Kenya: Aviation Policy Shouldn't Be Tied to KQ Fortunes

opinion

A few weeks ago, I provided a summary of a report drawn by a committee of the National Assembly following hearings on an investment proposal that Kenya Airways presented to the Kenya Airports Authority. As I concluded, the committee rejected the private investment proposal and proposed that Kenya Airways ought to be re-nationalised.

While that decision to reject the private investment proposal was right, the recommendation for the re-nationalisation of Kenya Airways is not necessarily an efficient solution.

First, the committee made the common error of equating Kenya's aviation policy to the success and continued operation of Kenya Airways to the exclusion of all other firms and institutions in the industry.

This is baffling because the committee was presented with balance sheets that demonstrated that the Kenya Airports Authority, despite being a state corporation with significant administration faults, made substantial profits.

PROFIT

Granted, the profit is disproportionately derived from the operations of Kenya Airways and concentrated to Jomo Kenyatta International Airport. To state it clearly, Kenya Airways will only deserve the name "National Carrier" if it is re-nationalised but as it stands today, it is just another airline competing in a difficult and highly competitive industry.

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Conflating issues that are barely related is common in Kenyan policy discourse and is demonstrated by the ridiculous view that food policy is about maize.

So, in aviation, the maize is your Kenya Airways. Obviously bad thinking. The refusal to decouple Kenya's aviation policy from Kenya Airways constrains growth of airports, limits competition and the expansion of travel choices for Kenyan passengers. In a casual conversation with a citizen of Singapore, I learnt that Singapore Airlines has only partial access to Kenya because ferrying of passengers from the Far-East is not open to them under conditions that are commercially sensible. Only cargo flights into Kenya from Singapore are allowed.

These restrictions are tied to ensuring that Kenya Airways can compete as a large player in a minuscule market.

HIGHER TRAFFIC

Singapore Airlines has no choice but to activate its code-sharing arrangement with Ethiopian Airlines, which captures a majority of its passengers through Kenya.

This wrong-headed approach is baffling because the broad trend in the aviation industry is to secure city pairs that create higher traffic volume into hubs even if it adds to the competition.

Barring leading airlines from accessing landing spots at JKIA under the guise of protecting one airline is self-inflicted economic sabotage.

This is because a hub status, which JKIA seeks, cannot be maintained entirely on the back of a Kenya Airways that presently owns only 40 planes.

Clearly, the quest to create and sustain a hub in Nairobi shouldn't be held hostage by the expansion plans of Kenya Airways even if as claimed, the latter presently provides the largest share of JKIA's incomes. As an airline whose future is uncertain owing to heavy liabilities and operating costs, even the Kenya Airports Authority ought to be worried that its main client is financially limping.

Parliament has been made to believe that successful airlines must run under the model of Ethiopian Airlines. This informed the proposal for Parliament to consider reversing the private firm status.

In its re-nationalisation, Kenya Airways will try to expand both fleet size to match Ethiopian Airlines and destinations.

Leaving aside the peer envy with Ethiopian Airlines' model, the resurrection of regional airlines suggests that further aggressive expansion that is predicated on multiplying destinations would be unwise. And since this presumed expansion would be supported by the public purse, it will not solve any of Kenya Airway's woes but leave the taxpayers with more bills.

HIRING STAFF

Expanding the number of routes beyond the 53 reported to Parliament would require buying new vehicles and hiring staff, areas in which Kenya Airways has previously performed poorly.

In this industry, the two leading costs in the direct control of an airline's management are staff remuneration and planes acquisition.

Information presented to Parliament showed that pilots at Kenya Airways earn twice as much and fly for 35 per cent less time than those at Ethiopian Airlines.

Under these conditions, re-nationalisation without containment of these costs would not save this firm from insolvency.

Virtually all of Ethiopian Airlines' 2018 profit of US$ 233 million comes from tight management of staff costs.

Replicating its model without a similar staff wages policy would be futile. As a state corporation, the Public Investments Committee of Parliament would sooner rather than later confront and determine whether state ownership should be a mechanism of flying passengers for a profit or a welfare scheme for pampered pilots.

BENEFITS

Based on the recommendations from Parliament, existence of Kenya Airways as a private corporation is uncertain. The committee has succumbed to the envy of Ethiopia Airlines and accepted the reasoning that an airline projects Kenyan pride and would yield indirect and unstated benefits to the economy.

They add to this error by giving a blank cheque to the Treasury and ministry responsible to acquire Kenya Airways by compensating current owners.

Based on existing liabilities, infusion of taxes to prevent collapse, mollify debtors and maintain credible sovereign guarantees, the total cost of this approach will leave a huge hole in tax revenues.

I am confident that Kenya's aviation industry wouldn't collapse even if the worst were to happen to Kenya Airways. For that reason, that blank cheque is a terrible policy signal.

PUBLIC PURSE

As custodian of the public purse, Parliament ought to consider a plan prepared by the management of this firm and choose to fund a limited share of it over a limited time span.

That fund could be exhausted in equal amounts every year over that period with the management alerted that at the end of the subvention season, the firm would either close, fly on its own or scale down operations. It is bad economics for Kenyan taxpayers to fund a project that cannot fly. No country ever saved a bad business by throwing tax money at it.

The number of debt write-offs, bridging loans and sovereign guarantees through direct cash infusion and other tricks has exhausted the kindness of the taxpayer. In other words, denationalisation is not a solution if it means the taxpayer will throw money into a pit that will never be filled.

The writer is CEO, Institute of Economic Affairs

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