Through the Turbulence

A bit of history for context...

To best understand KQ, we’d have to trace its roots, how it was founded, and its origins; The East African Airlines. Here is a bit of history for the once big regional carrier with unimaginable potential that was not realized.

East African Airways Corporation was established in January 1946 from Eastleigh Aerodrome. It was a joint venture between the United Kingdom stakeholders (including the British Overseas Airways Corporation) and the governments of Kenya, Uganda, Tanganyika (now part of Tanzania), and Zanzibar.

The primary purpose was to handle air transport for these territories in East Africa.

In its first year, East African Airways inaugurated regional routes across East Africa, connecting destinations such as Nairobi, Dar es Salaam, Tanga, Zanzibar, and Mombasa.

Despite flying 9,404 passengers, the airline faced financial challenges initially.

Throughout the 1940s, the airline expanded its fleet. It acquired Lockheed 18-56 Lodestars and de Havilland Doves.

In 1952, East African Airways achieved a significant milestone by becoming the first commercial carrier to transport a reigning British monarch. Princess Elizabeth (now Queen Elizabeth II) flew on an East African Dakota from Nanyuki to Entebbe before boarding a BOAC Canadair Argonaut to London.

The 1960s were crucial as all territories related to the airline gained independence from the British. As a result, the flags of Kenya, Uganda, and Tanzania adorned the tail livery of East African aircraft in 1964.

This era marked a significant transition in East African society and paved the way for subsequent airlines like Uganda Airlines, Kenya Airways, and Air Tanzania

East African Airways ceased operations in 1977 due to several factors, majorly political changes (non-performance), financial difficulties, and the emergence of national carriers in the individual member states posing conflicts of interest.

The Birth of Kenya Airways

Following the dissolution of EAA, the Government of Kenya founded its national carrier, Kenya Airways (IATA code: KQ), in 1977 which commenced operations with a modest fleet of two Boeing 707-321 aircraft leased from British Midland Airways. These initial aircraft served both domestic and regional routes, including the Nairobi–Frankfurt–London route, with the inaugural flights on February 4th, 1977.

The Evolution: KQ Take Off

The KQ evolution was majorly marked by its privatization in 1996, the first African flag carrier to successfully privatize which led to a share distribution as follows :

• The Kenyan government - 48.9%.

• KQ Lenders 2017 (Consortium of Bank Lenders) - 38.1%

• KLM (Royal Dutch Airlines) - 7.8%

• Minority Shareholders (Owners through NSE) - 2.8%

• ESOP (Employee Share Ownership Plan) - 2.4%

Start of Turbulence: A downturn for KQ

Kenya Airways (KQ) faced significant financial challenges despite maintaining profitability annually. The genesis of these difficulties stemmed from the ambitious yet flawed Project Mawingu, initiated in 2009. This strategic 10-year plan aimed at expanding KQ's footprint by increasing its destinations from 53 to 115 and acquiring over 100 aircraft by 2020, primarily funded through a $2B debt. However, the project lacked proper corporate oversight for commercial viability, leading to excessive costs and over-ambition. Moreover, KQ made detrimental decisions such as selling valuable slots (authorization to either take off or land at a particular airport on a particular day during a specified time period) in London below their value, undermining its revenue potential.

In the 1990s, KQ had even surpassed Emirates in size but faced a series of macroeconomic challenges that hindered its growth trajectory including currency fluctuations and interdependencies with other economic sectors. Downturns in traditional tourist sources, adverse terrorism advisories, the JKIA fire in 2013, and the Ebola pandemic in 2014 all contributed to its financial woes. Additionally, competition from Middle East carriers eroded KQ's competitive advantage, further exacerbating its situation.

Operational inefficiencies compounded the airline's problems. Mismanagement of assets - eg aircraft being grounded for more hours than required to generate profit, overpricing of tickets, and outsourcing maintenance and aircraft checks all strained its financial performance. External factors such as forex effects and fuel hedging further added to the pressure.

The airline also struggled with network optimization, failing to adequately adjust schedules, connectivity, and routes to meet market demands - and all culminating in poor customer experience and hurting the brand. The lack of distinction between trade routes and tourism routes impacted decision-making regarding cargo or luxury passenger aircraft. Suboptimal use of aircraft further compounded the issue, necessitating better optimization strategies.

At this time, KQ received financial support from the Kenyan government. However, this support was contingent upon implementing permanent cost-reduction measures, increasing productivity, and improving operational efficiencies with the support of all stakeholders, including employees, suppliers, and capital providers. These measures aimed to ensure KQ's long-term viability in the face of a challenging operating environment. The well-intended plan did not materialize.

The Delisting

In 2020, Kenya Airways (KQ) initiated contemplations for delisting from the Nairobi Securities Exchange (NSE) as a strategy to enhance its agility and improve its financial standing, under the leadership of the then CEO Sebastian Mikosz. Despite considering this move, it wasn't deemed a top priority for the airline at the time. Mikosz highlighted the regulatory burdens and rigidity associated with being the sole publicly traded large airline in the region, which posed challenges compared to competitors like Ethiopian Airlines and Gulf carriers that are not listed on stock exchanges.

The airline's focus lay primarily on finalizing a public-private partnership (PPP) aimed at granting Kenya Airways control over Nairobi Jomo Kenyatta, its gateway. The then leadership suggested that the delisting decision would be a complex one, potentially considered during or after the PPP process.

In line with efforts to address KQ's financial challenges, the Kenyan government announced plans in 2020 to buy out Air France-KLM, local banks, and individual shareholders holding KQ shares on the NSE. This privatization initiative aimed to delist the carrier, providing a fresh opportunity for survival amidst financial woes.

Hope Rekindled!!!

Kenya Airways has made significant efforts to improve its financial performance, with positive trends observed in operating profits and passenger numbers. The debt-to-equity ratio indicates the company’s financial leverage and liquidity ratios show its ability to meet short-term obligations.

The airline has embarked on a significant turnaround journey, showcasing promising signs of recovery and growth. After ten consecutive years of losses, KQ reported an operating profit of Kshs 998 million in the first half of 2023, marking a remarkable 120% improvement from the previous year. This positive momentum reaffirms the airline's prospects for recovery.

Several factors contributed to this turnaround:

1. New Strategic Routes: KQ introduced profitable routes such as Mombasa to Dubai, operating four times a week, tapping into high-traffic corridors.

2. Operational Efficiencies: The implementation of monofleeting and improved crew management resulted in better operational efficiency, reducing costs and enhancing performance.

3. Strategic Fleet Expansion: The addition of fuel-efficient narrow-body aircraft optimized for long-haul flights facilitated cost-effective operations and increased capacity utilization.

4. Promising Subsidiary: Jambojet, a subsidiary targeting substantial revenue growth in 2023, further bolstered KQ's financial outlook.

In 2022, despite challenges such as fuel cost increases and forex fluctuations, KQ demonstrated resilience and substantial growth. Total revenue surged by 66%, reaching KES 117 billion, driven by a significant increase in passenger numbers and cargo tonnage. The deployment of available seat kilometers (ASKs) expanded by 75%, indicating a robust recovery trajectory.

Efforts to address legacy issues and optimize operations are underway:

• Debt restructuring initiatives are ongoing to manage finance costs effectively.

• Operational costs are being targeted for a 10% reduction by 2024, with progress already at 60% completion.

• Lease cost reductions and operational excellence initiatives are being pursued to enhance cost efficiency and service reliability.

• Customer and employee experience enhancement programs are prioritized to ensure a seamless journey and improve productivity.

Looking ahead, KQ aims to diversify its revenue streams, with plans to grow the cargo business contribution from 10% to 20% over the next five years. This strategic approach aligns with the anticipated return to profitability for the global airline industry in 2023, following the challenges posed by the COVID-19 pandemic. With ongoing support from stakeholders and a focus on sustainable growth initiatives, Kenya Airways is poised for a new phase of rekindled growth and profitability.

KQ 2.0

Such an eventful voyage KQ has had! With ups and downs and lots of heavy turbulence.

The airline, however, presents strong prospects for a new phase of good performance on all critical fronts of commercial performance: Financial, Operational, Customer Excellence, and Brand development.

The airline now boasts improving performance - including profitability after long periods of loss-making and new highs in revenues. Operationally, new routes driven by demand in both domestic and international destinations give a new promise of financial performance.

The leadership inspires investor confidence, particularly in the refinancing strategy which has it looking to mobilize long-term and strategic capital from aligned financiers.

With such prospects, it will take a not-so-long period of consistent performance before the national carrier can be relisted on the bourse for investment by the public.

Author: Easter Fanning