After a restructuring programme aimed at reducing Kenya Airways’ $2bn debt pile, the majority state-owned airline is pursuing a strategy to once again become a competitive African carrier. Under new CEO Sebastian Mikosz, the airline is flying new routes and looking to diversify its revenue stream at its Jomo Kenyatta International Airport hub in Nairobi.
Mikosz was brought in a year ago having led LOT Polish Airlines, before which he worked in banking and private investment. His appointment came after the resignation of former CEO Mbuvi Ngunze. All eyes now look to Mikosz, who has overseen the unveiling of a new route to New York.
The grand unveiling of Kenya Airway’s (KQ) direct flight to New York this October seems to promise a new era for Kenya’s national carrier. What is the significance of this latest route? Is this the beginning of growth and expansion?
It is a symbol but there are two aspects. The first aspect is that we have managed to go through all the formalities; so achieving the departure is behind us. From a symbolic level it’s very positive. For us as an airline, it has created a strong level of emotion in terms of public perception. Now the biggest difficulty is to sell the tickets.
You can reach Nairobi from the US through many hubs, which are run by good airlines with good products. So it’s a very competitive market. But I am confident that this project will be a success, I am confident that we will make it, because there is genuine interest; but I keep reminding everyone that as an airline we need to be extremely agile and flexible and adapt to the market. That’s my strongest message.
We are going to announce five weekly flights instead of daily flights starting from late January to summer. Then we will come back to the daily flights after we have tested the market. Now I have a product, I need to sell.
KQ was reportedly in $2bn worth of debt until last year’s debt-for-equity swap with the Kenyan government and 11 local banks. One year on, has the restructure yielded results? Is KQ on the path towards overall profitability?
We are on the path but we haven’t reached it. The financial restructuring has saved the airline and provided it with significant support; it was part of the healing process and it’s a long process through time. Without it we would simply cease to exist. So we went away and dealt with the danger but we still need to prove that the airline can deal with long-term viability. Overall, we are decreasing the losses and increasing the revenues. We are on the path, but not everything is done. It’s going to be a process of internal change.
The debt-for-equity swap signified confidence in KQ from the Kenyan government and the local banks who held the majority of the debt. How is the relationship with your new shareholders panning out?
The plan is that they can recover what used to be the debt through the growth of the value of the company. The swap was part of a pretty complicated structure and for the moment it is very fresh. One of the key projects I’m trying to achieve is to build a normal relation with the board. I meet with them every week and we discuss priorities. I don’t think they are focused on us repaying anything, they are really focused on us turning around the company. The relation with the state is going well because the state is our biggest shareholder.
Some analysts are critical of African governments for continuing to bail out their struggling carriers, like South African Airways. What case would you make for the continuing development of many of Africa’s previously debt-ridden national carriers?
I’m not critical of this because I worked in an airline that was bailed out. Without the government bailing us out, we wouldn’t have an airline. Point number two is to look at this discussion from a broader perspective. First of all the story of bailing out airlines is the story of the airline industry. It started in the US, which is the biggest market, and is the story of most airlines going through a number of restructuring and bailing out procedures. Then there’s the story of European airlines. There is hardly a single European airline that hasn’t been bailed out once.
There is a strong connection between the competitiveness of the country and the availability of the air network. This is why there will always be the tendency of bailouts, as an airline is essentially the economic blood circulation. Without the airline you will not have a competitive economy. Of course my business model is not to grow an airline and then go back to the government to be bailed out.
The African air market is very small. It represents less than 3% of worldwide traffic. As it builds there will always be protectionism, there will be bailing out because the state will not allow an airline to go under. At the end of the day countries are not in the process of bailing out airlines. They are in the process of building the airline, so it’s going to take time. It’s very difficult to think that suddenly a new airline will be successful.
Even if you look at private investors they need bailing out. The story of Fastjet is a good example. It was a private investment that failed completely.
Can smaller national airlines compete with heavyweights such as Ethiopian Airlines and other global carriers? What lessons can be learned from their model?
This is really a challenge. What the Ethiopian model has shown is that when you create the right finance structure, you protect your airline, and you have consistency, then you achieve success. But they have been around for over 70 years; Ethiopian hasn’t built itself in two years, which is sometimes the expectation. The expectation that buying an aircraft and having passengers means you are successful is not how it works.
Ethiopian Airlines will try and fly 10m passengers this year, so they are two and a half times bigger than us. But there are still 90m passengers flown in Africa so there is room for competition. There are routes and markets in which Ethiopian will not be successful. If having one big player was a showstopper for other airlines, then the market would be frozen and nothing would move.
The government is backing a merger between KQ and the Kenya Airport Authority (which runs Jomo Kenyatta International Airport) so that KQ has full control of the airport. How important is the merger?
It’s absolutely fundamental for an airline and its hub to have an additional revenue stream. That’s absolutely Ethiopian’s model and it’s the right model. We are pursuing a very similar model. So we have our own training centre, we have our maintenance hub with 800 people working, we have our own handling and cargo warehouse. So the model is more or less there, but our problem is scale. We need to grow in terms of scale.
There was a cabinet meeting a week ago where the main topic discussed was the merger. There might be delays in the future, but we are on track and it will be game-changer for Kenya, not just for KQ. If you look at our competition, all of the airlines have all their cards in one hand. It’s the case of Rwanda, Ethiopian, Turkey, Emirates, Qatar and Oman. So everyone that’s in the area and competing with us for traffic from and within Africa has exactly the same model where all the assets are working together and not against each other.
The introduction of the Single African Air Transport Market (SAATM) earlier this year was heralded as a turning point for African aviation. What effect has the market had on KQ so far?
It’s a very nice idea but for me in everyday life running an airline, I encounter all the same obstacles. The state will always need to protect their airlines; that is how Ethiopian got so successful. You need to have a system which completely enforces open skies.
You have to align all the passengers’ rights and all the legal mechanisms through SAATM. So for me it’s a valuable idea but we are nowhere near there in reality. We still have to refer to bilateral relations. So if I want to fly somewhere I don’t refer to SAATM. If I want to fly to Angola I need to talk to the Angolan government. If I want to fly to Rwanda I need to talk to the Rwanda Civil Aviation Authority. So it has not fulfilled as many expectations as when it was announced.
BY Tom Collins
Source: African Business Magazine