Thursday, September 28, 2023

Flying Through the Turbulence Part 1

Leonard Khafafa - Public Policy Analyst

A lie has many versions. The truth has only one-Paulo Coelho

In an age and at a time when disinformation and fake news have ascendancy over facts and figures, the truth can sound bizarre. Nowhere is this clearer than the situation that obtains at Kenya Airways (KQ) the National carrier. Working through a cloud of half-truths and outright embellishments, this series of articles intends to separate fact from fiction; to distil the truth from first-hand accounts and KQ’s annual reports that are already in the public domain.

KQ has not always been on a downward spiral. There was a time in its history when it was one of Kenya’s best-performing companies; when it was truly the Pride of Africa. It was deemed the continent’s “primus inter pares” or first among equals. KQ was, and still is, the default National carrier of many sub-Saharan countries. The KQ brand with its red, white, green, and black livery is easily recognized in major airports around the world.

To understand where the rain started beating KQ and to have a proper appreciation of the efforts currently underway to restore it to its former glory, some background is needed. This series of articles focuses on four thematic areas that have been the bone of contention. These have provided naysayers with the fodder for conspiracy theories which have contributed to Kenya’s legacy carrier’s reputational deficit.  These are KQ’s fleet, debt, the KALPA CBA, and costs.

The KQ Fleet

Curation of an airline’s fleet is no mean feat. It involves several considerations, each consideration addressing a unique stakeholder need or demand.  For example, a network should meet customer expectations in the following ways: a plane considered, say for a flight from Nairobi to New York, should be able to go the distance non-stop. It should have a seating configuration that allows comfort for the long-haul flight. It must have the right In-flight Entertainment (IFE).

When it comes to the airline, it should facilitate ease of operations in terms of ground handling; ease of loading and off-loading baggage. It must also make sense in terms of new/ additional training for crew, cost in terms of maintenance, fuel burn, load factor and routing.

Kenya Airways now flying to New York daily, London 14 times per week

Then there is the choice between new and old equipment (the name for aircraft in aviation circles). New equipment has the advantage of the latest technology. This is reflected in the enhanced IFE, more comfortable and quieter cabins, and savings from fuel-efficient engines.

The downside is the exposure to engine technology that is not mature resulting in unexpected maintenance costs and grounding, disrupting the network. One remembers the issues of exploding batteries when Boeing 787s were first put into service. Or the recent mishaps in the Boeing 737-800 Max 8 that led to their grounding globally. Furthermore, newer technology is more expensive. An airline may pay much less for older technology that is tried and tested but trade-off with the fact that they will appear to lag behind the competition.

Another consideration is the availability of an equipment type. For example, the Airbus A320 ticks all the boxes of an airline’s needs but globally, they are sold out until 2027. Then there is technical support that may be slow in coming for one reason or the other. Most of Air Tanzania and Egypt Air’s A220 fleet is grounded because of technical problems with their Pratt & Whitney engines. Media reports say, “The fleet remains grounded for the foreseeable future.”

Kenya Airways posts Sh. 38.3 billion full year loss

From the foregoing, one surmises that fleet discussions are not as pedestrian as buying groceries from a supermarket. Typically, they follow a five-to-ten-year plan. Kenya Airways’ fleet, over the years, has been carefully selected from these and other considerations. Currently, the airline has Boeing 737s, Boeing 787s, Boeing 777s and Embraer jets. The ownership and financing structure behind these equipment shall be canvassed later in this series of articles.

The disinformation mill has been on overdrive about the suitability of the Embraer to KQ’s operations. Information from the airline’s annual reports that is in the public domain disproves notions of unsuitability. An analytical look at KQ’s traditional routes and the calibre of traffic they carry provides the rationale for the curation of the Embraer.

Because of Jomo Kenyatta International Airport’s (JKIA) strategic positioning as a hub, KQ’s expansion strategy has focused on the development of intra-African routes. This is also in line with the Government of Kenya’s aspirations as a signatory to the Single African Air Travel Market (SAATM). Majority of these routes have thin traffic but with unique requirements for large amounts of baggage. Embraers were first mooted as replacements for KQ’s old 737 classics.  They were initially tested on developing routes using two E170s. These were 72-seaters. The success of these two precipitated the acquisition of another three of the same. These five planes were all used (pre-owned) and were on operating leases.

The Embraer fleet has since grown organically. The success of the five leased planes has paved the way for the acquisition of new financed E190s. The brand-new planes are 96-seaters and have replaced the smaller ones. And it makes perfect monetary sense to go with Embraers for the intra-African routes. A new Boeing 737 of the same capacity would cost 350 to 450 thousand dollars in monthly payment while the Embraer costs 250 to 300 thousand dollars. Yet the load factor remains the same even as the fuel burn on the Embraer provides significant savings.

However, it is acknowledged that whereas the Embraer fleet leads to massive savings, it has one downside. The E190s have a smaller belly for baggage than the old 737 classics. This has posed challenges wherever trader routes have been developed successfully with load factors of over 70 per cent. It may be prudent for KQ to consider the deployment of the larger 737s on such mature routes on a permanent basis.

KQ presently has 13 Embraer E190s in service. It also has three 777-300s, though they have been leased onwards to Turkish Airlines. At the peak of KQ’s expansion, these planes had been acquired to replace the ageing fleet of 322-seater 777s and 216-seater 767s. However, the new 777s were much bigger 400-seater planes. At the same time, due to external factors; the war in Central Africa Republic, the Ebola epidemic in West Africa, and depressed demand from Europe following the Global Financial Crisis of 2007, the airline suffered demand shocks that saw it unable to get a favourable load factor on these wide bodies.

The 234-seater Boeing 787s have been the perfect substitute for both 767s and 777s. With the relatively lower entry into service costs, they are also the perfect complement to the Boeing 737s and adequately cover any demand needs that arise from season to season. KQ also has two Boeing 737 freighters. These are invaluable assets in the development of the rapidly growing cargo division of the airline. It is expected that more freighters will be added to the number in future.

Part 2 of this series will attempt a critical examination of KQ’s debt and how it arose.

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