THE KQ DEBACLE

How Kenya Airways got itself into unending turbulence

In 2010, the board failed to engage and consult management on its ill-informed decision to purchase old aircraft from its strategic partner — KLM.

In Summary

• In the initial stages post-privatisation, management enacted a poor ticketing strategy that offered unreasonably cheap rates to travel agents

• The aggressive expansion programme coupled with the internal rifts between the Board of Directors and management has contributed to the airline’s decline and subsequent losses in the billions

Kenya Airways planes are seen parked at Jomo Kenyatta International airport in Nairobi during a pilots strike organised by Kenya Airline Pilots Association, April 28, 2016. Photo/REUTERS
Kenya Airways planes are seen parked at Jomo Kenyatta International airport in Nairobi during a pilots strike organised by Kenya Airline Pilots Association, April 28, 2016. Photo/REUTERS

Kenya Airways has had a long history since its separation from the East African Community that dates to 1977 when the airline was incorporated and nationalised as the national carrier.

In 1991, a new Board of Directors was appointed to initiate the commercialisation in anticipation of its privatisation. The board then appointed a new management team to streamline its operations, marketing and finances. The airline entered into a strategic partnership with KLM Royal Dutch line in 1995.

Soon after, KQ made its Initial Public Offer (IPO), experienced significant growth in terms of expansion fleet and access to new routes.

By around 2010, it attained global airline status bolstered by its alliance with KLM and Sky Team. The airline posted commendable profits within two years. However, mismanagement overshadowed these gains and eventually led to significant loses.

A closer examination of the airline reveals its precarious state and highlights its nosediving trajectory that led to the loss of billions of shillings. These deficiencies may be categorised in two stages — preliminary faults and current faults.

In the initial stages post-privatisation, management enacted a poor ticketing strategy that offered unreasonably cheap rates to travel agents, who then seized the opportunity to capitalise at the expense of the airline. This strategy induced heavy losses on the airline as revenue streams were potentially lower in comparison with a direct sales approach.

Travel agents would then inflate the price of discounted tickets at the expense of customers whom would then opt to travel with more affordable carriers.

In addition to a poor ticketing policy, management was engaged in poor procurement practices. The private sector is reputed for its efficiency in the procurement of goods and services. Companies place value on not only quantity, but also quality, while objectively securing commodities at competitive market rates that benefit the company and customers.

Unfortunately, this was not the case with KQ who would frequently procure goods and services well above market rates, further exacerbating an already ominous situation.

The current and major issue that has attributed to the airline’s decline and subsequent losses amounting in the billions is its aggressive expansion programme coupled with the internal rifts between the Board of Directors and management.

In 2010, the board failed to engage and consult management on its ill-informed decision to purchase old aircraft from its strategic partner — KLM.

The purchase was neither informed by KQ’s route expansion strategy nor was it sanctioned by the planning committee whose initial recommendation proposed fuel-efficient long-range airplanes.

SELLING, LEASING AIRCARAFT

Further aggravating the issue, KQ subsequently sold the aircraft at a loss. Another misstep involved a contractual agreement with financiers that enabled the leasing of 20 aircraft. Despite the merits of this approach, the terms of the lease agreement were in the least bit suspect when the fees amount to $142 million. This figure amounts to approximately 12 per cent of the airline’s operating costs against the global benchmark of five per cent.

Since the airline’s inception, a reflective stance should provide a unique insight into answering questions concerning its subpar performance. When former President Daniel Moi appointed Philip Ndegwa as the airline’s executive chairman, Kenya Airways subsequently demonstrated its profitability.

As such, it is paramount that the airline adapts and revolutionise working practices from its golden era. Ndegwa took cognisance of the importance and value of his employees as the key to the success of KQ. Ndegwa focused on employee satisfaction to maximise productively. He embarked on an ambitious plan of clearing all pending arrears and empowering staff in their respective fields. He further improved staff morale by increasing salaries. It is during his tenure the airline was privatised and turned into the “Pride of Africa”.

Baring the above into context, it is understandable on both the government and board’s decision on bring in Sebastian Mikosz, especially when you consider his remarkable efforts in turning around LOT Polish Airlines.

Nevertheless, the airline’s continued spiral is a cause for concern and denotes the deficiencies in his strategy when we consider staff demoralisation, the premature launch of the US route, and poor logistics analysis.

As mentioned earlier, employees form a key component in the success of any organisation. Mikosz cost-saving strategy involved an approximate 50 per cent allowance reduction for out-stationed personnel, while retrenching non-essential personnel. He also attempted to decrease pilots’ salaries to below global competitive rates but was met with strong opposition from the pilots’ union.

While this is an acceptable cost saving measure, its impact should spread throughout the airline with management bearing the brunt of the situation that should have included significant pay cuts on their end, a gesture that was not on display.

Second, Mikosz’s premature launch of the daily US flight was demonstrably poorly planned, especially when you consider that the American market has a sales lead-time of 12 months.

The notion that he introduced the route with a lead-time of less than five months indicates the management failed to perform adequate feasibility studies. Likewise, a poor Code Sharing strategy has limited the success of the new route with no solid partners to feed in state passengers destined for Africa to KQ.

Lastly, poor logistical considerations have worsened the issue and drained valuable resources that could have catered to pressing matters. For instance, the new US route requires at least three aircraft for daily flight operations. This route thus required additional staff training, increased facilities, flight dispatch rescheduling etc to meet the demand. Undesirably, the airline’s occupancy rate stagnated at about 35 per cent and subsequently led to the reduction of flights to four per week. This has led to further negative implications for the airline due to revenue loss owing to the initial pull of aircraft from profitable routes, underutilisation of trained staff and decreased customer satisfaction from the early bookings.

Both share and stakeholders must put the Board of Directors to task in accounting for the continued decline of the airline under the current CEO. The board must also answer to the calls of bias against local management. The notion that Mikosz enjoyed indemnity despite consistently posting loses over a nearly three-year period is astonishing when we consider that a national afforded a similar opportunity would have been issued with marching orders under 18 months if he/she posted the same dismal performance.

We willingly accept Mikosz’s resignation and are optimistic his assembled team of experts will gracefully vacate office as a matter of principle. Notwithstanding, the current state of the airline, we should now more than ever seek accountability and invest in our flag bearer while cultivating hope in maintaining our global status as the Pride of Africa.

Kisia is the last town clerk and Nairobi CEO