Kenya Airways may have plenty of reasons for long-term optimism, pinned on Africa's economic potential, but in the near-term its profitability is under pressure.
On the one hand, countries in sub-Saharan Africa are enjoying strong economic growth and Kenya Airways is rapidly developing its fleet in a renewal programme that will climax with the arrival of its first Boeing 787s in 2014.
But the immediate outlook for the airline is far from rosy. Consistently profitable and something of a poster child for privatisation in Africa, the airline was dragged into the red in the first half of the year. It made a net loss of KSh4.8 billion ($55 million) for the six months to 30 September, after a recording a profit of KSh2 billion at the same stage last year. This came on the back of a near 10% fall in revenue to KSh49.8 billion.
"There is a lot going on in the industry. We are having challenges at the moment," said its long-serving chief executive Titus Naikuni, during a recent ceremony in Nairobi to mark the delivery of the 900th Embraer E-Jet - for which it is the Brazilian manufacturer's largest African operator.
Naikuni cites the strength of the Kenyan shilling, political instability in the region and continued fuel price volatility as central to the challenges in the first half.
"The Kenyan shilling is quite strong. If you look at our results we've lost KHs2 billion as a result of the exchange rate," he tells Flightglobal Pro. The strong shilling depressed its revenues, a large chunk of which are US dollar-denominated, though it did have a more positive impact on its costs. He argues it is important that development of the Kenyan shilling in future is balanced.
The SkyTeam carrier has already acted to tackle its costs and embarked on cuts aimed at reducing in staff expenditure by at least 10%. "Over the last few months we have revisited cost structures, reviewed processes, increasing efficiencies in order to mitigate our decline in profitability," says Naikuni.
The carrier's first-half results were also impacted by instability in the region, particularly around the border with Somalia. This has prompted some foreign countries to issue travel advisories which knocked tourism traffic to Mombasa. "We've seen a reduction in numbers," says Naikuni. Traffic on European routes, where it has dropped its unprofitable flights to Rome, has been hit particularly hard.
While political instability has dogged the full development of Africa's air transport potential, Kenya had largely avoided such problems until the protracted elections of 2007-08. Outbreaks of local unrest in some parts of Kenya resulted in high-profile - and Kenya argues unwarranted - travel advisories from western countries and forced it to temporarily suspend Paris flights. The stalemate in the elections resulted in a political vacuum until a coalition government was eventually formed.
While a subsequent new constitution and strong tourism push helped restore Kenya's standing, it is perhaps understandable there is a degree of trepidation ahead of the country's first elections since then. These will be held next March. "I can't address the political situation and I am only hoping that the elections coming are peaceful," says Naikuni.
Kenya's transport minister Amos Kimunya, who also spoke at the E-Jet ceremony, said he was confident of peaceful elections. "In 2007-08, we had taken peace for granted. We learnt our lesson. It was a wake-up call," he says.
If the short-term presents some worries for Kenya and its national carrier, the longer-term is all about potential. While Africa has struggled to unlock this in the past, strong investment, notably from China, is giving cause for optimism that it will start delivering.
Economic growth rates have topped 5% in sub-Saharan Africa over the last three years and, as most economies in the region aside from South Africa have avoided fallout from the eurozone crisis, growth of 5.7% is projected by the International Monetary Fund (IMF) for 2013. "In Kenya, tight monetary conditions have slowed consumption, but construction activity and corporate investment remain buoyant and will support an acceleration of growth to 5% this year and 5.5% in 2013," the IMF says in its latest market outlook.
"Africa is growing," says Kimunya, "Let's start preparing to take advantage of these growth opportunities when they come."
That includes development of the airport infrastructure at the airline's Jomo Kenyatta International Airport hub in Nairobi. "We expect strong growth at Nairobi. We are in the process of expanding the airport to facilitate this growth," Kimunya says. He points to development plans for a new runway and the Unit 4 project which will lift capacity to around 10 million passenger annually. "We've had some challenges and we are working round them so we can the deliver the hub for Kenya," he says.
Kenya Airways has long pressed for the expansion of its Nairobi hub. "We are facing a lot of issues at the airport and we are now seeing the light at the end of the tunnel," says Naikuni. "We are seeing some things happening. We are seeing some more parking for aircraft, we are now a member of a steering committee that is spearheading working on construction of the airport. We see a light at the end of the tunnel. I hope we are not seeing a torch, but a proper light."
The airline needs the infrastructure as it embarks on a major growth under which it plans to more than double its fleet to a hundred aircraft over ten years. "We are expanding," adds Naikuni. "The aircraft are here. It's not a case of us showing slides anymore, it's about showing you reality."
The carrier's dual strategy is to continue to develop connectivity of its African market as well as taking advantage of growth potential in emerging markets, particularly in Asia.
Within Africa, where it deploys smaller Embraer 170s and 190s alongside Boeing narrowbodies to develop new routes and add frequencies, the airline has a target of connecting Nairobi with every African capital.
"Driving that connectivity and increasing frequency, that will act as a bullwork against competition," explained the carrier's chief operating office Mbuvi Ngunze, speaking to Flightglobal Pro during the recent World Travel Market in London. "In 2013-14 we are still having narrowbody deliveries and it will be a lot about increasing frequencies. We want to increase connectivity. That gives us pretty good options, that is really the focus until we get the widebodies."
Kenya Airways network (Nov 2012)
The carrier will use new widebodies, including Boeing 787s and 777-300ERs, over the coming years to drive a shift in the carrier's long-haul network. Europe has been a key market in the past, historically generating around 30% of its revenues. But there will be a move towards the emerging economies in the future.
"If we talk about Africa, for the future it is east to west. Europe and the USA are still the largest in terms of trade, but declining. But trade with China, India, the rest of Asia and Latin America, it is growing 100% or more," says Ngunze. "We will grow in these markets."
The airline will take its first Dreamliner in the first quarter of 2014 and will have five that year. Four more will follow in 2015. These aircraft will be crucial in developing its long-range targets, for example enabling it to fly direct to Beijing.
"It will help us in opening up the likes of Asia, China, the Middle East," says Naikuni. "We'd like to do more in the Middle East, we'd like to do more in Europe. We don't have the aircraft right now. A lot of what we are doing now with this [Embraer] will have matured by the time we get our 787s."