By Joshua Oigara
Every cloud has a silver lining. This idiom, though cliché, is appropriate for our national airline Kenya Airways or KQ as it is known by its international code.
The airline has been facing a series of unfortunate setbacks that have led it to the untenable situation of its debts ballooning while revenues have stagnated. Ordinarily, the airline industry is prone to such cyclical disturbances but with KQ, there were a series of unfortunate events that led to the current situation.
The troubles that KQ has been through are in the public domain. A majority of airlines all over the world have at one time or the other faced some form of financial and operational turbulence. This is usually occasioned by many factors, among them the heavy capital expenditures in acquiring equipment; huge staff costs; rising global oil prices; currency fluctuations and unexpected events such as advisories that affect inbound traffic, especially for countries like Kenya.
A brief glimpse at the global aviation sector shows an industry that is littered with airlines that did not weather the storm. One of the oldest airlines Alitalia – Italy’s flag carrier—was forced into administration last year—for a second time— due to heavy debts and losses in 2010 after 84 years of continuous operation. Alitalia has been put up for sale with Lufthansa, the German group and several other airlines interested.
In the United States, two of the leading airlines of the time – Northwest Airlines and Delta – filed for bankruptcy in 2005 after being weighed down by huge debts. Delta would later emerge from bankruptcy in April 2007 in a $3 billion restructuring. The same year, Northwest was rescued in a merger with Delta.
Yet, many more airlines have navigated the stormy weather and emerged stronger for it. However, an inflection point has now been reached, and for KQ, the only way is up. Every indicator points to a resurgence of the airline, back to its ‘Pride of Africa’ status.
To start with, America’s Federal Aviation Administration (FAA) granted Kenya a ‘Category one’ status, meaning that KQ now flies directly to America, plying through the Nairobi New York Route daily. This is a strong show of confidence by FAA that Kenya has managed the issues surrounding airport security. It also means that this long over-due status upgrade will give a fresh lease of life for the national airline in terms of opening up new and more lucrative routes.
Structural changes at KQ have already started being implemented. We have seen internationally recruited senior management put in place meaning that operationally, the airline is fixing some of the shortcomings that led it to the current challenges. The airline’s Chairman, Michael Joseph is a seasoned executive whose managerial skills have been tried and tested in his stewardship of Safaricom to become the region’s most successful telco. It is expected that the same discipline that saw the telco grow to become the giant it is today will be rolled out at KQ.
The continued positive developments—from the successful balance sheet restructuring to the approval for KQ to fly directly to the US—has boosted the airlines stock at the Nairobi Securities Exchange over the past few weeks. This should be good news for the thousands of investors who have put their money on the KQ stock.
KQ now needs to find ways of mitigating some of the factors that have a major impact on the bottom but which the airline has no control over, such as global political realignments that may lead to changes in operational costs.
Fortunately, KQ’s majority shareholder – the Government of Kenya – has committed to supporting the airline to re-emerge stronger by increasing its shareholding through conversion of some of the loans into equity. The government is leading from the front. Incidentally, some of the best airlines in the world have attained world class status as a result of active government support. From Singapore airlines to Emirates, these airlines would not be what they are without the support of their respective governments.
For us in the banking sector, we continue to play our part in supporting the new lease of life for KQ. The conversion of debt—which KQ owes lenders—into equity provides the much-needed relief to the management who can now focus on operational efficiencies.
This will go down as the first ever successful transaction of its kind in Africa’s air industry, a confirmation that Africa’s solutions will only be resolved locally, by Africans.
Airlines are a long term investment and KQ has a great future given the niche it’s cut for itself in the region. Kenya is a natural hub for penetrating the rest of the continent meaning that once the issues besetting the airline are taken care of, the only way is up. Our role is to provide a helping hand to secure its future.
The Writer is KCB Group CEO and MD.
