The B787 Dreamliner
The B787 Dreamliner

In Summary

  • Ethiopian Airlines now holds the title of Africa’s largest carrier having enjoyed rapid growth over the past decade.
  • KQ lost the battle to dominate the African skies through strategic blunders in the execution of ‘Project Mawingu’.
  • Ethiopian Airlines flawlessly executed its fleet expansion strategy leading to improved profits and greater passenger and cargo volumes.
  • A series of unfortunate events including strikes by Labor Unions and terrorist attacks in Kenya also contributed to KQ’s dwindling fortunes.

Ethiopian Airlines now holds the title of Africa’s largest carrier. The airline has enjoyed rapid growth over the past decade. Revenues increased 10% to USD 2.4 Billion during the 2015/16 period while passenger numbers increased to 18% to 7.6 million.

Its ambitions extend beyond the skies of Addis Ababa. The Airline has a 49% stake in Malawian Airlines and a 40% stake in ASKY Airlines of Togo. Its acquisition spree has been extended to airlines in Zambia, Chad and the Democratic Republic of Congo where discussions are on-going with aviation stakeholders. Negotiations on ownership stakes of Nigeria’s largest airline, Arik Air, seem to have hit some turbulence and stalled.

The success of Ethiopian is a stark contrast to that of Kenya Airways (KQ). In the beginning of this decade, both airlines had competing goals of dominating the African skies. KQs dream ended in a financial fiasco. To understand these divergent fortunes, you have to go back their strategies at the beginning of the decade.

Strategic Initiatives

In 2011, the clairvoyants at KQ’s Boardroom had a dream. Aptly dubbed ‘Project Mawingu’, the dream was a 10 year master plan charting the flight path of KQ into the aviation powerhouse of the continent. Taking advantage of its East African hub, this trajectory would catapult KQ into a strategic and tactical dominance over the African skyline for decades to come.

At the heart of the nascent ‘Project Mawingu’, was a fleet modernization program that would more than triple KQ’s fleet from 31 Airplanes in 2011 to 107 ultra-efficient medium to long haul planes in 2021. In tandem with the fleet growth, was a route expansion proposition that entailed a doubling of its 55 existing destinations. This would include new and far flung routes to Australia, North and South America.

The sages at Ethiopian were not to be labelled as laggards; they were right behind KQ. According to the Centre for Aviation, Ethiopian’s strategy was similarly impressive but more customer oriented than KQ’s. Their strategy was three fold; generate revenues amounting to USD10 billion per year, acquire a fleet of 70 aircraft and improve its customer service experience. An incisive juxtapose of the two strategies reveals identical ambitions in route expansion and fleet upgrades but divergent in Ethiopian’s goal of improving its Skytrax customer service ranking from three to four stars.

Strategic Turbulence

Shortly after takeoff, KQ’s strategy hit some tempestuous skies. In November 2012, Kenya Airways announced a Sh4.7 billion net loss in the first half of the year. Attributing the loss to declining passenger volumes, the then CEO Titus Naikuni indicated that, “We were unable to predict what was happening in the market place correctly, and this is one of the reasons we had to pull out of daily London flights. We also suspended operations to Rome, Muscat and Zanzibar in order to reduce the loss making routes”. Inability to predict the market place correctly was a startling admission for an airline that had just contracted itself to billions in the purchase and lease of new aircrafts. Which routes would the new aircrafts be deployed to if the lucrative daily London flights were being suspended and operations to other cities curtailed?

According to the Economist Magazine’s 10th December 2012 issue, Mr Naikuni, whilst attending an aviation conference in Johannesburg where he was a keynote speaker, stunned some delegates with an off-the cuff remark when he ‘mooted the possibility of a three-way merger between Ethiopian Airlines, South African Airways and his own carrier. Combined, the three companies would be Africa’s biggest airline, offering about 650,000 seats per week.’ These remarks, coming from a key architect of Project Mawingu, were an early warning that the strategy was not sufficient to wade KQ through stiff market competition and keep it ahead of the pack. The Economist speculated that the remarks were out of ‘. concern that local carriers like Kenya Airways are too small to withstand growing competitive pressure from bigger international airlines like Qatar Airways, Turkish Airlines and Air France.’

The Dreamliner       

The Boeing 787 (B787) Dreamliner is a long-range Jet Airliner that was designed to be 20% more fuel efficient than the B767, which it was intended to replace. On 17th August 2012, Ethiopian’s first B787 landed in Addis Ababa making it the 1st in the world outside Japan and ahead of any airline in the Americas, Europe and the Middle East to operate the B787. KQ had to wait for 2 more years until April 2014 when it took delivery of its first B787.

Ethiopian’s B787 fleet has now grown to a size of 19 aircraft with 4 more on order whilst that of KQ currently stands at 7 with 2 to be wet leased to Oman Air. Deployed mainly on trans-oceanic routes, the bigger and earlier acquisition of the B787 fleet gave Ethiopian a tactical advantage on a fuel per kilometer basis attributable to lower fuel burn. KQ was laden with the B777, a reliable industry work horse but whose larger seating capacity KQ was unable to fill during off peak seasons, leading to lower revenues and higher costs per seat on the same routes.

On 28th July 2015, Obama’s Boeing 747-200B, popularly known as Air force 1, landed in Ethiopia after a two-day hiatus at JKIA on his Kenya-Ethiopia visit. In a now iconic photo, the CEO of Ethiopian Airlines strides the airport asphalt with the US President with a B787 Dreamliner providing a picturesque silhouette in the background. Such a rosy picture could not be said of KQ, two days after the Obama photo op, KQ shocked the markets and stakeholders by announcing a Ksh. 25 Billion loss that was unprecedented in the annals of Kenya’s corporate history.

Democratic Governance and Airline Profitability

A discerning look at the democratic space between these two countries is also paramount in appreciating the divergent fortunes of the two airlines. The Democracy Index is an index compiled by the Economist Intelligence Unit that measures the state of democracy in 167 countries. Kenya was ranked 103 in 2011 improving to 93 in 2015, whilst Ethiopia sunk further from 121 to 123 in the same time period effectively categorizing Ethiopia as an authoritarian regime. This is a crucial piece of the puzzle.

Many a times, KQ’s plans have been held hostage by a contingent of Labor Unions, industrial unrest and court injunctions courtesy of Kenya’s superior democratic ideals and liberties when compared to those of Ethiopia. In 2012 KQ sacked over 400 staff in an effort to cuts its wage bills, a decision that was reversed by an industrial court judge in the same year. Such is the operating milieu that in January 2016, The Kenya Airline Pilots Association (KALPA) issued a ‘vote of no confidence’ in KQ’s management team giving them a 7-day notice to vacate their positions failure to which unspecified actions would be taken. Such shenanigans would not be entertained in Ethiopia considering that Ethiopian is fully owned by an Authoritarian Government.

Currently the Government of Kenya is the largest shareholder with a 29.8% stake in the company closely followed by KLM at 26.73% whereas Ethiopian is wholly owned by its Government. The KQ-KLM partnership has been lambasted, by many pundits and stakeholders, as being overly detrimental to the financial wellbeing of KQ. KLM has often been accused of saddling KQ with burdensome legal and operational obligations that have been detrimental to KQ. Ethiopian, devoid of smothering business partnerships, has largely been able to run its affairs free from any interference from both private and public stakeholders.

A Series of Unfortunate Events

A series of unfortunate events, largely due to geopolitical risks, also conspired to shutter the destiny of KQ whilst seemingly giving Ethiopian a free pass. Kenya’s Operation Linda Nchi, a Military mission in Somali that began in October 2011, resulted in an upsurge of terrorist attacks in the country, largely attributed to Al Shabaab. Repercussive impacts included travel advisories by key Western Governments, notably the US and UK Governments. These had adverse impacts as Kenya’s service sector which contributes to 63% of GDP, and is largely dominated by tourism with a majority being visitors from these countries. This meant that KQs revenues from European and American routes continued diminishing. The same ripple effects were not felt by Ethiopian Airlines as there were no reverberations even after Ethiopia invaded Somalia in July 2006.

The Ebola virus epidemic had a bigger impact on KQ due to its concentration risks on the transcontinental routes of West and Southern Africa. Ethiopian had better route balance and diversification by spreading its wings further afield in the geographical paradigms of Asia and North America. According to CATA, ‘Ethiopian has a more balanced and significantly larger route network of the two carriers with a total of 82 non-stop destinations covering Africa, the Middle East, Asia, Europe and North America.’  That compares to KQ’s more limited global coverage, offering a total of 54 destinations covering Africa, the Middle East, Asia and Europe.

The most bizarre twist in this rivalry saga occurred in April 2016, when KQ management crafted a strategy to redeploy or second its B777 pilots to Ethiopian for a period of three years. This is the most unorthodox testament of how low KQ has fallen in sharp contrast to the monumental success of Ethiopian.

The burden and pressure on KQ’s management is palpable. Decisions are thoroughly scrutinized by a cadre of parties with varying degrees of vested interest; Unions, Governments, shareholders, Sky Team partners, staff, suppliers, competitors and the general public. This is occasioned in part due to a genuine foreboding that if not properly addressed, the corporate theatrics at KQ will bring it downs to its knees like many African Airlines before it.

KQs Silver Lining  

A turnaround is still possible. That is if KQs new CEO infuses a blend of shrewd and astute management, competitive pricing and superior customer service experience. See https://nairobibusinessreview.com/kenya-airways-and-its-flight-to-recovery/

Like the phoenix, KQ should, in due time, rise from the ashes and fly again as the unabashed pride of Africa. In the meantime, having overtaken South African Airlines and Egypt Air in profitability and size of fleet, Ethiopian shall now be crowned ‘the undisputed heavyweight champion of the African skies’.

 

 

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