Tales of Innovation and Adaptation 2: KQ’s creative resilience – A case study

By Juanita SALLAH

We started this series off on the back of a ten-year-old comment made by one of Africa’s most illustrious business leaders, Yaw Nsarkoh, who posited that “Africa will be globalized very quickly,” and for that reason, companies operating on the continent “better take up global benchmarks and global standards, realizing that there is only one world definition for excellence and head for it.” This, he believed, would help all these institutions stay afloat and not go under what we all have come to know and accept across the continent as African standards.  a

Nsarkoh made these comments during an ALD Coca-Cola Panel discussion, which Kenya’s Julie Gichuru moderated. Three other CEOs were on that panel. They were Titus Naikuni, the Group Managing Director and Chief Executive of Kenya Airways at the time (he has since moved on to other pursuits), Joseph Ogutu, the Director of Strategy & Innovation at Safaricom at the time (he recently retired after serving the telco giant for 17 years), and Ramamurthy Thiagarajan, the then Regional Director, Strategy & Operations at Nakumatt Holdings Ltd., a company now known as a fallen elephant.

With this background, we discussed in the first article of the Tales of Innovation and Adaptation series published in this paper on March 12, 2024, how well the Kenya-based telecommunications company Safaricom was doing financially with their M-Pesa product, which has been very profitable since its creation, as many other telcos and financial technology companies have successfully replicated their module, making significant economic gains in and for the jurisdictions in which they operate.

During the February 2014 ALD Coca-Cola Africa Leadership Dialogues in Nairobi, Nsarkoh—then the Managing Director of Unilever—East and Southern Africa—projected that the continent will soon become what some may say ‘a honey pot’ for the rest of the world, and we are seeing the realization of this in present time.

Today, our focus is on Titus Naikuni’s comments about how Kenya Airways came to be and the efforts they have been making to keep it all together. Of course, a decade after his comments on sustaining and keeping an airline afloat, many things would have changed. But I believe to fully appreciate the present, we must understand what the past offered.

After contributing to that panel, Titus moved on as the CEO of KQ to other profitable ventures in the transportation industry that same year; the airline had expanded a bit more after; they have had competitors to deal with as far as Ethiopian Airlines and South African Airways are concerned; and there has been a pandemic that has shaken all businesses across the world, especially transportation, trade, and the hospitality spaces.

The Story of Kenya Airways 

Kenya Airways has shown an incredible capacity for innovation, adaptation, and success in the face of adversity, as evidenced by its creation and rise from modest origins to its current status as a prominent African carrier in the airline industry, where we see intense competition and turbulence as a common ally, Kenya Airways is a shining example of adaptability and creativity.

Kenya’s national airline’s story is about its ability to overcome obstacles in order to keep going regardless of the challenges.

The story starts in 1946 with the formation of the East African Airline (EAA), which initially enjoyed a good reputation. Following the formation of the East African Community (EAC), Kenya, Tanzania, and Uganda transformed EAA into a joint venture. The EAC’s roots go back to 1967, with the signing of a treaty by the three nations. This created a common market with the goal of boosting economic cooperation. Ten years down the line, this good intention suffered a few blows, bringing the dream to a halt. Following the break-up of the East African Community in 1977, EAA ceased operations. However, Kenya saw it as a viable business opportunity, so the government salvaged it and established Kenya Airways as the national carrier on January 22, 1977, to link the country with the rest of the world. They started with just four aircraft and expanded marginally.

Naikinu told Julie Gichuru, “Population growth and people’s desire to link with other countries and explore other opportunities” served as catalysts in that decision-making process that led them to continue building the airline business out of the ashes of the defunct East African Airlines.

In its early years, Kenya Airways encountered several difficulties, ranging from budgetary limitations to operational impediments.

Over the years, there have been headlines highlighting just how poorly they are doing as a business. Some are interesting, while others make you cringe.

For example,

“Kenya Airways records the country’s worst ever loss.” – ‘Carrier highlights the scale of the turnaround task after recording four successive years of losses’ 2016,“Pilots’ strike clouds Kenya Airways plans to raise flight frequency.” 2022, -“Africa’s aviation industry faces hard times.” 2021 – “Kenya Airways lame re-entry with fewer flights, strict rules” 2020, – “Trouble continues to follow Kenya Airways” 2021, – “Kenya Airways reschedule flights due to lack of spare parts” – 2023, -“Kenya Airways sells more aircraft in cost-cutting efforts” 2022, -“Kenya Airways returns to fuel hedges to drive costs lower.” 2022, and more…

These headlines are often troubling because Kenya Airways, in the global aviation economy, used to be described as the pride of Africa. But troubling as they’ve been, these headlines have never read “Kenya Airways shuts down” or “Kenya Airways declares bankruptcy”.

They are still operational, though tumultuous in the face of embarrassing situations such as fuel shortages, spare parts unavailability, staff retention, high staff turnover, and other ridiculous challenges.

The airline’s survival can be attributed, in part, to its capacity to adapt to changing circumstances and keep going even when faced with challenges.

Kenya Airways pioneered innovation by incorporating new technology and improving its offerings to meet the changing demands of its clientele. The airline was one of the first in Africa to offer mobile check-in, onboard Wi-Fi, and in-flight entertainment systems. In addition to enhancing the traveler experience, these innovations assisted the airline in staying ahead of the curve in a sector that was changing quickly.

Due to their struggles, they were privatized in 1996 to improve operational effectiveness and pursue strategic investments. As a team, they strengthened their position in the competitive aviation industry through strategic alliances with major international carriers. They adhered to global aviation standards to improve operational skills and customer experience. The COVID-19 pandemic led to operational modifications, health and safety protocols, and alternative revenue streams. However, cost-cutting measures were implemented to boost the bottom line.

On the customer service front, to accommodate the changing needs and demands of travelers in the aftermath of the pandemic, the airline has been reevaluating its offerings, exploring novel digital technologies, allocating resources towards environmentally conscious aviation, and broadening its collaborations with Virgin Atlantic and Delta Airlines.

Additionally, KQ showed an incredible ability to adapt to shifting global trends and market situations. In response to mounting competition from low-cost carriers and evolving consumer preferences, the airline modified its business model, increased its route network, and forged strategic alliances to stay relevant and competitive.

Before his lengthy tenure with KQ came to an end, Naikuni disclosed that demand was the only factor in the company’s choice to expand its service offerings to several international locations.

“All we were doing was meeting a need. Someone obtains a passport and foreign exchange, and they subsequently have the desire to travel and look for opportunities.”

That was the driving force for their international expansion.

“At the time, Africa’s manufacturing sectors had collapsed, so you had to fly to get goods in for potential trade. Kenya Airways recognized the chance to offer convertible aircraft. We felt compelled to help people who wished to trade in China after seeing that there were more business prospects in China than Western propaganda had led us to assume” he said.

Titus added that although most of their destinations were African countries given that was the initial intention, they were quick to recognise China’s rising influence on intercontinental trade.

“We saw over seven hundred thousand passengers a year going to China from Africa. We recognized this opportunity and decided to realign our strategy. It has made things much easier and opened up regional trade.”

As it looks to the future, the airline is tenacious and constantly realigns plans to put itself in a position to uphold its heritage of excellence and set new standards for innovation in the aviation industry. To ensure its future, KQ is dedicated to evolving with the times and redefining itself as often as required.

Richard Quest of CNN commented, “From its modest start, the airline aimed to make a name for itself in a field dominated by well-established behemoths.”

Ethiopian Airlines takes over as the leader from Kenya Airways.

Despite their efforts to stay relevant, reports in 2019 revealed that Ethiopian Airlines, their biggest rival, had surpassed both KQ and South African Airways to become the continent’s largest airline in revenue and profit. When Kenya Airways began to look bad between 2015 and 2019, Ethiopia Airlines gained momentum.

Founded in 1945 as a joint venture with the now-defunct US carrier Trans World Airlines (TWA), Ethiopia Airlines has progressively evolved into one of the continent’s top airlines. They doubled their fleet to 120 in 2010 as part of a 15-year expansion strategy. However, the airline has developed quickly since then, and last year it revised that goal to 150 or more by 2025 whereas KQ is down to 34.

It exceeded the 100-mark in two significant categories in 2023: the quantity of aircraft operating (108), and the number of destinations served (113).

Ethiopian Airlines is not the subject of this article, although it is noteworthy how big of a competitive edge they have over their main rivals in Kenya.

Adherence to global standards

Membership in the International Air Transport Body (IATA), a global airline trade body that advocates for industry standards and safety procedures, is held by both KQ and Ethiopia Airlines. As a recognized training facility, Kenya Airways is an authorized training school for hazardous materials and an IATA Regional Training Partner.

 

In contrast to the industry average of 0.19 fatalities per million flights in 2018, IATA stated in November that there had been “two years free of any fatalities on any aircraft type” in Africa, including KQ.

In addition, Kenya Airways is a part of the African Airlines Association (AFRAA), a non-profit organization that represents airlines in 49 African member states and plays a significant role in the continent’s aviation industry. AFRAA is primarily concerned with lobbying for African airlines, safety, and commercial collaboration.

The airline’s membership and participation in these two regulatory institutions is a sign of their commitment to following the standards maintained by the industry worldwide.

Current CEO, Allan Kilavuka’s recovery plan

The most celebrated in the airline’s history as Managing Director and CEO was Titus Naikinu. While some claim he was fleeing a prediction of some future difficulties for the airline when he retired from his long devotion to KQ, others have contended that the executives who succeeded him led extremely poorly, driving the institution into debt.

In between Naikuni and Kilavuka were two more CEOs, Sebastian Mikosz and Mbuvi Nguze.

Allan Kilavuka succeeded Mikosz as Group Managing Director and CEO of the airline in April 2020. What an odd time to accept an appointment like this?! The global health scare, the grounding of aircrafts, the suspension of travel—cargo transports exclusively. He could have declined knowing the challenges he was about to face, but maybe he was a guy with a plan.

Kilavuka, who took over from his predecessors, inheriting poor financials, gloomy days for travel and a deteriorating brand image, spent the last three years strategizing with his team and been discussing in numerous interviews his strategy to steer KQ back towards expansion and recovery.

“Our financial expense issue is one that can only be resolved by recapitalizing the company. He told Spice FM’s The Situation Room hosts Eric Latiff, Ndu Okoh, and CT Muga, “There is nothing else you can do.

He was of the expert opinion that the airline would stay on this “same trajectory” of not being able to report profits for at least ten more years before they could gradually catch up if new cash was not infused into their operations sooner.

Hammering home their “very, very strong” and “very compelling” fundamentals, Killavuli claimed they were wooing investors in the Middle East, China, and the United States.

“We want to raise more than a billion dollars. We would need to begin expanding and pay off our loans as soon as we received this money.

He said such things in most of 2023, amid speculations by Kenyans that they were getting ready to sell the National carrier to the highest bidder.

Allan who never outrightly denied the veracity of these speculations, said in many interviews the airline’s leadership is in talks with “targeted and specific suitable investors” who would be able to provide them with the money infusion they require. He acknowledged in several interviews that they had increased their shares and sold some already.

 

First operating profit for KQ in seven years record in March 2024

The PR department has recently declared of Kenya Airways declared the airline’s first yearly operating profit in seven years in a statement dated March 26, 2024.

Making constant efforts towards their recovery and turnaround startegies, Kenya Airways’ operating profit for the year ending December 31, 2023, increased by 287% from the operating loss of Ksh 5.6 billion the previous year.

A 53% increase in overall sales, the Group ended with Ksh 178 billion. This is mostly due to an incredible performance of only 2% below pre-pandemic levels and a 43% increase in passenger numbers over the previous year.

Below are the Financial Performance highlights reported by the airline

• 287% growth in operating profit of Ksh 10.5 billion compared to an operating loss of Ksh 5.6 billion in the prior year.
• The Group’s total revenue increased by 53% to close at Ksh 178 billion.
• Turnover was higher by 53% as a result of higher passenger numbers and an increase in capacity deployed.
• The Group reported a 37% increment in total operating costs despite a 44% increase in capacity deployed. This is mainly attributed to increased operations as the Airline bounced back from the Covid-19 impact.
• Direct operating costs increased 48% in line with the increase in capacity.
• Fleet costs were lower by 47.5% due to fleet rationalization.
• Overheads increased by 22% due increase in employee costs as well as foreign currency losses caused by the devaluation of the Kenya Shilling against major world currencies, especially the US Dollar.
• Loss after tax reduced by 41% to Ksh 23 billion from Ksh 38 billion.

 

 

Beyond the profits declared

The leaders of the airline have been holding investor events to show that their efforts to improve profitability are working. This is part of a turnaround strategy that has been ongoing for some time. There is speculation among the Kenyan people that the national carrier may be sold off, but this is unlikely as the government recognizes the importance of the airline to the country’s identity. However, negotiations with investors could be challenging if they see the airline’s financial struggles and take advantage of the situation.

During the investor event, the company’s CEO explained to potential investors why their financial situation has improved. (This improvement being discussed as you see in the highlights above are still heavy on losses on the general outlook of their financials). The airline focused on enhancing the customer experience, operational excellence, and cash conservation. As a result, their On-Time Performance (OTP) increased to 76%, making them the second most efficient airline in Africa. They also launched a loyalty program and redesigned their website to better serve customers.

Overall, the airline’s management is working to demonstrate their operational sustainability and reassure investors. They have implemented various initiatives to improve their financial situation and enhance the customer experience. While there is speculation about the potential sale of the airline, the government is unlikely to go through with it due to the airline’s importance to the country. “The company also took advantage of opportunities to increase the much-needed revenues by stepping up its scheduled operations as well as through passenger charters,” he said. Among the other things the management did were form alliances with other airlines and implement cost-cutting steps.

The 2023 performance was a significant turning point in the Group’s turnaround plan, even though it resulted in foreign exchange losses of Ksh 24 billion on loans, leases, other monetary items.

The airline’s loss before tax improved from 38.3 billion in 2022 to Ksh 22.7 billion. The leaderships’ goal is to ensure Project Kifaru’s successes and conclude the capital restructuring plan to lower financial leverage and raise liquidity.

“Going ahead, our main priorities are to commit ourselves to promoting creativity, developing alliances, and developing an excellent culture to make sure Kenya Airways achieves unprecedented success” Mr. Kilavuka said.

“We will also keep working with the government to recapitalize the company in order to give Kenya Airways a solid foundation for future expansion. As a significant investor in Kenya Airways, the Kenyan government has declared its ongoing strong support for the operational and capital structure optimisation process of the company. It is actively involved in the transaction process and plans to continue to be a significant shareholder in the company.

The incredible fortitude with which “Kenya Airways” overcame severe financial difficulties and emerged with a year-end profit highlights the flexibility and tenacity ingrained in their basic principles. Notwithstanding heavy debt loads and unheard-of levels of uncertainty, KQ showed strategic vision, methodical cost control, and a dedication to operational effectiveness. This is a classic Business school case study!

For my part, without solid evidence of their mismanagement, I am slow to write out the accomplishments of the two CEOs prior to Allan. But I will undoubtedly reward the employees who persevered through the difficult times and are helping to implement the recovery plans.

 

Credits: KQ Pride Center, Website: Kenya Airways, Ethiopian Airlines, Business Daily, AlJazeera, CNN, BBC, Ghana Web, IATA.

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