88 African Business November 2015

November 2015 African Business 89

Aviation
A slump in tourism means that Kenyas national flag
carrier needs an immediate bailout and longer-term
support for its recovery. Will this be enough?

Kenya airways
in freefall?

enya Airways posted the worst financial result in the corporate history of
its home nation this summer, when it
announced a full-year loss of Ksh25.7bn
($254m). Management at the flag-carrier, which was privatised in 1996 but
is still 29.8% owned by the government, now face an
uphill struggle in convincing politicians and the public
that they deserve another shot at commercial viability.
The sheer scale of the losses eight times deeper
than the previous year has prompted soul-searching
in a country where 46% of the population lives below
the poverty line. A Senate Select Committee is now
poring over the disastrous result, with some MPs
openly calling for criminal proceedings against airline
bosses.
However, while the prima facie evidence points to a
series of strategic blunders, parliaments investigation
has yet to uphold any of the allegations of corruption
that have been bandied around by the press. In truth,
Kenya Airways predicament is far from unique in
African aviation, and its commercial fortunes are at
least partly influenced by external factors beyond the
control of management.
The countrys finance ministry estimates that the
flag-carrier now requires a $500-600m bailout in order
to restore solvency, while Standard Investment Bank
pegs the funding shortfall as high as $1bn.
Calls from the National Taxpayers Association to
block the bailout appear to have fallen on deaf ears,
with the government swiftly rubber-stamping a $40m
loan and the African Export-Import Bank signing off
on a $200m bridging facility. Reports suggest the funds
will pave the way for two new Boeing 787 Dreamliners
currently parked in Everett, Washington, USA to
make their delayed ferry flights to Nairobi.
According to Mbuvi Ngunze, Kenya Airways chief
executive, this interim financing merely gives management breathing space while talks continue about
longer-term support. The flag-carrier has contracted
turnaround consultancy Seabury to evaluate the

Right: Kenya Airways

not flying as high as
before.

So much
attention is
focused on a
small part of
the country.

options for a strategic overhaul, and further loans will

likely be contingent on compliance with its recommendations.
We brought in quite some significant capacity last
year, Ngunze told African Business at an industry
conference in June, referring to the addition of eight
wide-body and two narrow-body aircraft. The uptake
of that capacity has not been at the same level [as we
predicted] I felt we were not really shooting at the
right level, so we brought in Seabury to work with us
on commercial diagnostics.
This mismatch between capacity and traffic lies at
the heart of the flag carriers dire financial results, but
its causes are complex. Rising violence by Al-Shabaab,
the militant Islamist group spawned in Somalia and
now spreading its tentacles across East Africa, has
undoubtedly played a role in dampening traffic flows.
Al-Shabaabs most high-profile attack in Kenya
to date was the September 2013 Westgate shopping
mall atrocity, which left 67 people dead including

$254m
Kenya Airways posted
the worst financial
result in the corporate
history of its home
nation this summer,
when it announced
a full-year loss of
Ksh25.7bn ($254m).

citizens of the UK, Canada, France and South Korea.

Had the incident been a one-off it would likely have
had a muted impact on tourism, but with a succession
of mass-casualty attacks following in southern and
eastern Kenya, foreign governments were quick to
issue new travel advisories.
There has been, definitely, over time, a strong
improvement in [the security situation in] Somalia
and what we see is Al-Shabaab shifting their focus
to soft targets, Ngunze says, highlighting this years
attack on a Kenyan university college in the border
town of Garissa that left 147 dead.
The chief executive criticises foreign media outlets
for sensationalising the scale of the threat, and in
turn accelerating the exodus of tourists. The travel
advisories are really focused on the coastal regions
places like Mombasa and Lamu [whereas] the
rest of the country is open for business, he argues.
Thats the big narrative that gets missed. So much
attention is focused on a small part of the country

The international media has a lot of reflection to do.

While security jitters contributed to the financial
result traffic flows from London to Mombasa are
down 40%, for example management must accept
some of the blame. Kenya Airways increased capacity by 8.6% last year when measured by Available Seat
Kilometres, even as it became clear that tourism was
slumping. This expansion, predictably, resulted in a
glut of seats that has suppressed passenger yields and
deepened losses.
Ngunzes personal responsibility, though, may be
limited. He was only appointed as chief executive in
November 2014, replacing long-standing boss Titus Naikuni, who himself appeared before the Select
Committee in September to vigorously defend his
track record.
Wherever the blame lies, Ngunze has made clear
that the airlines 10-year expansion programme,
dubbed Project Mawingu, is now up for review.
Mawingu is a dynamic plan, he says. Weve already
had to tone down some of the ambition in terms of
fleet, and we keep on reviewing it. You must respond
to what you see in the market.
Having originally targeted 119 aircraft and 115 destinations by 2021 up from 45 and 53 today the flagcarrier is now talking about growing responsibly in
the current climate. There may even be a near-term
contraction. Four wide-body 777-300ERs have been
put up for sale, and North American route launches
have ostensibly been put on the back burner. Lets
do well the hubs that we already fly to, says Ngunze.
Another aspect of the business that is being closely
scrutinised by Seabury is the controversial joint-venture agreement with KLM Royal Dutch Airlines, which
owns 26.7% of Kenya Airways.
The two airlines have been sharing flight codes and
revenues on services between Europe and Africa for
two decades. Such partnerships are popular in the
airline industry as they spread risk on intercontinental
flights. However, Ngunze has admitted to the Select
Committee that the joint venture is not currently
profitable. The Finance Ministry says the agreement
is now being re-assessed, and warns that KLMs stake
could be diluted during any bailout.
While restructuring is clearly needed, the government should be wary of knee-jerk proposals that might
hinder a long-term recovery. Turfing out management,
severing commercial partnerships, and re-nationalising the company all offer immediate gratification,
but these measures alone are unlikely to rehabilitate
Kenyas struggling flag-carrier.
Martin Rivers