Turmoil at Kenya Airways Reaches Climax

 - May 10, 2016, 9:00 AM
A Kenya Airways Boeing 787-8 takes off from Paris Charles de Gaulle Airport in December 2015. (Photo: Flickr: Creative Commons (BY-SA) by airlines470)

Prominent African carrier Kenya Airways (KQ) is languishing in turmoil after reporting spiraling losses for a third year in a row and suffering a labor dispute that forced it to cancel services on April 28.

The persistent financial troubles reached a peak during the 2014-2015 fiscal year, as KQ registered a pre-tax loss of 29.7 billion Kenyan shillings ($290 million), the worst loss the East African carrier that calls itself the “Pride of Africa” ever made. In the 2013-2014 financial year KQ recorded a 4.8 billion shilling ($46.7 million) loss.

In November 2015 the top management of KQ led by chief executive officer Mbuvi Ngunze announced a further loss of 11.9 billion shillings ($115.8 million) for the half year ending September, compared with a net loss of 10.4 billion ($101.2 million) in the same period the previous year. The embattled Ngunze attributed the massive loss to stiff competition from Middle East carriers, volatility of exchange rates, terrorism and travel advisories and fluctuations in fuel prices.

Shareholders of Kenya Airways, including the Kenyan government and KLM, have expressed dismay over the dismal performance. Critics blamed the airline’s woes on questionable fuel hedging deals, dubious routing arrangements and partnerships that led to massive losses of revenue. They also blame shortsighted human resources policy and practices for the industrial unrest that led to frequent flight cancellations, causing inconvenience and a poor reputation with passengers.

The major shareholder of KQ, the Kenyan government, established an inquiry committee that looked into the airline’s crisis. The committee formed by the Senate questioned the managers’ investment and operational decisions, including a controversial fuel hedging strategy, fleet and route expansion, as well as expensive tickets. The former CEO of KQ, Titus Nakuni, retired after 11 years at the helm of the national carrier in November 2014, a few months before the carrier declared its worst financial performance in March 2015. Then-COO Ngunze took the chief executive’s post at the end of 2014.

To revive the ailing airline, Ngunz’s administration announced a turnaround strategy dubbed “Operation Pride,” through which the airline expects to derive at least $200 million in value from increasing revenue and cutting costs. The management has hired international consulting firms McKinsey and Co. and Seabury Group to spearhead revival strategy.

The strategy involves reorganization of routes, downsizing fleet and retrenchment of staff. The national airline cancelled long-haul flights to China and India and leased out its Boeing 777 and 787 jetliners. The management plans to lay off 600 employees, including 36 cockpit crewmembers. The planned job cuts sparked furious protest from the airline’s labor unions. Both the Kenyan government and fellow shareholder KLM backed the  strategy. KLM owns a 26.73 percent stake of Kenya Airways.  

After leasing its 777 and 787, KQ agreed to loan its underutilized pilots to rival Ethiopian Airlines for three years, until the end of the aircraft lease period. The management’s move drew the ire of the Kenya Airline Pilots Association, which called for a strike during the last week of April. A subsequent strike on April 28 paralyzed the airlines operations at its hub in Nairobi, Jomo Kenyatta International Airport, and stranded thousands of passengers.   

“History has uncanny way of repeating itself,” said the Kenya Airline Pilots Association in a statement. “In 2012, a similar exercise was conducted by the same management team. Needless to say, the staff rationalization exercise did not change the company’s trajectory.”

The association, which represents 500 pilots, called off the strike on April 29, after airline negotiators agreed to make some leadership changes by June 1. The association agreed to call off the strike after the airline announced that its group human resources director, Alban Mwendar, would leave the company. The pilot strike also saw director of corporate quality, safety, security and environment Alex Avedi and director for flight operations Captain Paul Mwangi issued forced leave. As part of the truce, KQ’s management suspended its staff rationalization plan.    

Nevertheless, management says its turnaround strategy remains on track, citing successful implementation of initiatives such as the sale and sublease of aircraft, the reduction of waste in catering and renegotiation of some contracts.   

Pilots, on the other hand, said any turnaround strategy amounts to an exercise in futility if implemented by the same management team they claim carries responsibility for the “poor” decision-making that dragged down the airline.