KQ hold on the region could prove to be its way out of crisis

An Air Uganda aircraft at Entebbe International Airport. After suffering huge financial losses, Air Uganda withdrew from the market last June. PHOTO | FILE 

By MICHAEL WAKABI

In Summary

• With a $200 million rescue package and no immediate alternative to its East African network, KQ can leverage its stranglehold on the region to recover from the crisis.

Kenya Airways’ record $251 million loss, and the impending suspension of services to Uganda by British Airways and Brussels Airlines from Kenya later this year, may have shaken the industry, but is not an indicator of long-term prospects for the region’s air transport industry.

Although East Africa’s recent aviation history is dotted with failed and struggling carriers, analysts say this is merely a reflection of a shifting competitive landscape, external challenges and the internal dynamics of individual airlines.

READ: Kenyan Treasury to probe Kenya Airways over loss

As Kenya Airways and the two European carriers shrink their East African presence, Fastjet is enjoying rapid growth and expansion on its Tanzanian and regional routes.

With the exception of Kenya and Burundi, annual passenger traffic to Tanzania, Rwanda and Uganda has remained positive.

International passenger traffic through Rwanda crossed the 530,000 mark in 2014, while Tanzania breached the five million mark. Uganda suffered a 3.6 per cent decline to 1.41 million, occasioned by the withdrawal of Air Uganda from the market last June.

Kenya Airways has partly blamed its loss on a decline in the country’s tourism sector through travel advisories by key source markets, the outbreak of Ebola in West Africa last year and fuel hedging gone wrong.

Finance director Alex Mbugua also blamed competition from Gulf carriers, not just for their impact on passenger numbers but also because of their lower fares. The carrier was trapped in a fuel supply contract that saw it spend $347 million on fuel at a time when falling prices would have allowed it a rebate of between 25 and 30 per cent, experts say.

“Their hedge book is twice as large as the current price for fuel, which is trading at below $50 a barrel. This denied them the benefits of falling oil prices,” said one analyst, who added that the effect would have been less had the competitive environment allowed the airline to charge good fares.

This is more or less the situation that has led to British Airways’ withdrawal from Uganda, where despite near full cabins on its direct London-Entebbe service, BA was not making enough money because stiff competition from Middle Eastern airlines had depressed fares.

BA also had to contend with a stringent UK visa policy that has diverted potential growth in traffic from Uganda and Tanzania to new destinations in the Far East.

Brussels is exiting Nairobi because most passengers on its network were destined for Frankfurt, making it more sensible to cede the route to fellow alliance member Lufthansa, which resumes services to Nairobi.

The undoing for Kenya Airways, analysts say, is its unbalanced route network that relied heavily on Africa for revenue. KQ relies on Africa for about half of its revenue, followed by Europe at 22 per cent, 10 per cent each for the Middle East and Asia, and six per cent on domestic routes.

Suspension of flights to West Africa for much of last year took away a large part of the carrier’s earnings.

KQ’s main rival on the continent, Ethiopian Airlines enjoys a more balanced revenue spread between its African, European and American markets. Ethiopian Airlines flies to more destinations in Asia than Kenya Airways.