KQ’s survival strategy as global travel resumes

August 6, 2020 / Comments (0)


National carrier Kenya Airways has resumed domestic and international flights after being grounded for almost four months.

Martin Mwita spoke to KQ chairman Michael Joseph on the resumption, challenges, nationalisation and the future of the airline.

The Star: How does it feel to be back in the skies?

Michael Joseph: It is wonderful, we need to fly. There are two reasons why we need to fly. One is obviously revenue. When a plane sits on the ground and does nothing, it costs a lot of money because it requires to be maintained even if it does not fly. The other thing is we need to restore the confidence in Kenya Airways to have KQ survive so it can provide the strategic services we need.

Nairobi is the natural place to put your headquarters for Africa, the natural place to invest. Kenya Airways will provide the connectivity needed to encourage people to put their investment here. If you look at Dubai, years ago it was nothing. Look at it to today and the only reason why Dubai is the way it is is because of Emirates. In Rwanda, President Kagame is putting a lot of money into RwandAir and the airport, so we need to do everything for Kenya Airways to survive. 

After resuming domestic flights and now international, how is KQ doing?

It is difficult to say. We are flying two times a day to Mombasa, once to Kisumu, the average load factor is 60 per cent, it’s not great. But we have to get confidence during this pandemic because many people are afraid to fly, even on other international airlines. It is a wait-and-see what will be the load factor.

What is your resumption plan for international flights?

Right now, we are going to fly to London three or four times a week, Amsterdam, Paris three times a week. When we go back to New York, we will probably fly once a week, Guangzhou maybe twice a week, we won’t go daily. We will manage and monitor to see what the load factor is like.

What informed the choice on routes?

Projected demand. It is complex when you structure a route. For example, when you fly from here (Nairobi) to Mumbai, probably it doesn’t justify the cost of that flight, but people might be coming from Lagos and then going to Mumbai and that justifies the cost of the flight. It is a very complex thing when we try to project future bookings.

We have, however, started taking bookings, so we are trying to see the load. As it increases, we shall put on more flights. Coming from Europe, there should be a good number of people coming here for the migration, Christmas season and like that. Then for New York during winter, we will see people wanting to come. We have gotten some good bookings from November, but we have to project and see what the future demand looks like based on forward bookings.

How do you give people confidence they will not catch Covid-19 on a KQ plane?


You do the best you can. We have very special efforts to ensure safety on the plane, including specialised air filters. People must wear masks all the time and crew will be in PPEs, among other measures.

When do you expect to resume direct flights between Nairobi and New York?

We are looking at October. I think we will go once a week and then we will start to build up. If we see the demand, we will go two times or three times a week. I don’t know when we will go back to daily flights to the US because of the pandemic.

There are concerns that KQ risks being short of pilots due to redundancy. What is your take?

Right now, there is no shortage of pilots for sure. There will probably be no shortage of pilots until the industry picks up. No airline economist is predicting the return to 2019 levels until 2023 at the earliest.

How prepared are you to resume flights? There is a concern that most of those sent home are those who had taken recurrent training.

First of all, no pilot has been sent home except maybe those who were on probation. On readiness, the way the regulations work, all the aircrafts are fully maintained even if they are on the ground. Secondly, we have been doing a lot of evacuation and freight flights, so most of the Boeing 787 Dreamliner and Boeing 737 pilots are flying freight or evacuation flights, so we are good to go.


How do you plan to deal with grounded planes, looking at cost factor and leases?

That’s a good question. What most airlines around the world are doing is returning aircrafts on leaseholds. To return an aircraft costs loads of money, the money we don’t have. We have to look for some deal. It can’t be the normal penalties that they levy when you return an aircraft before your lease expires. We have to negotiate so they don’t levy penalties now, we will commit to a working plan.

Some aircraft, we can just keep because it won’t cost us anything. We are going to go down from 38 aircraft to 24 aircraft. We will try to do something with the balance of our aircraft, maybe we will return them or do something else. We have nine 787s (Boeing). We will probably not return any one of them, but we will park them and use them as backup, but we have to manage this process so we can start to see the light at the end of the tunnel.

Management has been criticized on layoffs at a time when nationalization is coming and expected to create jobs.

Criticism will be there when you lay off people. Nobody wants to be laid off and nobody wants to do layoffs. It is really tough to let people go. Everybody can criticize you, but what do you do? Things are difficult for airlines across the globe and KQ is not an exception.

How are you doing the layoffs?

What we have said is for people who are on contract, we don’t renew their contracts, and that is not unusual in contracts. People who are close to retirement, like some of our pilots are approaching the retirement age when they are not allowed to fly, we say if you have two years to go, we will give you your salary and offer you early retirement. There are people we took from third-party providers, some on probation. We have to do it.

How far will the redundancy process go and how many will be affected?

We will finish by the end of September as long as we don’t have another pandemic or obstacles. We are 4,300 people in Kenya Airways at the moment. I don’t know what the eventual number will be, but it is difficult. It is a tough thing to do. 

KQ is going back into nationalization, something that has failed before. How differently can it be done to get it right?

Good question. If I look at Kenya Airways before, we were competing with Middle East carriers, which are owned and subsidized by the state. Same for Ethiopian Airlines. They run the airports, catering, duty free, all these are in one holding company. That ability to put these three or four things together makes you very strong, and that is what I am trying to do with Kenya Airways.

Our idea is to emulate what Ethiopian Airlines has done, what Emirates has done, what Turkish Airlines has done, Qatar, you name it. Integrate airport, duty free and other services. If you look at JKIA, duty free is making a lot of money, ground handling is making a lot of money, if I put those two things together and put those balance sheets together, we can leverage the balance sheet not only to rebuild the airport but also to expand the airline. That is the reason why we are doing it and we can only do it by putting them into one holding company that is owned by the state.

How do you plan to deal with shareholders in the nationalisation process?

The government currently owns nearly 50 per cent of Kenya Airways, 38 per cent is owned by the banks and seven per cent is owned by KLM. Minority shareholders own the balance. In the current financial year, we have put out some money for buying out the minority shareholders, individual shareholders; these are the people who bought shares in Kenya Airways. We have no money to buy out the banks and KLM, but our intention is to give them some kind of arrangement, that they will get their money in the next five to eight years.

Any fears on nationalisation?

Look at SAA (South African Airways), it was doing very well until the government started interfering with the running of the airline and putting people in charge who knew nothing about the airline. They used the airline and they ran it down. This is the fear we have and a legitimate fear. If we nationalise Kenya Airways and we put in into this aviation-holding corporation, it is state-owned. We could run it down or grow, but if you look at the Aviation Bill, we have some safeguards in there to try and prevent that.

How best can KQ stand competition from other airlines?

First is by reducing our operating cost. We cannot compete with, say, Ethiopian Airlines and these other guys on a level playing ground because our cost of operation is high. Our average cost per kilometre, for example, compared to Ethiopian Airlines is much higher. It costs less money to fly to London by Ethiopian. Their pilots are paid 50 per cent of what our pilots are paid, the fuel is subsidised, we pay railway tax on our fuel and so forth.

Becoming a state corporation, I am hoping that we can bring down the cost of operation. Even if we cannot bring down the cost of salaries, we can start to look at other costs and then  leverage the balance sheet.

Pilots have argued that if they are brought on board, you could actually expand the airline.

It has been their mantra since I have been there. They say ‘we could do a better job than you guys’, but has any of them applied for the job of the CEO or chief commercial officer? I would love them to come to the board or to send a representative to the board to really understand our business.

This is a standard language they use because that is what the international pilots’ association tells them to say as union officials on how to deal with management. There are some good things they have said, like making Nairobi a business hub, absolutely 100 per cent, I agree. But when we have nobody flying, no possibility of restoration of the normal number of passengers by 2024, you want to expand? With what? How are you going to meet the costs? We can’t even pay salaries.

You have been accused of using British Airways, a competitor, to fly on routes when you could use KQ at a cheaper cost.

When I joined the board, we were in the middle of a financial restructuring. We hired Mckinsey and other financial consultants, and we were going into restructuring of the debt of Kenya Airways. That required a lot of consultation. I was still living and working in London and I had to come here a couple of times for meetings. I could only come for a day so I would take a Kenya Airways flight at around 5 from Heathrow, come for the meeting and then go back with British Airways. That is the only way you can come for a day, come with KQ and go back with BA, and vice versa.

I answered the audit questions about why did you fly with British Airways. It is just a normal business trip but the union took it as if I am spending thousands travelling with BA. Again when you fly with KQ for free, it is on availability basis, so when it is full, you can’t fly. You can’t leave a fee-paying passenger and fly the chairman for free. When there was no seat in KQ, I flew British Airways and there were arrangements for cheaper tickets.

Former CEO Sebastian Mikosz and yourself were accused of increasing your salaries without approval. Can you explain?

When I became the chairman, I said to the minister look, this is going to take a lot of my time because a lot needed to be done. So I said, I need to be paid more. KQ was going through a financial restructuring, we had just hired a new CEO, we also had to decide what are we going to do with the airline.

When we went through the Public-Private-Partnership proposal, it became very intense and I was spending a lot of time with Kenya Airways. It’s about the amount of effort that I had to devote to Kenya Airways as a person, not as a chairman who appears only four times a year. So I was paid not a sitting allowance but a fee. It was agreed and the following year the finance people accrued for that amount. It was shown in the balance sheet as salary paid to me.

However, the board never approved it, so it had had to be reversed. I paid that money back. Currently, none of us is being paid since the pandemic. I haven’t been paid since February, the CEO has taken a pay cut because we volunteered to help address the situation. I have never been dishonest. I am not that kind of person. I am very proud of my reputation.

When do you think a nationalised KQ will return to profitability, and can it be privatised again?

This is a difficult question to answer. My view is in three or four years’ time, we will be profitable if we go through what we are doing now and things work out as we predict. To re-privatise would depend on how the world looks like. But in my view, we have to get back our market share, we have to fight for our market share. Ethiopian Airlines has a grand design to be Africa’s airline. It’s not going to be easy, but we have to fight.

Do you feel KQ is getting enough support from the government?

Yes, and particularly from the President. We are getting good support. I can’t wish for better.

How have you addressed the safety alert on your Boeing 737s issued by the US Federal Aviation Authority?

There is a safety alert almost every day. This is not the first alert on the 737s. We always take the safety alerts seriously and we do what we are required to do. This happens all the time. We check our planes regularly so it’s not an issue. Safety is always number one in an airline and KQ is no exception.

How do you compare leading KQ and leading Safaricom?

Different challenges. One is an extremely profitable company, easy to run and one is not. When you don’t have money, it is very difficult. Even to become successful, you need money. If we (KQ) are going to compete, we have to offer better service, better in-flight service, better meals, better uniform, better seats, all these will cost money.

Parting shot?

I took up this job because I believe Kenya Airways is a strategic asset of this country. As a standalone business, we are too small to compete, we have 38 aircraft, Ethiopian has 120. It’s the national thing that we have to do. It’s not about pride, it’s something we have to do, we have to put Nairobi on the map.

Nobody wants to fly to a destination via other airports, they want to fly directly. An airline is one thing that will attract people to come here. The government has set up an office to attract businesses, we have to have the same objective. We should protect KQ and make it work. 

Source: https://www.the-star.co.ke/news/big-read/2020-08-04-kqs-survival-strategy-as-global-travel-resumes/

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