KENYA Airways (KQ) last week announced a loss of $257 million (Ksh25.7 billion), the biggest ever in the country’s corporate history.
It’s a shocking tumble for Kenya’s national carrier; although this is the third year the company is running a loss, the magnitude of KQ’s hole – this year’s loss is 661% bigger than last year’s – was much deeper than anticipated.
It seemed like all factors in the world seemed to conspire perfectly to batter KQ’s fortunes – company CEO Mbuvi Ngunze blamed the losses on competition from Middle East airlines, western travel advisories against Kenya, runway closures, Ebola in West Africa, terrorism, high operating costs, and troubled relations with crew.
But there have also been credible reports of shady procurement and aircraft leasing scams within the company that have been haemorrhaging cash.
According to KQ’s consolidated income statement, although turnover increased by 4% in the past year, it just wasn’t enough to keep up with costs – operating losses were 500% higher than last year, net finance costs nearly three times higher, and ultimately, loss after tax was 661% higher than in the year before when the company posted a net loss of$33 million (Ksh3.3billion).
KQ is not alone
Still, KQ can find small comfort that another one of Africa’s big carriers has been in the red for years now, too – South African Airways (SAA) posted a net loss of $200 million (R2.5 billion) in the past financial year, up from $91 million (R1.1 billion) in 2013.
And in SAA’s case, the sustained currency decline of the rand against the US dollar has wiped out any advantage of lower oil prices in the global markets.
In the company’s most recent annual report, despite the 3% decrease in the average price of Brent crude oil in the financial year 2013-14, the total fuel costs actually increased 16% from the previous year as a result of the weaker rand.
Since 2011, the real rand cost of fuel to SAA has increased 77%, and the company also suffered a $15 million (R200million) loss from fuel hedging after oil prices went in the direction the company had not anticipated – down.
Meanwhile, another big flier in African skies, Ethiopian Airlines, is posting healthy profits in the region of $96 million and can now properly claim to be the king of East Africa’s skies, at least.
About five years ago, both Ethiopian Airlines and Kenya Airways embarked on ambitious, once-in-a-generation expansion strategies that would see them poised to claim dominance over the region’s airspace. Both plans involved replacing older aircraft with more fuel-efficient planes, principally the Boeing 787-8 Dreamliner.
The Dreamliner’s lightweight carbon-composite wings and fuselage makes it 20% more fuel-efficient than the Boeing 767, the chief industry workhorse. In a world where fuel typically accounts for around 30% of an airline’s total costs, such efficiency is extremely attractive. Ethiopian ordered ten planes (and was the first in Africa to receive a 787), while KQ ordered nine.
But that is where the fortunes of the two companies began to diverge.
By 2013, Kenya had received six 787-8 Dreamliners, but buying the planes outright (as opposed to leasing them), as well as high wage costs and thorny industrial relations with its crew and workers, had put severe a crunch on cash flow.
Both airlines have jostled for dominance in the African airspace, but Ethiopian has been more aggressive in pursuing key growth markets such as Asia and South America, which allows it to benefit from a more balanced route network compared to KQ, whose core operations are more concentrated in Africa.
In total, Ethiopian flies to 78 international destinations, compared to KQ’s 59; Ethiopian earned 37% of its revenue from Asia and the Middle East in FY2012, compared to Kenya Airways that earned just 20% of its revenue from that region in FY2013. Ethiopian’s reach is aided in no small part by having thirteen 787 Dreamliners as part of its fleet, compared to KQ’s six.
Since the 787 has a massive 14,200km range—roughly equivalent to a 20-hour non-stop flight—Ethiopian can operate more direct flights from its hub at Addis Ababa to almost any city on the planet.
Stunning African “super airline” idea
In 2012, delegates attending an aviation conference in Johannesburg were stunned when Titus Naikuni, then chief executive of Kenya Airways, suggested a three-way merger between KQ, Ethiopian Airlines and SAA, this article in The Economist reports.
Naikuni pitched the idea of an African “super-airline” as the only way to survive competition from Middle Eastern carriers like Emirates, Qatar Airways and Turkish Airlines, that were “stealing” African passengers with cheaper fares, bigger and better planes.
But that is most likely to remain a dream. Apart from the fact that it would be logistically difficult to implement – Ethiopian and South African belong to Star Alliance, an air alliance that rivals Kenya Airways’ SkyTeam – African governments are notoriously, sometimes illogically, protective of their national carriers, shielding them from competition and often endlessly throwing good money after bad.
In the 60s and 70s, when Africa was still basking in that warm, post-independence glow, a national airline was one of the three visible symbols that encapsulated sovereignty and self-determination: along with a national flag and national anthem (and, some would include, a national beer).
A national airline is a particularly grand gesture that asserts a country’s status on the table, as it gives it clear visibility on the global arena.
But many were just not able to compete. According to the African Development Bank, 17 countries in sub-Saharan Africa continue to operate weak state-owned carriers in very small, protected markets, that only survive thanks to substantial government subsidies and often represent a considerable drain on public finances.
An additional 25 countries have scrapped their flag carriers in favour of private operators – including Uganda, Nigeria, Ghana, Cameroon, Senegal Tanzania, Democratic Republic of Congo, Zambia and Malawi.
A plane of the now defunct Cameroon Airlines lands at OR Tambo International Airport in Johannesburg in 1999. (Photo/Flickr/ Bob Adams).
The big three in sub-Sahara Africa that have survived – Ethiopian Airlines, South African Airways and Kenya Airways – have fallen on very different fortunes. As SAA and KQ are running into deep losses, Ethiopian seems to be growing from strength to strength.
The most obvious difference between these countries is that South Africa and Kenya are democracies (flawed ones, but still), while Ethiopia is a quasi-authoritarian regime that has little tolerance for freewheeling politics or economics, but is pursuing an aggressively state-led growth model.
Perhaps there is something unique in the airline business that makes it suitable for a “clever” hybrid democratic-authoritarian regime (emphasis on “clever”) to find success. First, there is probably no other business that a developing country can run that is so embedded in the global economy, and that is so exposed to exogenous risk.
Needs a firm hand
KQ CEO Ngunze has pointed the finger on a clutch of external factors, including terrorism, a slump in the European economy, the Ebola outbreak, travel advisories against Kenya and oil price volatility as contributing to the company’s losses in 2014.
But it is such inherent vulnerability that requires strict control to run efficiently, at least in the African context where institutions and corporate governance is often weak.
Case in point – by 2013, KQ’s wage bill had more than doubled to $161 million in seven years, and staff numbers were at 4,000. According to the Centre for Aviation, the average annual wage at the airline was $32,333, about double what Ethiopian was paying its 6,300 workforce.
While Ethiopian managed to persuade its workforce to accept a pay cut in 2012, Kenya Airways fought the unions in the courts over the dismissal of 447 workers in 2012 as part of cost reduction measures; the case took two years to conclude, though it was eventually ruled in KQ’s favour.
But the other thing is clear visibility that an airline gives a country, and autocratic and hybrid countries are always keen to prove to the world that their model works. It means that the political currency – both locally, and internationally – you can gain in running a successful airline is miles ahead of anything else you might put your hand to.
This might partly explain why Ethiopian Airlines has managed its national carrier so carefully, when there was a time the demise of yet another African airline came as regularly as Christmas.
Rwanda is another hybrid regime, that saw the political and economic mileage that a national carrier would give it.
Last week, at the launch of the Rwanda-Kenya Business Forum held at the Kigali Serena Hotel, President Paul Kagame revealed how he “laboured to explain to economists the benefits of direct government investment in Serena Hotel and RwandAir”, New Times reports.
A view of Mount Kilimanjaro from the window a RwandAir jet as it flies over Tanzania. (Photo/Flickr/Adam Jones).
As the country posted roaring economic growth figures in the past decade, a hotel room shortage began to bite as investors and expatriates trooped into Africa’s newest success story.
International experts from the IMF wanted private business to fill the gap, but the response was lukewarm.
Kigali takes matters in own hands
So Kagame decided that the government would take matters into its own hands and do so itself, against the advise of the IMF experts who typically don’t like government being so overtly involved in a commercial enterprise; they predicted such a venture would be foolhardy at best.
Kagame says his intention was to “break the hard ground” and demonstrate a proof of concept through Serena Hotel and RwandAir, and so stimulate private investment and spill over effects into the wider economy.
Within five years of government-aided operations, RwandAir has close to 20 destinations in at least 12 countries; this has boosted tourism and widened market opportunities for the private sector. Though it is not profitable, it is not bleeding at alarming rates – and Rwanda has a decent national airline where all its neighbours have long buried theirs.
Indeed, Kagame said; “If you compare the so-called ‘loss’ and how much money local businesses have made, the benefits are significant, and I am yet to be proven wrong.”
The hotel and the airline will “eventually be handed over to a suitable private investor”, the New Timesreports.
But when you consider all the things that could go wrong in the airline business, it’s not so surprising that tightly controlled, precisely choreographed regimes would find success where freer, more democratic ones haven’t. For starters, in South Africa and Kenya, officials who run down airlines can, if they are arrested, can expect to win their cases and get off scot free.
In Ethiopia and other countries with a high “developmental” premium, if you “ate” the national airline, a court is unlikely to give you an easy pass.