9 May 2011

Kenya: Hard Landing for Local Airlines As Routes Fall Short

Nairobi — The landing gears are up for domestic airlines' route expansion plans.

Passenger numbers are not adding up as the rising cost of fuel continues to take a hit on their margins, forcing them to review routes.

Already, two of the leading airlines have had to suspend some routes as it becomes costly to fly empty seats to some destinations.

Jetlink Express was recently forced to suspend its operations for the Hargeisia route barely a year into the destination.

Hargeisia is the capital city of Somaliland, a more calm part of the troubled coastal country of Somali.

According to the airline's managing director Mr Elly Aluvale, passenger numbers were dwindling fast on the route and the twice-a-week flight had to be grounded.

"We had to suspend the route because we were not seeing the numbers as we had expected during the launch. Empty seats were increasing on every flight and we had to take this option," Mr Aluvale told Smart Company in a telephone interview.

The airline had anticipated brisk business on the route following the grounding of another local airline, East African Air Safaris.

This was especially so because airlines flying out of Jomo Kenyatta International Airport were cutting the travel time by about two hours for businessmen.

It also provided them with a seamless connection to international airlines plying the Middle East popular with businessmen from Somaliland.

But Mr Aluvale contends that the rising threat from the Al-Shabab terrorist group in the region cut out more business for them.

"The terrorist group's constant threats around the region made most people not to fly into and out of the country. If things improve then we can review the route in the future," he explained.

Industry sources indicate that Fly540, the budget airline that has been fast expanding with plans to venture into Angola, has suspended its flights to Mwanza, Tanzania.

The company, describing the move a "smart decision," has offset the route to its sister company in Tanzania.

Mr Nixon Ooko, the operations director at Fly540, indicated it was rationalisation since the route became commercially unviable.

"The passenger loads were not very promising so we decided to off load it to our sister company in Dar es Salaam," he said.

A number of airlines are currently reviewing their businesses to focus on routes that give good return on investments.

"It takes a lot of intellectual calculation and research to decide on a route to fly. There are certain assumptions that come with it that do not translate into yields once you start operations," said Mr Ooko.

Ordinarily when an airline takes up a new route, it plunges into a loss-making phase that must be sustained by its budget as it establishes itself on the route sometimes with promotional airfares.

What creates the point of departure from one airline to another is its ability to overcome this period and normalise its operations with regular pricing.

"A critical cost benefit analysis is very important in this period and the industry is today operating in difficult times," says Mr Ooko.

Among the challenges that airlines are facing locally is the poor economic growth that the country has witnessed in the last six months.

A general upsurge in the cost of doing business and living is giving little room for air transport unless it's inevitable.

Coupled with this is the rising cost of jet fuel that has kept local players at the edge on rising budgets.

Industry players indicated that the cost of a litre of jet fuel has risen significantly from $0.7 cents to about a dollar.

Fuel accounts for a substantial percentage of airlines operational costs, estimated at about 25 per cent to 30 per cent.

This is due to the thousands of litres of fuel that aircraft burn. Globally, the rising cost of fuel is a key threat to aviation industry profits.

In February, the International Air Transport Association (IATA) downgraded the industry's profitability for 2011 from $9.1 billion (Sh728 billion) to $8.6 billion (Sh688 billion), with the cost of jet fuel having increased by an average of 50 per cent from a year ago.

"Today oil is the biggest risk. If its rise stalls global economic expansion, the outlook will deteriorate quickly," said Giovanni Bisignani, IATA's secretary general on the revision of profitability.

But local players are not only taking the heat from the fuel cost surges; competition is frightening the faint-hearted. Late last year, the industry was held in a tight price war that saw airfares hit near rock bottom.

National carrier Kenya Airways, determined to make its presence felt, took the battle to the doorsteps of other players who had carried along the tag of low cost airlines.

The airline increased its frequencies on the Nairobi-Mombasa route and now operates 10 flights a day.

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