Saturday, April 28, 2012

Will Kenya Airways get it right this time on low-cost carrier?

Kenya Airways’ venture into the low-cost airline business takes off with the planned hiring of an executive to head the unit as it takes up a model it abandoned nearly 10 years ago.

Kenya Airways (KQ) through Jambo Jet, a low-cost airline, will seek to make headway in the fast-growing domestic and regional flying markets.

However, analysts warn that the airline faces huge competition from already existing low-cost airlines.

Does KQ have something up its sleeves to help it push through a strategy that flopped in 2004?

The number of cheap, short-distance flights across East Africa keeps increasing; to succeed in this segment, an airline must manage costs, lure customers from rival airlines and give passengers value for their money.

Value for their money will be measured by the airlines’ ability to keep time and take fliers as close to their destinations as possible without hurting their pockets.

Also, low-cost airlines keep costs low by using small, relatively inexpensive aircraft that handle several flights each day.

KQ’s Jambo Jet — which is expected to be operational in the third quarter of 2012 — will have its own management team, have a leaner wage structure and lease planes from its parent company.

However, the Kenya Airways management has been cagey with details about the expected rollout of Jambo Jet.

KQ, whose shares are listed on three regional stock markets, closed its fund raising drive last week through a rights issue, where it was hoping to raise Ksh20.6 billion (about $250 million).

The money is expected to boost the airline’s expansion plans, which include establishing a low cost airline.

Jambo Jet is expected to serve the growing domestic and regional routes. “This low-cost airline is necessary because of increasing competition and to provide an alternative to cater for the needs of all our passengers. It will serve existing routes in the region and any other new route that will make economic sense,” said Titus Naikuni, CEO of Kenya Airways.

KQ is said to have advertised for a CEO for Jambo Jet through international executive recruitment company Spencer Stuart.

Jambo Jet’s CEO and the management team are expected to be in place by September and will report directly to KQ’s board, according to sources familiar with the discussions.

Sources said KQ opted to recruit at an international level in order to get a CEO with a deep understanding of the low-cost airline model.

“The low-cost carrier will have a different business model from that of KQ, and given that locally there are really no low-cost carriers going by international standards, the company has decided to source the CEO globally,” said a source familiar with the matter.

Low-cost airlines have lower fares and fewer comforts — the price of the meal is not included in the ticket price for example Fly 540, Jetlink, Air Uganda and Rwandair are among the competitors who have been fighting for a slice of the region’s aviation market.

READ: Why flying in Africa is getting harder even as airlines expand fleets

But most of them have similar air fares to KQ, bringing into question whether they are indeed low cost carriers.

For example, KQ charges around Ksh12,950 ($155) for a return flight from Nairobi to Mombasa, while Fly 540 charges Ksh12,570 ($151) and Jet Link Ksh12,205 ($147).

But Fly 540 said the term low-cost airline was not just about price and that they offer different bands of pricing for their clients, with a return trip going for as low as Ksh10,540 ($127).

About low-cost airlines

“The term low cost airline does not necessarily mean cheap fares,” said Nixon Ooko, Fly 540 operations director. “Low-cost airlines provide you with other things like the way you purchase your ticket,” he added.

Mr Ooko said 75 per cent of their bookings are made through the Internet, which makes it cheaper for their clients because it cuts out agents’ commissions.

In 2000, KQ rolled out a low-cost airline called Flamingo Airlines but it was closed in 2004 after it faced stiff competition from AirKenya, African Airlines and Regional Air, which ceased operations in 2005.

The competing airlines’ costs were lower and their fares cheaper.

While operating Flamingo Airline, KQ rolled out a then ambitious programme that sought to have customers book their flights on the Internet via e-ticketing.

This would not only have made booking flights quicker for customers, but it would also have cut out middlemen — travel agents who raked in about seven per cent commission on each ticket — and helped improve KQ’s profit margin.

But factoring in that in 2003, Internet penetration stood at just 500,000 users compared with 20 million today, the e-ticketing idea, though smart, was well before its time.

Now, KQ is focused on a leaner structure. “The airline learnt a vital lesson then. The current business model is very different from a low-cost model, and probably this thinking is behind the push for separate management for the two firms,” said the source.

Jambo Jet will have its own staff, whose terms, especially for the cabin crew, will differ from those of KQ.

Currently, an entry level flight attendant at KQ earns in excess of Ksh100,000 ($1180). But at Jambo Jet, an entry level flight attendant will earn around Ksh35,000 ($413).

Also, flight attendants at Jambo Jet will not be part of a union and will have a renewable contract of two years. Fly 540 said its workers, including cabin crew, are free to join a union.

By putting the employees under a two-year contract, KQ will be seeking to limit union power in its subsidiary and thus help it control employee costs, which according to analysts at Renaissance capital contributed 14 per cent to the company’s total expenses in the year ending March 2011.

KQ signed a collective bargaining agreement (CBA) with the Aviation and Allied Workers Union (AAWU) last year, under which union members received a 25 per cent increase in salaries and allowances backdated to 2008.

The new 2010-2012 CBA will result in a 20 per cent increase in salaries and allowances (a 10 per cent adjustment for the next two years).

Taming expenses

The proposed salary structure will be within the same bracket as that of regional rivals, a factor that will enable KQ to effectively tame its employee costs and deliver better margins for regional flights.

Jambo Jet will lease KQ’s aeroplanes, especially the Embarer 190s and the Embarer 170s, which KQ currently uses for its regional flights.

It will also operate regional routes within four hours from Nairobi, meaning that it will fly to countries within EAC, placing it in direct competition with Fly 540, Jetlink, Air Uganda and Rwandair.

“I think Jambo Jet is targeting the regional market, not just the domestic market,” said Captain Elly Aluvale, CEO of Jet Link. “We do not project to go head-to-head with Kenya Airways.”

In Kenya, Jet Link currently flies to Mombasa, Kisumu and Eldoret. Outside Kenya, it flies to Juba, Mwanza and Dar es Salaam.

Captain Alluvale questioned the need for an international CEO to run a low-cost airline. “Will an international CEO really understand the East African market?” He asked.


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