Monday, August 3, 2015

KENYA AIRWAYS A CAUTIONARY TALE FOR UGANDA AIRLINES CHAMPIONS

Kenya Airways last week announced a horrific $252m (sh882b) loss last year, blaming low tourism numbers and competition, while observers in addition, point to judgmental errors in route expansion and cost indiscipline as key to the airlines’ latest woes.

The airline saw a marginal growth in revenue to Ksh110b (sh3.3trillion) from Ksh106b (sh3trillion) the previous year which was not helped by a near 25 percent jump in costs.

A cursory look at their financial statements shows their fleet ownership costs doubled, as did their finance costs and they took Ksh7b (Sh210b) loss from realised and unrealised losses on their fuel derivatives bets.

Being a huge consumer of aviation fuel Kenya Airways seems to have bet fuel prices would rise last year and took out insurance (derivatives) to guard against that eventuality. However world oil prices have been falling since June, making the airlines’ derivative positions expensive to maintain or dispose of.

As if that is not enough the airline now has a negative net worth, its liabilities exceeding its assets. The company says it will look to borrow $200m and sell off some of its aircraft to raise an additional $100m.

"The aviation business is a volatile one in the best of times. It did not help, that Kenya has had several high profile terrorist attacks in the last two years, keeping tourists away or that the middle east airlines have made aggressive inroads into the continent, but one can bet that if you put the company’s expenses under a microscope you will find a lot of fat, wastage and downright theft embedded in the system...

Rumours of fat deals to favoured contractors, planes leased irregularly from connected individuals and hush money being doled out to people in the know abound.

In an increasingly competitive environment there can be no excess, companies need to be lean and mean so that they can not only fend off competitors’ maneuvers, like price wars but also initiate some aggression themselves.

Except for the Nairobi-Entebbe route where Kenya Airways has a freehand they are most likely taking a beating on all other routes on which they face competition.

With an eroded balance sheet, the pride of Africa is exposed and it maybe that only the Kenya government can fork out some more money to pour down that black hole.

Stripped to the bare essentials business is simple. For long term sustainability you need to make more money than you spend. The difference is profit, which may be parcelled out among the shareholders and ploughed back into the company to drive growth.

In a competitive environment the profit margins can grow increasingly thin, hence calling for increasing levels of efficiency and a healthy pile of retained profits. Companies can either hang in there giving as good as they get and hope to weather the storm or sell out, abandon the business. 

These are strategic decisions, which are not made any easier by the hard facts on display, but can be complicated by sentimentality and misguided loyalty to the business.

Which brings me around nicely to the champions of the revival of Uganda Airlines. The sum total of their argument for the return of the airline, which went under at the start of the century, is that it is an infrastructure such as roads or railways or ferries that government has to put in place regardless of its direct return on investment.

"That there is the fallacy of the argument. If the enterprise is not profitable it will not sustain itself and rely increasingly on the treasury for capital infusions just like Kenya Airways is doing and South African Airways is doing with disturbing regularity.
We are talking hundreds of millions of dollars. Money that would show a better, more sustainable return for this country by educating or treating a few thousand children....

One wonders which market research these people are referring to in pushing for a billion dollar investment on when British Airways with a monopoly over the non-stop Entebbe-London route only last week announced they were pulling out of this market?

It is not a crisis that BA has left our market, there a dozen other airlines flying out of Entebbe. A better way to spend money on the aviation industry would be to upgrade Entebbe airport which barely manages to handle three jumbo jets when they land at the little airport within minutes of each other.

Given what we know about our government’s workings, it is not a stretch to think that a stateowned airline would just increase the surface area for corruption,  especially as such an airline will not breakeven for at least a decade if it does at all. It really has nothing to do with improving access to Uganda for tourists or someone hazarded last week, to make our coffee more marketable.


If it was up to me we would put this “Force Uganda Airlines Back” to bed for at least the next decade or it put it down all together.

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