

But on the flipside, the new airline also has the potential to dilute the national carrier’s earnings on domestic and regional routes where the airline has a solid presence, with a market share in excess of 90 per cent on some.

Return to profit

KQ has begun to return to profitability after a Sh10.8 billion pre-tax loss in its 2012/2013 financial year. It reported a pre-tax profit of Sh548 million in its first half of the year ended September 2013, after a loss of Sh6.589 billion over the same period the previous year.

Jambo Jet is expected to commence operations in a couple weeks’ time, with domestic flights to Mombasa, Kisumu and Eldoret. It will then begin to fly regional with flights to Bujumbura, Kigali, Dar-es-Salaam, Mwanza, Zanzibar, Kilimanjaro and Addis Ababa.

The airline will charge between Sh2,800 and Sh3,800 for a one-way ticket to domestic destinations, fares that have excited the market and will no doubt shake up the domestic and regional aviation space currently dominated by major airlines and a few small operators.

Mr James Mureu, the chairman of the Mombasa branch of the Kenya National Chamber of Commerce, said the planned fares will ease movement for business people in major towns across the country.

“We are excited about such a low-fare airline as the business community. Everybody could travel by air given that the cost almost matches what buses charge.”

However, he added that while the market is enthusiastic, it is also cautious as there have been disappointments in the past where airlines have announced low fares that turn out to be for just a few seats, with most passengers paying normal fares.

“There are questions as to whether it is sustainable or it will end up disappointing … can we do it and sustain the low fares over the long haul, or is it just hype that will fade after the initial weeks or months?” Mr Mureu asks.

Mr Charles Wako, an aviation expert and the immediate former chairman of the Kenya Civil Aviation Authority, says the airline could make or break KQ. He fears that the airline could be employing a strategy to push out other players by using rock-bottom prices, and then later raise fares.

“There is a need for regulatory authorities to check competition to ensure the dominant companies don’t run out other companies by using such strategies,” he says.

He added that the low fares could be a strain for the new airline as they might not meet its operating costs.

Fuel costs

“Airline fares are complex. There are many factors that come into play, but direct costs can be quantified and at Sh3,000, it would be difficult to sustain operations … in fact Jambo could operate at a big loss and might drag KQ into loss making,” Mr Wako says.

“It can cost as much Sh1 million to run a B737 aircraft for an hour. At Sh1 million, the per passenger cost would be at least Sh7,500 if a plane is full to capacity. The B737 300 has a capacity of 138. If it operates at 80 per cent capacity, then it would need to charge customers Sh9,500 to break even.”

The largest expenditure component is fuel, which costs a minimum $5,000 (Sh430,000) an hour, though this can go as high as Sh650,000, depending on the age of an aircraft.

By the time we went to press, KQ had yet to respond to questions Business Beat had asked on the sustainability of Jambo Jet’s price structure.

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