As Kenya Airways pilots staged their sit-in this week while demanding the exit of the chief executive officer, Mr Alan Kilavuka, questions were raised on the destiny of an airline that at one time dreamed about becoming the largest in Africa – but has been on a drip for a decade. With the current liabilities of the national carrier standing at Sh101.5 billion, Kenya Airways remains insolvent.
In previous industrial actions, the pilots had pressured the removal of former CEOs Titus Naikuni and his successor Mbuvi Ngunze, hoping that the airline’s financial mess would be tackled through a change of guard.
Today, not even the magic of Michael Joseph, the man who built Safaricom, seems to be working. Kenya Airways has been a historical mess – at least for the past 10 years.
In March 2010, the airline returned to life with a pre-tax profit of Sh2.6 billion, compared to a Sh5.6 billion loss it had recorded in 2009. In the miracles of the Mwai Kibaki era, KQ was now making money and was in the league of companies raking in profits above the Sh1 billion mark.
For part of Naikuni’s era, everything seemed to be working for the airline: It had rebranded. It got some new fillips as “The Pride of Africa” and finalised orders for nine Boeing 787s that were to be delivered in the first quarter of 2013. The airline had opened some new profitable routes, too. But most importantly, it was posting profits.
In March 2011, KQ again proved its critics wrong by recording a Sh3.5 billion profit and another Sh1.6 billion in 2012. Mr Naikuni, a man who walked in the corridors of KQ with the confidence of a big cat, now had some bragging rights.
On Mr Naikuni’s desk lay a dream to transform Kenya Airways. Within that dream, some new Boeing 787s were to replace the aging fleet of Boeing 767. On paper, the Mawingu strategy – as it was known – looked solid. But, as it later turned out, the project would plunge the airline into goofs and blunders that would sink KQ back to its factory settings of financial turbulence and struggle.
In Naikuni’s 10-year plan, the airline had planned to extend its network to every African nation and double its fleet in five years. At first, everything seemed to be working. The route network expansion and fleet modernisation that had been introduced had boosted the number of flights as well as passengers.
During the year ending March 2013, Kenya Airways approached three funders to finance the purchase of 10 Embraer aircraft and pay for the pre-delivery deposits of some more Embraers and nine Boeing 787 Dreamliners. This financing was part of a larger $2 billion syndicated loan from the African-Export-Import bank (Afrexim), which was to act as the lead financier. The Afrexim-Aircraft loan was to accrue an average interest rate of 5.39 per cent between 2012- 2025.
At the heart of the 10-year Mawingu project was a strategy to see Nairobi become a hub for flights from the East, notably from India and China. The Nairobi hub was to cover 115 destinations, 77 countries, and six continents by 2021. From Nairobi, Kenya Airways’ Sky Alliance partners, KLM and Air France would fly the passengers to the rest of Africa and Europe. The next assumption was that African countries would open their skies to KQ. They had not anticipated the behaviour of other airlines – which would now compete with a bullish entrant.
In 2013, to the surprise of the aviation sector, Kenya Airways recorded a staggering Sh7.9 billion loss – a record loss then by any local company.
As Mr Naikuni launched his Mawingu project, an Ebola crisis emerged in West Africa, grounding all air travel after the Ministry of Health banned the carrier from Sierra Leone and Liberian routes in August 2014. As a result the carrier, by then one of the biggest in Africa, lost routes worth tens of millions of dollars in annual revenue. With loans to pay and new aircraft parked in Nairobi, KQ was facing turbulence. But more so, there were questions about how the planes were procured.
The Senate would later question why Kenya Airways opted to register Special Purpose Vehicles in the Cayman Islands to act as intermediaries in purchasing the new aircraft. According to the Senate, the deals were “questionable” since the SPVs were to lease the aircraft to KQ. These agreements continue to weigh heavily on the airline's performance.
When a Senate committee, led by Prof Peter Anyang’ Nyong’o, was asked to investigate what went wrong, they found that Mawingu was a capital-intensive project and that there was poor planning of the earmarked routes. The Prof Nyong’o team found that Kenya Airways never got its routes right because of its troubled marriage with KLM. They said that the code-sharing and the entire joint venture agreement were not in the interest of the airline.
In 2015, Kenya Airways made yet another costly blunder after hedging on fuel – which is an industry practice. Under a hedging agreement, a company agrees to pay fuel at the current prices hoping that if the price goes up, it will make super profits by buying below market prices. But oil prices took a downward trend, leading to a monumental Sh26 billion loss since other airlines were cheaper.
Besides Mawingu, the Kenya Airways joint venture with KLM was criticised by insiders as exploitative.
In 1995, when Kenya Airways entered into the joint venture, Kenyans hoped this would turn the company around. But the agreement was skewed against Kenya Airways because it gave KLM’s appointed board members some veto powers.
As such, KLM had an upper-and in decision-making, although they held 26 per cent shares. In the joint venture, signed by Mr Benjamin Kipkulei, the then Treasury PS on behalf of the government, and KLM, the Dutch airline agreed to purchase 26 per cent of the issued share capital of KQ for $26 million in return for some veto powers on the management of KQ.
Although it was a minority shareholder, KLM was to appoint two board directors, plus a managing director and financial director.
By the time this matter was raised by Mr Ndolo Ayah, as Transport minister, the veto power was already included in Article 115 of the Articles of Association of Kenya Airways Limited. That was said to be part of the airline’s management problem. Insiders argued that over the years, the joint venture lacked transparency, with pilots and other managers lamenting that KLM was “causing KQ’s Europe flights to be unprofitable” by taking off traffic from KQ’s own home markets.
One consultancy report dated August 2015 commissioned by Kenya Airways had insiders accuse KLM of dominating meetings and failing to listen to KQ’s input. That year, 2015, KQ recorded a pre-tax loss of Sh30 billion!
Over the years of the joint venture, there was a huge unexplained imbalance in ticket sales. This was because Kenya Airways relied on KLM as its general sales agent (GSA) in Europe, while KQ was not given such rights for Africa. Thus, KLM was posting more revenue as a plating carrier – the airline that a ticket has been issued on behalf of – compared to tickets generated by KQ.
Initially, the two had agreed on a 9.5 per cent commission for all the tickets sold, and since KLM was responsible for most sales, it got more money than KQ. However, KQ could have been more competitive since it relied on the expensive Global Distribution System (GDS), which charged a hefty fee for each ticket sold. While KLM was also flying in KQ’s traditional routes in Africa, it was not allowed to do the same in Europe.
For the last 10 years, KQ has been struggling in the skies – and on the ground – and has been living off Treasury bailouts as debts pile up. KLM has left. The pilots’ strike, which was cut short this week by the High Court, is one of the many turbulences that the firm faces in its struggles to stay afloat.
