The week Airline Business came to Nairobi, Kenya Airways’ long-serving chief executive Titus Naikuni was preparing for the coming weekend, when he was helping to plant 250 trees on his farm.
Going back to the country’s stunning natural landscape is a way for Naikuni to escape the demands of running an airline with annual revenues topping $1 billion. “I have my own farm, about an hour and a half out of Nairobi,” he explains. “I have cattle and goats and I enjoy going out there at the weekends. That’s how I unwind: I go back to the village, where nobody bothers you about why have you bought a Boeing and not an Airbus, or about why have you delayed or cancelled a flight.”
It will be many years before the trees planted that weekend are fully mature. But Kenya Airways is already yielding the fruits of its chief executive’s labours at the airline.
The tall, imposing Naikuni took the helm of Kenya Airways nine years ago, his first airline executive position after a career largely working in the mining and rail sector.
Since then he has overseen steady progress as, despite some challenges along the way, Kenya Airways has enjoyed an unbroken run of operating profits – only losing money at a net level in 2008 amid spiralling fuel prices and the unrest that erupted after elections in the country. Even though this year’s profits will be down following more market challenges, it will remain in the black.
On Naikuni’s watch, Kenya Airways was among the first African airlines to join an alliance, SkyTeam initially as an associate member in 2007, carries in excess of three million passengers annually and will be adding 787s to its fleet two years from now.
In making this journey, it has become something of a poster child for privately owned airlines in Africa, a continent where profitable carriers free from the state hand still tend to be the exception rather than the rule. While the government retains a stake in the airline, it is primarily in private hands – KLM owns 26%, while 49% of the company is publicly listed.
At the heart of Naikuni’s strategy for the airline has been the development of an intra-African network, connecting points across the Continent principally from its Nairobi hub. The airline now serves 45African destinations and has further developed this network with regional jets. It operates eight Embraer 170/190s and has commitments for up to 26 more.
“When you look at the new routes we have started, some of the routes are thin initially, and that is why we have moved from using the 737 to the [smaller] Embraer jets,” explains Naikuni. “On some of the mature routes, we need to start looking at increasing frequency and the Embraers are very good for that also.
“Intra-Africa traffic has increased,” he adds. “We still have constraints on travelling between countries. We find we don’t have fifth freedom rights to other countries.”
Liberalised African skies, or rather the lack of them, remains a major challenge for the airline and the continent as a whole. While some parts – including its own East African neighbourhood – are open, wider access is not. Covering the continent on its own is virtually impossible without partners. In East Africa, Kenya Airways has had a 49% stake in Tanzania’s Precision Air since 2003. But efforts to secure partners in West Africa are still to get off the ground.
“We are still working on that. I think we are strong in connecting ourselves to the rest of Africa,” says Naikuni. “However, we are not strong enough in giving a service to [passengers], especially West Africans, going into cities that are away from the capitals. That’s why we need local partners, as they are able to give a seamless service. At the moment if we take you to Lagos, we just drop you in Lagos and it’s up to you get to where you want to. “We need partner airlines, but we also need to be selective because we don’t want to take a partner airline that is a risk,” he adds. “So we are very, very selective and that is why it is taking us time in West Africa.
Out of Africa, Kenya Airways has in the past looked to Europe for its long-haul business. It serves SkyTeam hubs in Amsterdam, Paris and Rome. But Naikuni is looking towards Asia for future development. “Traffic between Africa and Europe and North America has shrunk,” he says. “But traffic between Africa and the Middle East and the Far East in particular, including China, has increased. The intention as we grow is to move into six [Chinese] destinations in the next few years,” he says. The airline already serves Guangzhou and Hong Kong, and is launching freighter flights to China.
This wider demand supports the ambitious expansion it is now set to embark on. This envisages its fleet jumping from 34 to more than a hundred over the next ten years, including commitments for up to 13 Boeing 787s. It is currently working on a planned rights issue to help fund the new aircraft.
Kenya Airways operates five Boeing 767-300ERs and four 777-200ERs today, and originally planned to introduce its first 787s by now. “Right now we are overstretched,” says Naikuni. “We would like to have aircraft in, but we don’t have them. The 787 is coming at the end of 2013 or start of 2014.
While acknowledging frustrations at the delay, his hopes for the aircraft are not dimmed. “It’s very important: it’s a lighter aircraft, is very efficient compared to the 767 and has a longer range than the 767 and when you put those things together, it brings in benefits to the airline,” he says. “Had we got it in 2010, when we expected, imagine how much we would have recouped in fuel savings?
The airline will also lease a pair of 777-300ERs in October 2013 and May 2014.
Further ahead, new narrowbodies are on the agenda, with Naikuni offering a glimmer of hope for Airbus at the thus-far Boeing-dominated carrier. The airline operates 15 Boeing 737s – including six -300 models alongside -700/800s. “We are looking at the aircraft size between the Embraers and the 787s, the 737s or Airbus, says Naikuni. “We have always been a very Boeing-dominated carrier, but that is because of our size. Now, as we start getting towards 40 to 50 aircraft, we can afford to start mixing the fleet. But that is in another two or three years.
One of its latest fleet additions has seen its first dedicated freighter arrive – a Boeing 747-400F. “We are starting with a freighter into China, and that is just the beginning of our freighter business. We intend to grow now,” he says. The carrier is also looking at a couple of 737 freighters for use within Africa. There is a lot of traffic coming from Asia, India and China into Africa, but we are also starting to see products leaving Africa,” he says.
Such is the potential that Naikuni sees the possibility of one day spinning out its cargo business, but is mindful of the danger of cannibalising its passenger aircraft belly space. “One has to be very careful to look at this so the two sides are working in harmony. Ultimately it will break away, but in an organised manner that still has visibility,” he says.
Ironically, this would take the carrier back full circle. Shortly after Naikuni took the helm, KenCargo – a joint-venture with Dutch partners KLM and Martinair – was shelved.
NEW REGIONAL ARM
Similarly, the airline is retracing ground taken by another former unit Naikuni axed. Flamingo Airways was a short-lived regional arm operating two Saab 340s in a tentative step into the low-cost sector. But this year, Kenya Airways will launch a new regional unit, Jambo Jet, using Embraer regional jets and possibly Boeing 737s.
“As you start looking at the East Africa region, it is very different from the rest of the places we fly,” explains Naikuni. “Our crews fly into the region and come back home the same day, while the others fly into, say, London and stay there for days. So you need to start structuring the domestic and regional operation efficiently to utilise your crew.
“The other thing is you start removing some of the trappings that are linked to long-haul routes that aren’t cost-efficient and make it prohibitive on fares.”
He sees the timing and scope of Jambo Jet as a different proposition. “Firstly, Flamingo was an airline that had only two aircraft and they were limited in the stations they were looking at. I’m looking at the East African region. Secondly it was an IT-based project. Imagine where IT was eight or nine years ago in this region. We were kidding ourselves. Now its different and I think we feel it is opportune for us to grow along those lines.”
It says something about how far the airline has come to see how little it was sidetracked by the political unrest in the country which erupted out of the blue following presidential elections in December 2007. Kenya fell into a political vacuum, taking its key tourism industry down with it .
“When it happened, it hit us badly for a few days. Of course people started getting a bit sceptical, particularly from Europe,” Naikuni says. Some European Governments issued travel advisories warning against visiting the country “But the recovery was quite fast [for us], because we were not really dependent on tourism ourselves as an airline.
“If you look at most of the African customers we carry, they are traders, business people, and as long as they were going through the airport and did not go into the city, they didn’t see anything wrong, and just carried on.”
Indeed, Naikuni sees positives from the episode – notably the country’s new constitution. “What it has done is it has brought a lot of freedom into the country and a lot of transparency in how people are appointed to positions to manage public resources, and that is what people had been clamouring for.”
Naikuni is passionate about the opportunity in Africa - even if unlocking this potential still requires progress to develop liberalisation, infrastructure and safety on the Continent (see box story). He cites figures showing five African states among the top ten fastest-wgrowing economies of the decade – albeit from a lower base – and projections for a similar number in 2011-15.
While the airline has warned its profits for the year to March 2012 will be down at least a quarter amid headwinds including higher fuel prices, its growth strategy continues undeterred. “The potential [of Africa] is huge,” says Naikuni, noting the market capitalisation of African stock markets more than quadrupled to $1 billion between 2002 and 2010. “Population is around a billion. There are about 40 cities with more than a million inhabitants.
“These are fruits of the more democratic principles,” he adds. “There was a time when every headline on Africa was about a coup. Rarely do you hear that now. The world has been talking about Africa for years and it is now starting to come to fruition.”