Kenya Airways: A Trailblazer in the African Skies

Kenya Airways has finally matured into Africa's first world-class airline. While taking delivery of Africa's second Boeing 777-200 ER, Africa's best airline for 2004 introduced its new corporate colors and logo signaling its new status.

Renovation

With the recent renovation and expansion program of its Nairobi hub at the Jomo Kenyatta International Airport (JKIA), the Kenyan flag carrier has invested heavily in new technology and modern fleet. April marked one year since the reorganization of Kenya Airways that resulted in the formation of the airline's cargo division - Kenya Airways Cargo (KQ).

KQ was formed after a share buyout by Kenya Airways of stakes from Martin Air and KLM Royal Dutch Airlines, with a 20 percent stake each in KenCargo Airlines. Kenya Airways, however, maintains a strategic and commercial cooperation with the pair. Managing Director Titus Naikuni, KQ, says the formation of Kenya Airways Cargo was part of the ever-changing demands of the global aviation industry. "Our fleet expansion and modernization program will continue to enhance the cargo capacity needed to grow our cargo business into the future," says Naikuni.

Preliminary unaudited cargo revenues show that the division has made remarkable progress, reporting a revenue increase of 47 percent, nearly Kenya Shillings 4 billion (US$50m), compared to Kes 2.8 billion (US$35m) for the previous financial year. Haulage in tons has also increased as the business registered unprecedented demand due to a boom in regional trade. According to the head of cargo at Kenya Airways, Guy Mertens, a lot of this increase is attributable to the growing balance of trade between Africa, the Middle East and Asia.

The airlines' Commercial Director Hugh Fraser says the closer cooperation between the airlines' commercial department and the new cargo division has been fruitful, leading to aircraft upgrades from the Boeing 737 to the modern wide-bodied Boeing 767 on the major infra-Africa routes such as Lusaka, Entebbe, Harare and Kinshasa. "Our customers have indeed acknowledged this trend and our cargo results are in line with our expectations," says Fraser. He adds that the increased cargo capacity from the larger Boeing 777 would enhance the airlines' capability to operate freighter services for feeding and de-feeding through Nairobi and strengthen Nairobi as the preferred cargo hub in Africa.

Kenya Airways has distinguished itself as a regional airline within the East and Central African region.

With a market share of about 6.8 percent based on total cargo capacity into Europe and approximately 22 percent based on capacity (only scheduled carriers), KQ is quickly establishing itself as a major player in Kenya's cargo industry, the largest and most lucrative cargo market in Africa. While capacity exists for cargo business, there is a challenge for the airline. Mertens says most traders opt to transport their merchandise as excess baggage, meaning cargo competes with this excess baggage, but traders don't mind paying more for it.

This is occasioned by increased insecurity at the airports, particularly in Western Africa. Several traders have been victims of pilferage, and this has caused them to prefer to pay almost double the price for their excess baggage, rather than ferry them as cargo, where they stand to save more than $2 on each kilogram.

To enable the airline to compete with major airlines such as British Airways, Lufthansa and Emirates, the cargo division has moved to strengthen its business by adopting new technology and recently invested in a cargo automation system.

The system, developed by Cargolux, is known as eChamp. Mertens says that customers will be able to log into the Kenya Airways Cargo website and monitor the location of their shipment. It is expected to reduce the workload by hastening processes within the cargo division. This, he says, is a key differentiator for modern cargo freighting.

Once this system is in place, competitiveness is assured. This is one of the driving factors pushing the cargo division to be at par with the passenger divisions' drive to meet world-class standards. A strategy that has made Kenya Airways a leading contender for the Sky Team alliance.

Sky Team

Sky Team is a global airline alliance partnering Aero Mexico, Air France, Alitalia, Continental Airlines, CSA Czech Airlines, Delta Airlines, KLM Royal Dutch Airlines, Korean Air and Northwest. Through one of the world's most extensive hub networks, Sky Team offers its 341 million annual passengers a worldwide system of more than 14,000 daily flights covering all major destinations. "If we join Sky Team, it will open up immense opportunities for us. It means we can book our passengers in Nairobi to fly almost anywhere in the world," says Naikuni.

KLM, Northwest and Continental Airlines became full members of Sky Team on September 13 after the merger of two airline groupings - the Wings Alliance and Sky Team.

Fund managers at Africa Alliance of Nairobi say KQ will reap significant benefits once it joins the Sky Team, as this will turn powerful competitors on key routes into allies, allowing the company to exploit significant synergies from cross-selling and expand coverage without risking huge investment costs.

"It will improve geographical coverage, such as to the US, without additional Kenya Airways investments. It will also offer Kenya Airways a valid opportunity to overhaul its safety, maintenance and ground handling procedures in line with alliance procedures," says investment analyst Beth Munga of Africa Alliance. Naikuni adds, "network plans are majoring on Africa especially where KQ can offer value to its potential Sky Team partners."

Cargo Space

In aviation parlance, Kenya Airways Cargo sells belly space to freight forwarding agents. This is the available space left after passenger baggage and excess baggage has been accounted for. Nevertheless, the airline does not limit selling the belly space available on its aircrafts' flights. Extra capacity is obtained by having code-share agreements in place with other airlines on routes that have high demand for cargo space. Mertens asserts that with this extra capacity, Kenya Airways is able to generate approximately $1 million a year in extra cargo revenues.

In line with increased economic activity, aviation experts project the use of aircrafts to ferry cargo, to grow exponentially in the coming years. The International Air Transport Association (IATA), Boeing and Airbus last year did a study that estimated air cargo to triple in the next 20 years. Boeing expects the world market to grow 6.7 percent annually through 2015 fuelled by many factors, including economic growth, the relaxation of international barriers, increasingly time-sensitive product delivery schedules, increased just-in-time (JIT) inventory management systems and increasing levels of international commerce.

Benefits

Kenya Airways faces a huge potential for cargo business in two ways. First, the airline has invested more than $400m in building its fleet capacity through the acquisition of the bigger B767s and B777-200ER aircraft. The new aircraft will serve the Lilongwe, Lusaka, London and Amsterdam routes, which generate a high volume of traffic and baggage.

Secondly, with the development of the Nairobi Cargo Center, Nairobi is increasingly playing the role of a cargo hub as much as it is serving as a passenger hub for the African sub continent. The 11,700 square meter cargo handling center, put up at a cost of more than Kes 1.5 billion ($18.5m) in 1999, helped boost cargo capacity at JKIA by as much as 70,000 tons. The cargo center, with a maximum capacity for up to 97,000 tons, was built to help provide efficient, high quality and competitive ramp services, cargo handling and logistics at JKIA.

Mertens says that 50 percent of the airlines' cargo traffic from Europe, 60 percent of its Dubai and Mumbai originating cargo and 80 percent of its Far East cargo is transiting through Nairobi. While this creates a lot of transit business into the continent, it also poses a huge challenge for the airline.

Even more crucial, however, is the need to expand the cargo handling capacity at JKIA. If this does not happen in tandem with the rise in cargo movements, JKIA is likely to experience congestion. Mertens estimates that the resultant excess tonnage would top 20 tons a day. The ensuing congestion would create a bottleneck situation in Nairobi due to lack of capacity into West Africa.

As cargo freight volumes grow, the general theme is that freighter operators will respond to the challenge of profit by using larger aircraft in order to drive down unit costs. In order to cope with market demand and growth, additional freighter aircraft will be required.

  • Boeing forecasts that the world's freighter fleet will increase over the next 20 years from 1,775 to 3,078 aircraft.

  • IATA notes that this expected growth in the air cargo industry will require not only additional aircraft, it will also require expansion of airport cargo facilities, improvements in cargo handling capabilities, advanced communications technology and a more liberal approach to the regulation of air cargo operations.

In Africa, air is the preferred mode for shipping urgent documents, automobile electronic components, mobile phones, high fashion apparel, pharmaceuticals, optics and small manufacturing equipment, along with many perishables such as seafood, fruits and vegetables and fresh cut flowers. Kenya Airways has shrugged off the gloom that has pervaded the international aviation industry since the leveling of the World Trade Center in the September 11th terrorist attacks which badly squeezed profit margins in the travel industry. The firm has recorded a significant 324 percent profit, a four-fold increase in half year net profit to Kes 1.51 billion ($18.9m).

A successful restructuring program initiated by McKinsey, a reputable global consulting firm, has buoyed the airline's profit margins. The McKinsey study identified cost cutting opportunities that could generate between $40m and $50m in cost savings. Since the implementation of the study in October 2003, the airline has managed to cut down costs by up to 70 percent.

Kenya Airways is set to take the delivery of two more B777s later this year that are expected to fly the long-haul markets in Europe, Asia and the US. If the airline continues growing revenues at its historic, ten year, growth rate of 13 percent, its revenues could top Kes 55 billion ($678.5m) over the next five to ten years. Route expansion into Bangkok and Hong Kong and soon Shanghai, China, and the expected upgrading of the airlines' hub at JKIA to a category 1 status by the US Federal Aviation Authority (FAA) that will allow the airline to fly directly to US airports are some factors that could work in the airlines' favor.

Nairobi-Miami Route

One route that could be a major attraction and has elicited a heated debate between the airline, the Kenyan government and US aviation officials is the Nairobi-Miami route. According to a study prepared for the Miami-Dade Aviation Department by SH & E International Air Transport Consultants, the Nairobi-Miami route has the potential of generating $40.7 million in passenger revenues. These forecasts are based on the assumptions of KQ operating a 300-seat Boeing 777 aircraft on three round trips non-stop.

While the Kenyan government and the Kenya National Chamber of Commerce and Industry (KNCCI) are working in conjunction with the Miami-Dade Aviation Department to seek direct air links between Nairobi and Miami to enhance trade and tourism, the KQ management have categorically declined to fly to Miami due to what Naikuni says is a "very saturated market" and compared it to knowingly "putting your finger in the mouth of a lion."

During a recent visit to Kenya for talks on flights to Miami, Miguel Southwell, the assistant aviation director at the Miami-Dade Aviation Department said that they hope to collaborate with the Kenya Civil Aviation Authority (KCAA) and JKIA to build a long-term sister-airport relationship between JKIA and Miami International Airport.

The arrangement is also expected to provide an opportunity for Kenya to export to the US a wide range of products that are eligible for entry into the country under the African Growth and Opportunity Act (AGOA).

As Kenya Airways takes to the skies as a world-class airline, it remains the only fully privatized African carrier. Whereas several African airlines are invariably weighing down heavily on state coffers and maintained for national pride totter on the brink, none so far has emulated KQ.

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