Can KQ Still Stay Afloat Amid New and Increasing Competition?

Can KQ Still Stay Afloat Amid New and Increasing Competition?

Debate over turning around Kenya Airways(KQ) and putting the national carrier back on the profitability track has been ongoing since 2013. The company began experiencing a dwindling performance in 2013 when it recorded an after-tax loss of KSh7.9 billion compared to a profit of KSh 1.7 billion recorded in 2012.  The management then attributed the change in performance to increased costs of operation, especially after fuel hedging bet and currency exchange volatility. Nevertheless, the company has not recovered despite changes in the management and successive strategies, and the rate of growth has consistently fluctuated over the years. Between 2016 and 2017 for instance, KQ’s rate of growth was 61.1 per cent compared to 1.9 per cent that was witnessed between 2015 and 2016.

In  2015 and 2016, KQ experienced huge losses, which were largely attributed to Project Mawingu (a 10-year expansion plan that included the purchase of Dreamliners to modernize the airline’s fleet) fuel hedging and it’s KLM managerial agreement. The fuel hedging contracts were signed for 2012, 2013, 2015 and 2016 after which KQ put them on hold. However, in 2018, KQ has announced its intentions to restart fuel hedging. The company has been securing loans to enhance its liquidity position, which is an additional cost due to increased interest. As a precautionary measure, KQ embarked on a cost-cutting mission to condense its operational costs. The company considered laying off some staff. This led to increased industrial court cases and go-slow strike that was witnessed in 2017. Coupled with the poor remunerations for its technical employees, KQ has been losing highly-trained and experienced engineers to other airlines such as Qatar Airlines.

Kenya Airways’ main revenue channels include passengers travels, freight and mail handling among others. Despite continued efforts to enhance its revenue generation, its securities have continuously performed poorly in the Nairobi Stock Exchange. Foreigners’ buying of the carrier’s shares in the stock market started dwindling since mid-2011.

However, the announcement of the appointment of the new CEO, Sebastian Mikosz, and direct flights from Kenya to New York rekindled some hopes and this saw the company’s stock rise sharply. Following the announcement of direct flights to the US , KQ’s stocks jumped by 11 per cent with KSh17.30 a share in January this year. However, it seems that the increased shares’ sales were reactionary, and they were not sustained for long.

Competition

Competition in the airline business has been demonstrated through new entrants in the market, increased strategies to acquire huge market share, pricing of fares, offering quality services, creating mergers and buying new and novel aircrafts. Despite the continued efforts to uplift the national carrier, KQ has not been immune to stiff competition from other carriers such as Ethiopian Airlines, Emirates, Qatar Air and Rwandair.

For several years, Kenya Airways has dominated various routes in the African market. These include destinations such as Entebbe, Dar es Salaam, Lusaka, Bujumbura, and Kigali. The new trend of African countries reviving their airlines is likely to be a game changer and if KQ does not formulate effective strategies to venture into new and profitable destinations, its performance may be adversely affected. Tanzania and Uganda are some of the countries whose national airlines are coming back. The entry of other airlines from Uganda and Tanzania could be a major blow to KQ, especially in the East African market. They will be eating into routes that KQ has dominated for years, with likely focus on price competitiveness as a strategy to woo customers. For instance, Air Tanzania introduced its direct flights from Dar es Salam to Bujumbura.

Further, most of the airlines are moving to increase and upgrade the fleet of their aircrafts. Ethiopian Airlines is set to acquire its 100th aircraft and has 105 destinations, while KQ has a fleet of 50 aircrafts with 60 destinations. In the last five years, Ethiopian Airlines has acquired five Boeings and 16 Airbuses, and the company has increased its profit within the same period. Recently, Rwandair entered into a contract with Aircraft Lease Corporation as a move to increase the national carrier’s fleet. The freights are expected to get business in the new destinations across Africa and direct flights to the United States. Ethiopian and South African airlines are some of the airlines in Africa that fly directly to the US.

SkyTrax’s World Airline Awards 2018 ranked KQ among the 100 best airlines in the world. The carrier was ranked position 85. Ethiopian Airlines was at position 40. Although KQ is rated higher than some airlines, it has to find ways of turning around to its profitable path.

Lessons to learn

Turnaround strategies are key in the airline business and KQ can learn from some failures and successes of major airlines such as British Airways, Lufthansa and Ethiopian Airlines. Despite the European aviation witnessing many entrants in the market, British Airways’ profits continue to rise. This is attributed to its economy of scale in terms of fleet size and destinations. The airline uses a mix of price competitiveness and customer experience by providing superior services to maintain and attract customers. While other entrants focus on providing lower prices, they are unsuccessful in winning British Airways’ customers who are contented with the quality of services such as being served by well-trained customer-relations employees, traveling in spacious and comfortable seats and airline’s reward programmes.  The company uses marketing strategies such as sponsorship for the Olympic games to sell their brand. British Airways innovatively comes up with packages that attract new customers. Further, the airline often forms mergers with other carriers such as Spanish Iberia airline, a move that enables the airline to tap into different markets.

Government’s interventions that affect airlines’ operations, such as controlling capacity and restricting market entry, have caused most of the British Airways’ competitors to exit the market. Nevertheless, despite the airline being the largest in the UK, it has not been exonerated from paying landing fee by the government.

Unlike the British Airways, Lufthansa has experienced fluctuations in its profitability. The fluctuations were caused by economic recession, restructuring costs and competition from other airlines. Despite this, the airline adopted strategies that put it in a profit-making path. These entailed transferring all short-haul flights outside its hubs in Frankfurt, Munich and Düsseldorf to the company’s re-branded low-cost carrier Germanwings; making some routes seasonal; closing other routes; and retiring old fleet and buying new ones. The airline has other strengths such as its large fleet of over 200 international destinations and high-quality services. Lufthansa resumed its operations in Nairobi in 2015 after its absence for 18 years.

In the African region, Uganda Airline’s management has been poor and because of political interference, the company has on various occasions been forced to close its operations. The company has previously been plunged into debt and despite attempts to privatize it, the strategies have not been fruitful.

Ethiopian Airlines, on the other hand, presents a winning case study. Before the implementation of its Vision 2015 strategic plan, the airline was ranked 4th in Africa, behind KQ. Nevertheless, with systematic implementation of its plans, ranging from infrastructure, human resources management, fleet planning and procedure plans, Ethiopian Airlines has become African’s leading airline and has won numerous awards in Africa. The airline is protected by its government, which restricts foreign airline access. Therefore, it has a monopolistic dominance on its domestic routes. The Ethiopian Government does not give the national carrier explicit subsides. However, the state has 100 per cent ownership. The airline, therefore, does not have to pay dividends and instead it reinvests all its profits. In 2017, Ethiopian Airlines merged with Ethiopian Airports Enterprise (EAE) as a strategy under its Vision 2025. EAE runs airports and it oversees setting and receiving of landing, parking light and terminal facility charges, hence there is a possibility that Ethiopian Airlines is exempted from landing charges in the country.

Going forward

KQ should focus on venturing into new markets. The company already has an edge by launching the direct flights from Kenya to New York, which is a major boast to its revenues. This will directly impact on Kenya’s trade, tourism and businesses. The national career will increase its customer base, especially those travelling to the US and the tourists visiting Kenya. Kenya receives approximately 100,000 visitors annually from the US. About 7,000 travellers have booked seats on Kenya Airways’ direct flights to New York ahead of the 28th October inaugural journey. KQ needs to venture into some destinations considered lucrative such as popular cities in Latin America.

Cost-cutting measures are prudent, and the firm will be rescued from capital shortfalls. KQ has already formed a merger with the Kenya Airports Authority (KAA) with a view of sharing costs. This is just a tip of the ice-berg since cost cutting needs to be complemented by other valuable options such as consideration for outsourcing services. KQ hopes to run Jomo Kenyatta International Airport (JKIA) and talks are still on-going with the Government and KAA to actualize it merger dubbed Project Simba. If this is realized, KQ will have a level playing field with its competitors such as the Arab carriers and Ethiopian Airlines that get preferential treatment at their hubs and even have an influence in operations of their home airports. However, KQ’s partnership won’t the same since her competitors such as Emirates, Ethiopian Airlines, Qatar Airways and Rwandair that are running their hubs are fully government-owned and hence making it easier for them to run their home airports and expand their reach.

The Government’s protection of KQ against unnecessary competition could be a remedy for the ailing firm.  The airline’s management has complained of the Government’s actions to license new airlines to fly to Nairobi, arguing that the added competition will take the share of the market that KQ enjoys. The same sentiments have been echoed by the International Air Transport Association (IATA) as part of the reasons why African airlines make losses. The Government’s supportive policy and insulation of the firm from unnecessary competition could be a remedy to the firm’s profitability.

For KQ to make profits, it must borrow a leaf from thriving airlines such as the Ethiopian Airlines and British Airways in terms of its management, business strategies and operations. More profoundly, there should be strategies to increase its fleet and venture into new destinations to serve a wider market. With the current investment climate and business model, KQ might continue making losses.

From the SkyTrax’s ratings, KQ has improved in terms of staff hospitality, seat comforts and cabin safety information. Nevertheless, the company should work on services such as washroom cleanliness, service efficiency, transfer services assistance, staff assistance on arrivals and premium check-in facilities that have recorded low ratings.

Authors: Brian Nyaware and Isaac Waithaka, Young Professionals, Infrastructure and Economic Services Department

 

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