SkyTeam has had a rough week.
First news of Delta’s tech meltdown then further cutting Tokyo Narita and exiting the New York-Japan market all together. Then Korean Air’s unexpected Q2 losses and now Kenya Airways, ‘the Pride of Africa’, posting record losses, the worst the country has ever seen from any private company listed in Nairobi.
The turnaround at KQ has started, but the work is definitely cut out for management.
The airline has posted a net loss of $258 million which is up from the previous fiscal year despite moves from the company to stem losses. The main problems from this year seem to come from a series of ‘one off items including charges linked to a poor fuel hedging policy’.
Having posted four successive years of massive losses, shares in Kenya Airways further dropped and lost 8 percent value since last Wednesday when the news broke. An embarrassing fact is that Kenya Airways stock has lost nearly 90% of its value in the past five years, having dropped 87%.
This bad news for fellow SkyTeam members Air France and KLM, both of whom are majority shareholders in the company alongside the Kenyan government. Folks in Paris and Amsterdam have been waiting in vain for years for the company to stabilize. Domestic terror attacks and a sharp drop in Kenyan tourism have also had a part to play in this mess, but the lack of management of the airline’s cost structure might also be considered a significant factor in the delay in stemming KQ’s losses. While Mbuvi Ngunze, Kenya Airways’ chief executive since December 2014, highlighted how the airline’s revenue had increased 5 per cent in 2015-16, it is puzzling that the company would still post such disastrous net results.
Further damning is fellow East African competitor and neighbor Ethiopian Airways has just posted a net profit of USD 148 million operating out of their base in Addis Ababa. While Kenya Airways cited fluctuations in various African markets and foreign exchange losses that were exacerbated by capital restrictions imposed in Nigeria, Angola and South Sudan, the fact is that African currencies have been much more stable this year and don’t seem to have affected their Star Alliance competitor across the border.
This all said, Kenya Airways is actually taking steps to try to minimize the hemorrhage – they will cut about 600 employees from the workforce (about 15% of total) and will sell or lease off their 777-300 fleet which they haven’t been able to operate profitably since their introduction in 2014. They will stick with the smaller, more efficient 787 and will also rely on their 767 fleet for India and South East Asia operations. Their market with China will continue to be nurtured. KQ will also rationalize their European ops, focusing on SkyTeam hubs in Paris CDG with AF and Amsterdam with KL along with other important business heavy high yielding routes such as London Heathrow, Geneva and Frankfurt. Other routes such as Rome, Barcelona and Athens are all fair game for the chop. They will also shelve any plans for expansion into the American market for now. Code sharing through AF and KL is the much better option for the near future anyway. For their overall profitable African operations they will continue to rely on their 737NG and Embraer fleet. Things are not so bad.
This all is a little bit too late to salvage any decent financial result for KQ this year or indeed most likely the next few years. But they have a key role to play in the market with a home base like Nairobi: they can and will make it work.
As a prominent member of SkyTeam (Ethiopian is Star’s, SAA is just irrelevant at this point and oneworld has next to no real African presence) and with such a vested interest from AF and KL, there is no way their partners will let them fail. KQ will emerge a more rationalized and integral figure after some of the hard decisions are made this year and the next.