KQ struggles to remain in business

The premier airline recorded a profit of KES 345 million [US$3.8
million] for the year ending March 2003, down from KES 868 million
[US$9.6 million] the previous year, while operating expenditure
increased from KES 11 billion [US$120 million] in 1999 to KES 26.6
billion [US$296 million] last year, or 97 per cent of the turnover.

It is against this background that the airline has embarked on a
restructuring process, which includes the painful exercise of downsizing
of staff. Significantly, the airline has also embarked on an ambitious
expansion and modernization plan to achieve its vision of becoming a
World Class airline network by 2005. The move is aimed at entrenching
Kenya Airways as Africa's premier carrier.

However, the recent fall in airline profitability is not unique to
Kenya Airways. It is worth noting that the global air travel industry
was already reeling from excess capacity and global recession in 2001, a
situation that was exacerbated by the September 11 twin terror attacks
on the World Trade Centre and the Pentagon. Notably, World Class
airlines such as Swissair, United Airlines and Sabena swiftly filed for
bankruptcy.

But global factors aside, Kenya Airways' profit dropped from KES 2.7
billion [US$30 million] in 2000 to KES 1 billion [US$11 million] last
year, largely due to the November 28, 2002 bombing of the Paradise Lodge
in Mombasa and the subsequent travel advisories, the war on Iraq and the
onset of SARS in the Far East, which delayed the commencement of the
Bangkok-Hong Kong flights.

Besides, the airline had to contend with a ban on its flights to
Cameroon [now lifted], trouble with hard currency-starved Zimbabwe and
political instability in a major African destination of Abidjan, Cote
d'Ivoire.

The restructuring process - which began in early October - saw five
directors sacked in just one day. Without mentioning the figures
involved, the airline's Chief Executive Mr Titus Naikuni says he hopes
to recoup the funds spent in the job cuts within 12-18 months.

Another measure the airline has adopted is absorption of the
loss-making domestic franchise Flamingo Airlines, with its 66 employees
into the main airline, with the casualty being Flamingo's Managing
Director Mr Johan Borstlap.

The airline, however, is set for a major bruising court battle with its
employees, if one of the reports by an international consultancy firm is
implemented. The Mckinsey report- prepared by the Philadelphia-based Hay
Group Consultancy- recommends that a third of the airline's 3500
workforce be sent packing. This is bound to compound matters for the
already litigation prone carrier. The airline is known to have a long
history of legal tussles with retrenched employees, a factor that has
posed an indirect threat to its increasingly besieged profit base.

During its 1996 privatisation, the airline retrenched 960 workers, who
subsequently moved to court and were awarded KES 880 million [US$9.7
million] in compensation. Later, the same year, the court ordered the
airline to pay KES 39 million [US$433, 000] to the 11 flight engineers
it had declared redundant in 1993.

But more recently, the airline fired 32 workers over alleged
connections to drug trafficking and announced the same to the public.
The employees promptly sued, seeking millions of shillings in damages
and compensation, a case that is still pending in court. In spite of the
legal tussles, continued staff reduction cannot be ruled out as the
airline needs to accommodate 80 well-trained pilots over and above the
present 170, to match its expansionist scheme.

Despite a nosedive in Kenya Airways' profits, it remains one of the few
formidable airlines on the continent, with an enviable network of
partners, along with South African Airlines. Kenya Airways boasts
partnership with its 26 per cent shareholder but loss-making KLM, which
has teamed up with Air France.

The airline - code-named KQ - has also formed alliances or code-sharing
arrangements with a number of airlines in Africa, Asia and Europe. The
airline is also currently contributing to the development of Nairobi's
Jomo Kenyatta International Airport with a view of transforming it into
a premier hub on the African continent.

The airline, which launched direct flights to Bangkok and Hong Kong in
September said it intends to increase revenue by opening up new markets
in Africa and increasing flight frequencies to Nigeria, Cote d'Ivoire,
Ghana and the Far East. "If you look at Africa, we are not so much in
Francophone Africa. There are a lot of African countries we haven't gone
to", said Mr Naikuni.

But judging from the current market trends, it is clearly evident that
Naikuni and his team will have to work extremely hard to restore the old
profit margins.