How to get it right – or wrong: A tale of three airlines

Oct 2, 2007

The contrasting fortunes of three African airlines – Kenya Airways, South African Airways and Nigeria Airways - provide a salutary lesson for Africa’s aviation and political leaders.

Evidently, getting it right in the highly competitive, global airline industry depends on key factors such as a sound business plan, shrewd management, competent staff, no Government interference in commercial decisions, the discipline of the private sector, the careful selection of strategic partners and a lot of luck. 

Kenya Airways has come a long way from the dark days of the 1980s and early 1990s when it was almost insolvent and was struggling to survive. The Government of Kenya bit the bullet and decided to genuinely turn the national airline round with the help of Speedwing, the British Airways consultancy company. 

Once the airline had been put on a stronger footing in 1996, it attracted equity investment from KLM Royal Dutch Airlines, along with management and technical support. Today, Kenya Airways operates a fleet of modern technology aircraft, has a growing African and international route network, impressive financial results and is delivering value to its demanding shareholders.

 South African Airways (SAA) is Africa’s largest carrier. It has a long track record of achievements and is no pushover. Its vision is to be the carrier of choice in the markets it serves. It is aiming to be at the forefront of global airline standards and to be the airline that brings the world to Africa and takes Africa to the world, according to its Chairman, Professor Jakes G. Gerwel. 

However, SAA is currently grappling with major challenges which are likely to have a profound impact on the nature of its future existence and direction. It is being challenged by stronger carriers from Europe and the Middle East, and by aggressive low-cost carriers at home. It has been weakened by long-running financial problems, a high turnover of senior management and a depletion of its technical and operational staff. Its attempts at regional co-operation within Africa have not been as successful as they should be. In addition, according to Professor Gerwel, the airline’s financial results have not met the expectations of its Board or shareholders.

 Under Khaya Ngqula, its President and Chief Executive Officer, SAA is currently implementing a fundamental restructuring plan aimed at right-sizing the company and returning it to profitability as soon as possible. The airline’s management team is being assisted by the US-based Seabury Group which has played a key role in the restructuring of several major airlines, including US Airways and Air Canada. The restructuring has involved tough decisions regarding the airline’s workforce, fleet and strategic direction. 

Although it is too early to fully assess the success of the on-going changes at SAA, a ray of hope is evidenced by the small, net interim profit recorded for the six months ending September, 2007. The carrier posted a profit, before tax and restructuring charges, of R135 million (South African Rands) from airline operations. This represents a significant turnaround from the R650 million net loss the airline made during the comparative six months period ending September, 2006. The net profit after restructuring charges amounted to R80 million. 

Khaya Ngqula says that the positive interim financial performance shows that the airline’s restructuring programme is starting to pay off, with the growth in operating costs beginning to slow and revenue showing good growth. “We still have a long way to go as the interim results reflect a profit margin of 1.2% in comparison with our target profit margin of 7.5% which we need in order to return to profitability on a sustainable basis,” says Ngqula. This note of caution is supported by SAA’s acting Chief Financial Officer, Clive Else, who points out that a significant portion of the one-off restructuring costs will be incurred in the second half of the financial year. Consequently, a net loss after finance charges, tax and restructuring costs is expected to be recorded for fiscal 2007-2008. 

In the case of Nigeria Airways Limited, in 2004, the Federal Government of Nigeria decided to liquidate the loss-making national carrier rather than to first restructure and then partially privatise it, like Kenya Airways. This was a very controversial decision, the ramifications of which are still being felt today. Nigeria possesses some of the most profitable international routes in the global airline industry but, for a multitude of reasons, Nigeria Airways was unable to capitalise on this market. Industry analysts have cited gross mismanagement and constant interference in the airline’s commercial affairs by some Government officials - over many years - as key reasons for the carrier’s eventual downfall.

 In September, 2004, the Government appointed UK-based Virgin Group as the strategic investor and technical partner in the new flag-carrier called Virgin Nigeria Airways. The Government agreed to sell a 49% equity stake in the new Nigerian airline to the Virgin Group for US$24.5 million, somewhat of a bargain for the UK company, considering that KLM Royal Dutch Airlines paid US$29 million to the Government of Kenya in 1996 for a 26% equity stake in Kenya Airways.

 Virgin Nigeria is trying to fill the vacuum created by the liquidation of Nigeria Airways and to its credit has introduced several innovations which have helped to move the Nigerian airline industry forward. It faces strong competition from other carriers such as Aero, Arik Air, Bellview Airlines and Chanchangi Airlines, in the now more liberalised Nigerian airline market.

 The difficult job of liquidating Nigeria Airways fell to Prince Adebajo A. Babington-Ashaye, head of Babington Ashaye & Co, one of the country’s leading insolvency practitioners. He founded Babington Ashaye & Co, a firm engaged in Auditing, Taxation, Management Consultancy and Insolvency, in 1985. 

To the great relief of the former workers and pensioners of Nigeria Airways, Nigeria’s new Head of State, President Umaru Musa Yar’dua, recently confirmed that his Government will pay the outstanding pensions and gratuities owed to the airline’s former staff. Similarly, the creditors of Nigeria Airways are cautiously optimistic that further payments will be made as more assets of the airline, such as its wholly-owned subsidiaries, are realised.

Kenya Airways has made great strides in recent years but its management is well aware of the precarious nature of the airline industry. Success today is no guarantee of prosperity tomorrow. Indeed, the strong profitability Kenya Airways recorded in the financial year ending 31 March, 2007, was under pressure in the six months up to September, 2007. Increased competition, high fuel prices and the adverse impact of a weaker US dollar took their toll. 

On the plus side, previous problems such as the infrastructure difficulties encountered at the airline’s hub, Jomo Kenyatta International Airport (JKIA), Nairobi, and the shortage of qualified pilots and engineers have been addressed, says Titus Naikuni. The rehabilitation of JKIA is currently underway and the implementation of an ab initio training programme for pilots and engineers has commenced.


– By Nick Fadugba
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