Deloitte says KQ ignored warning on open sky policy

National carrier Kenya Airways’ management ignored consulting firm Deloitte’s warning that the open sky policy would not favour its ambitious Project Mawingu.

The airline rolled out the 10-year plan in 2011 with the intention of positioning Nairobi as a hub for flights from the East, notably China and India.

The International Air Transport Association’s (IATA) open sky policy came into force in 2010, eliminating the use of government oversight in commercial air services.

These carrier services include passenger, all-cargo and a combination of air transportation as well as scheduled and charter services. Before introduction of the open sky policy, an aircraft could be apprehended or shot down if it flew over an area without seeking prior consent.

Deloitte served as Kenya Airways’ auditors for seven years from March 31, 2004 to March 31, 2010.

Deloitte’s chief executive Sammy Onyango on Wednesday told a Senate committee probing KQ affairs that the airline’s management overlooked advice about the rollout of Project Mawingu.

“We warned the management that the open air policy was going to create competition and that they reconsider the planned acquisition of aircraft,” he said.

The airline had planned to acquire additional aircraft to service new routes in line with its expansion plan.

Prior to the rollout of the plan, the auditors had shared with the company’s management statistics on dropping passenger loads on the routes they intended to expand to.

Deloitte partner Joe Wangai said Africa being the key route for KQ, it was clear that the open sky policy would see bigger airlines come in and eat into KQ’s market share.

With IATA’s new rules in place, there was going to be a shift from the Western to the Middle Eastern airlines, including Qatar Airways and Emirates.

Mr Wangai said Deloitte had warned the Kenya Airways management that the landing slots would become competitive with the introduction of the open sky policy.

“We shared with them how this would impact their operations and our message to them was that they focus going forward, given the new industry rules,” he said.

Mr Wangai, however, told the committee that it was entirely the choice of KQ management to decide whether to heed advice from the auditors or to ignore it.

He said that by the time Deloitte’s tenure as KQ’s auditors ended in March 2010, Project Mawingu was already on the table. Mr Wangai said at the time of their exit no reports of fraud had been brought to their attention.

PricewaterhouseCoopers (PwC) took over the auditing of the airline in March 2011 to March 2015.

READ: Naikuni says he was not behind KQ aircraft deals

PwC assurance partner Richard Njoroge said the Sh25.7 billion loss that the airline posted this year was occasioned by a combination of factors accumulated over the years.

At the beginning of Project Mawingu, a decision was made to increase the number of aircraft but challenges kicked in between that period and the time the planes were actually delivered.

“It takes three to four years before you actually receive the aircraft after placing a purchase order,” he said, noting that it is common practice in the aviation industry.

Mr Njoroge said PwC did not get involved in acquisition of the aircraft and had at the time concentrated on KQ’s rights issue where they acted as the reporting accountants.

Makueni Senator Mutula Kilonzo sought to know how much the airline saved when it retrenched 447 employees in 2012 and hired 517 shortly after. “The benefit of retrenching those employees was not felt in the books of account of 2014,” said Mr Njoroge.

Among the issues that the senators are investigating is staff retrenchment at the airline, which is said to have caused friction between the workers and management.

KQ laid off the employees in 2012, citing the airline’s poor financial performance and declining profitability.

The airline also blamed travel advisories that led to a slump in the tourism industry, as well as runway closures for renovation, for eating into the company’s 2014/2015 full-year earnings.

KQ has, however, been accused of poor management decisions, operational inefficiencies and failure to counter competition.

Preliminary evidence gathered by a Senate Select Committee looking into the airline’s operations revealed that strategic errors led to the near-collapse of Kenya’s flag carrier.