Kenya Airways: after the storm


eTN: Kenya Airways (KQ) just suffered from a strike, even though the industrial court had specifically prohibited the union from going ahead with such action. Were you surprised by the turn of events and had you made any contingency plans?
Titus Naikuni: The recent turn of events was most unfortunate in view of the fact that KQ places a lot of emphasis on maintaining highest levels of employee satisfaction. All negotiations had been undertaken in accordance with the industrial laws of Kenya. The airline held the negotiations with the understanding that all parties would respect and abide by the spirit of the law and their open disregard for the court injunction was most unexpected. However, the airline had in place a contingency plan reliant on non-unionisable staff – this was constrained by the high passenger volumes and considerations of minimum rest time etc.

eTN: Talk has it that the strike will cost KQ several hundred millions of shillings, plus the cost of the new wage settlement in the medium term. How does this affect your drive to return to profitability in 2009?
Naikuni: The strike cost us about Kshs.600 million in direct costs. KQ has remained profitable in the last ten years since privatization. The loss reported from the year ended March 2009 was as a result of changes in accounting reporting rule. The fuel hedging accounting rules (IAS 39) require that changes in Fair Value balances of outstanding fuel derivatives be accounted for in the income statement. Fair Value calculations, also referred to as “Mark to Market”, represent the unrealized loss or gain relating to hedged fuel to be consumed post the balance sheet date.
Despite this, the key components of our balance sheet including our asset base, our cash reserves remain in good shape. Our business leadership remains committed to a strategy of developing new revenue streams by opening new routes, optimising current opportunities and actively saving on costs without compromising on customer satisfaction. This will ensure that KQ remains a viable and profitable future for now and in the foreseeable future.

eTN: You are now flying to some 36 African destinations across the continent. Where else will KQ’s flag soon be flying and what is your goal in terms of African connectivity via Nairobi?
Naikuni: We are committed to the sustainable development of Africa and continue with network expansion to achieve this goal. From September 4th this year, we will fly thrice a week to Gaborone, Botswana via Harare and from 17th September we will fly twice a week to Ndola, Zambia via Lubumbashi. Earlier in the year, we commenced flights to Libreville, Gabon and to Congo Brazzaville. These new routes are supported by a timetable that now provides increased frequencies to key market destinations and offer more flexibility and connectivity to our passengers.

eTN: The airline recently pulled out of Malindi, leaving that route to domestic competitors. You also ceased to operate to Lamu and on occasions pulled out of Kisumu over the state of the airport. Where does that leave you on domestic operations where you now have competition like Fly540, Jetlink and others?
Naikuni: The decision to cease operations to Malindi was made early in the year, after the business evaluated the commercial viability of the route. The state of any airport forms a major consideration in our decision to fly to and from our destination since safety comes first always. Our pulling out of these local destinations does not in any way mean that KQ does not value our Kenyan market. We have increased frequencies to Mombasa where we now offer 58 flights per week and also offered very pocket friendly prices to this destination. We also now fly Embraer jets to this route in comparison to the past where we flew the Saabs. We offer a product that is competitive and up to international standards on all our domestic routes. We have suspended operation to Kisumu pending awaiting the completion of the renovation of the airport.

eTN: Notably KQ continues to be absent from the profitable Juba route and there are always questions as to what caused this gap in your network.
Naikuni: Profitability is just one of the factors that influence KQ’s decision to fly to any destination. Other considerations include safety of operation, staff equipment etc. All these are weighed and evaluated by a competent team that includes representatives from network planning, safety, revenue management and flight operations. Evaluation on operations to Juba is on-going and once we are sure that all issues have been addressed sufficiently, we shall make the right decision for KQ.

eTN: On the Entebbe route there will be some developments in September, i.e. Air Uganda will switch to the CRJ and commence their morning flights again and Fly540 too will introduce the CRJ on this route. That makes it 8 frequencies on working days. How will KQ respond to these changes?
Naikuni: KQ constantly monitors its operating environment and is fully aware of the developments in the competitive activity. Any decision to make changes in these routes will be guided by safety, our internal capacities, our overall business strategy which hinges on achieving highest levels of customer satisfaction

eTN: Kenya Airways is again sponsoring the Classic East African Safari Rally later this year. What other major sporting events are on your sponsorship calendar and are in fact working with the Kenyan sports authorities to attract major sporting events to Kenya?
Naikuni : The East African Classic Safari is our major sporting event sponsorship. We are constantly looking for new opportunities and reviewing proposals from time to time to ensure that they connect the brand to our target audiences at all times.

eTN: You have several Boeing 787’s on order, but delivery has been delayed due to production and other problems at Boeing. Ethiopian Airlines recently broke their own long standing habit and ordered Airbus models, apparently in a move to get more modern and fuel efficient aircraft on their fleet to support fleet and route expansions. How does KQ react to the delays and what do you intend to do about replacing your 767 fleet in coming years, wait for Boeing or seek alternatives?
Naikuni: KQ’s board and senior management have been making evaluations regarding the replacement of the Boeing 767 fleet. The board is taking into account the delays and how they impact on the company’s future strategy. In view of this, KQ is deliberating on the pros and cons of available options and will be announcing the final decision on aircraft purchase by end of year 2009.

eTN: Two years ago you showed a very substantial profit and KQ for years was named as ‘most respected company’ in East Africa. In the face of the political fallout after the elections, followed by the onset of the global economic and financial crisis, last year saw your fortunes reversed. Can you tell us about the measures you are taking to return KQ to profit in the short term?
Naikuni: Despite the challenges of the last 2 years, KQ remains optimistic that the Company’s performance will improve in the coming year. The main drivers of the anticipated improved performance are increased passenger numbers from the opening of new routes, better yields and a favourable exchange rate. Additionally, the Company continues to strategically focus on improving its operational integrity, through investment in staff training, improvement of systems and fleet modernisation. Cost cutting initiatives have been instituted across our operations with a view to eliminating possible wastage and to streamlining operations.

eTN: You are now flying to three destinations in Europe, Amsterdam, London and Paris and several routes to the near and far East. Any plans to add more destinations on your long haul network besides the impressive expansion across Africa or is this contingent on the delivery of the delivery of new aircraft?
Naikuni: Our focus remains Africa and on developing a robust network in Africa-this includes opening new routes within Africa and also providing a product and timetable that suitably meets the needs of the African traveller. As associate members of Sky team and through our strategic partnership with Air France/ KLM, we are able to provide our passengers with connectivity into Europe, Asia and the Americas. Our immediate focus remains staying true to our core market, which is Africa.

eTN: In closing a question regarding recent discoveries of so called ‘blood ivory’ in the East Africa and the Far East, especially Bangkok. What is Kenya Airways doing in regard of cargo screening and cooperation with Kenyan authorities to prevent such shipments?
Naikuni: We are aware that the initial part of the ivory consignment was seized in Addis Ababa en-route to Bangkok. The second portion of the consignment was seized in Nairobi. It is still at the warehouse and investigations are in process. Our policy requires the shipper to make a declaration on the contents of the shipment. As Kenya Airways, we have the right to refuse carriage of a shipment if it is not in line with our values and regulations.

(1.00 US$ = 74.8500 KES)