Ideas & Debate
Suspending West Africa flights not good for KQ shareThursday August 14 2014
It will not be good news for shareholders if Kenya Airways is coerced into suspending its flights to West Africa.
Kenya Airways’ share price has been ailing for some time now. In fact, the stock is down 23 per cent year-to-date and continues to compare unfavourably to overall market performance (with the NSE All-Share Index having gained 13 per cent year-to-date).
It’s all to do with the airline’s wobbling macro-fundamentals.
Kenya Airways flies to 36 African destinations, out of which 16 are West African destinations (and accounting for 44 per cent).
It operates nearly 44 flights weekly to West Africa out of which Nigeria, Liberia and Sierra Leone — the three Ebola-hit countries — account for about 20 weekly flights. Nigeria alone has 11 weekly frequencies; seven and four weekly flights to Lagos and Abuja respectively.
These 20 flights a week are almost half of weekly frequencies to West Africa. Additionally, West Africa is also one of the high-margin markets. But let’s face it, there a number of variables that global airlines, including Kenya Airways, have to deal with on a daily basis in the course of their operations—variables that, most of the time, are beyond management control.
Such variables as political unrest, global interest rates (which have a direct bearing on foreign currency borrowing costs) and global exchange rates (which hurt revenues) negatively impact financial health of the global airline industry.
And now Ebola.
Just like the other three variables, it is beyond Kenya Airways’ control and can significantly impact its financial health, even if the West African flights are suspended for just two days.
At the end of the day, Kenya Airways has to balance its three core goals: service to customers, create wealth for shareholders and play the role of Kenya’s strategic resource.
Most of the time, these three goals are always in frequent conflict with one another. Right now, literally, everybody is expressing displeasure at Kenya Airways’ continued operations to Ebola-hit West Africa.
MPs have termed the airline’s continued plying of the routes, especially when such major international names like British Airways and Lufthansa have stopped operations to affected countries, as “irresponsible”.
But the truth is, Kenya Airways is not wholly State-owned and does not enjoy any State subsidies and neither does it enjoy any form of tax-waivers or fuel cost subsidies. Daily, it battles the global market’s competitive forces, just like any other business.
Therefore, drawing a comparison between Kenya Airways and either a European, American, the State-owned Ethiopian Airlines or South African Airways is like comparing apples and oranges.
Secondly, it is not clear yet how and when the Ebola outbreak in West Africa will be fully contained hence flights could be grounded for days, weeks or even a few months.
So, in calling on Kenya Airways to suspend nearly half of its high-margin flights someone should, ideally, be ready with some form of compensation. Otherwise, its stock price will continue being more vulnerable in the coming weeks.