Kenya Airways stranglehold on the region is its lifeline out of crisis

Kenya Airways record $251 million loss and the impending suspension of services to Uganda by British Airways and Brussels Airlines from Kenya later this year may have shaken the industry but it is by no means an indicator of long term prospects for the region’s air transport industry.

While East Africa’s recent aviation history is dotted with failures or struggling carriers, analysts say this is more a reflection of a shifting competitive landscape, external challenges and the internal dynamics of individual airlines.

As Kenya Airways and the two European carriers shrink their East African presence, Fastjet is enjoying rapid growth and expansion on both its Tanzanian and regional routes.

With the exception of Kenya and Burundi, annual passenger traffic to Tanzania, Rwanda and Uganda has remained positive.

For example, international passenger traffic through Rwanda crossed the 530,000 mark in 2014 while Tanzania breached the five million mark. Uganda suffered a 3.6 per cent decline to 1.41 million, occasioned by the withdrawal of Air Uganda from the market last June.

Kenya Airways has partly blamed its loss on a decline in the country’s tourism sector on the back of aerse travel aisories from key source markets, the outbreak of Ebola in West Africa last year and fuel hedging gone bad.

Finance Director Alex Mbugua also blamed competition from Gulf carriers, not just for their impact on passenger numbers but fares.

The carrier was trapped in a fuel supply contract that saw it spend $347 million on fuel at a time falling prices would have allowed it a rebate of anywhere between 25 and 30 per cent of that figure according to experts.

“Their hedge book is twice as large as the current price for fuel which is trending below $50 for a barrel. This denied them the benefits of falling oil prices,” commented one analyst, who added that the effect would have been less had the competitive environment allowed the airline to charge good fares.

This is more or less the situation that has forced British Airways out of Uganda, where despite near full cabins on its direct London-Entebbe service, BA was not making enough money because stiff competition from Middle Eastern Airlines had depressed fares.

BA also had to contend with a stringent UK visa policy which diverted potential growth in traffic from Uganda and Tanzania to new destinations in the Far East.

Brussels on the other hand is exiting Nairobi because most passengers on its network were destined for Frankfurt, making it more sensible to cede the route to fellow alliance member Lufthansa who resumes services to Nairobi.

In the present competitive landscape, the undoing for Kenya Airways analysts say was always going to be its unbalanced route network that relied heavily on Africa for revenue. For example, the carrier relied on Africa for about half of its revenue, followed by Europe at 22 per cent, 10 per cent each for the Middle East and Asia and six per cent domestic.

This revenue structure potentially meant that other carriers, particularly Ethiopian and RwandAir which have been active in the African region, were growing at Kenya Airways expense.

Suspension of flights to West Africa for most of last year, therefore, took away a significant chunk of the carrier’s earnings potential.

KQ’s main rival on the continent, Ethiopian Airline, on the other hand, enjoys more balanced revenue spread between its African, European and American markets.

Ethiopian Airline flies to more points in Asia than Kenya Airways. For example, the Ethiopian flag carrier flies to the major Chinese cities of Beijing, Guangzhou, Hong Kong and Shanghai in compared with just Guangzhou and Hong Kong by KQ.

Analysts also say that Kenya Airways fleet plan which saw it grow to 52 aircraft was overambitious and the financial structuring they used to achieve that through a number of local intermediaries meant that they were paying more for aircraft than they should.

Coupled with crippling labour disputes, it would only be a matter of time before Kenya Airways was brought to its knees.

But fears of its crisis impacting the region may be premature. With a $200 million rescue package in the works and no immediate alternative to its East African network, KQ can leverage its stranglehold on the region to crawl out of its crisis.