On the sidelines of the 2022 US-Africa Summit, President William Ruto held a meeting with executives from Delta Airlines, the largest carrier in the US by market value, where he sought to sell the government’s 48.9 percent stake in Kenya Airways (KQ).
This speaks to two things: first, the government has realised that it can no longer underwrite Kenya Airways for eternity and two, there is a conflict between the perceived strategic value of KQ and its return to investors (and the government is now willing to sacrifice the former).
That said, I do not see Delta, under current circumstances, agreeing to acquire the Government of Kenya’s stake in KQ. First of all, Delta is a very profitable airline. For the nine months that ended September 2022, it delivered an operating income of $2.19 billion (about Sh274 billion), representing a strong post-pandemic recovery (pre-pandemic net profit was $4.8 billion in 2019).
These are airlines that take the bottom line very seriously because of the many stakeholders who keep watch of its financial health daily, led by Wallstreet. And Delta has learnt the art of survival in the tough aviation environment. Broadly, to survive and stay profitable, airlines attempt to manipulate three main variables — cost, yield and load factors.
Simply put, the cost of providing a seat per kilometre needs to be less than the revenue per set per kilometre (and this is where the magic lies). KQ, on the other hand, has been a money pit and hasn’t made a profit in nearly a decade, which is down to the cost structure.
In fact, to return its balance sheets to respectability, Kenya Airways would have to achieve profit margins that are almost unprecedented in its history and sustain those margins for up to a decade.
Beyond the numbers, Delta doesn’t seem to have much experience in African routes. It flies long-haul to only five destinations in the continent, namely, Cape Town, Johannesburg, Accra, Lagos and Dakar. If it were to increase its coverage of Africa, it would probably consider codeshare agreements.
These are commercial agreements that allow shared access to each other’s routes and permit each carrier to market the others’ routes as its own. One Delta flight, for instance, might also have a KQ flight number and a KLM flight number. It’s an especially appealing arrangement to frequent fliers who prefer to build up miles on one airline while flying all three.
Finally, the infrastructural constraints at the Jomo Kenyatta International Airport (JKIA) have also meant that KQ doesn’t get the best out of its hub-and-spoke structure. The government erred in shelving the planned construction of a new terminal (the Greenfield project) as well as a second runway. A lot has been and is at stake.
Geographically, Kenya is a premiere strategic point of entry. This is why the modernisation of JKIA infrastructure is overdue. The airport urgently needs a new modern terminal, a second runway and sufficient parking spaces, able to handle some of the latest aircraft, such as the double-decker Airbus A380.
Under the defunct Project Mawingu, JKIA capacity forecast back then had projected that the completion of Greenfield Terminal Phase 1 would raise the airport’s capacity to 16 million passengers annually, with Phase 2 raising it further to slightly over 20 million passengers annually.
In essence, KQ offers very little value proposition to Delta. And of course, for such a deal to go through Delta would have to seek significant concessions, including the government underwriting all of Kenya Airways’ liabilities. But that would be it.
In the absence of a strategic investor, Kenya Airways doesn’t have to be big to survive, of course. Smaller carriers continue to play a vital role. In his Vision 2050 speech, former IATA director-general and CEO Giovanni Bisignani said aviation “will be a consolidated industry of a dozen global brands supported by regional and niche players”.
The fact that the smaller low-cost carriers have been able to mature this far says as much about what’s wrong with the majors as it does about what’s right with the low-cost counterparts.
The writer is an investment analyst. @GeorgeBodo
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