Having sealed its partnership with KLM, Kenya Airways is wasting no time in completing its privatisation and entering the next phase of its development. Jackie Gallacher reports.Kenya Airways is in a hurry. It aims to complete its privatisation by the end of March, and to outline the main priorities for development with new partner KLM within a month. Then it wants to get on with implementing them.

All this speed is decidedly un-African, but then there is very little at Kenya Airways that evokes the typical problems of a state-owned African airline. Under managing director Brian Davies and finance director Malcolm Naylor - who are both on fixed term contracts via Speedwing Consulting until August - Kenya Airways has been introduced to the concept of time pressures. Bureaucratic inertia is a thing of the past. Instead, everyone is concentrating on getting things done.

Managers are set targets and expected to achieve them within a specified period. 'We have action plans. You have to achieve them in a certain time and if you don't you have to explain why,' says George Kivindyo, Kenya Airways' director service delivery. Bonuses are now linked to performance and no-one is posted in a position simply because they have a well placed contact. The outcome: staff morale has soared along with productivity. Kivindyo adds that another of the first things Davies did was to control expenditure - no more unnecessary expenses paid 10-day trips.

Four years after the government first appointed a new board to oversee the airline's restructuring, the result is impressive. Kenya Airways made a net operating profit of $16 million in the financial year ended March 31, 1995 and is forecasting a $22 million net profit in the current year on revenues of $176 million. That amounts to a net margin of over 13 per cent, ranking Kenya Airways among the strongest carriers worldwide.

Since 1994, when the Kenyan government converted $33 million of debt into equity and assumed $79 million of loans owed by Kenya Airways, the carrier's longterm debt has remained low, and totalled $35 million at the end of September 1995, says Naylor. The carrier's debt is just 0.8 per cent of shareholders' equity and it boasts $55 million in cash reserves. And, as Kenya Airways prepares to float the remaining 51 per cent of its stock earmarked for privatisation on the Nairobi stock exchange, the Kenyan government can look forward to receiving back roughly the amount it took over in debt, and to continued ownership of 23 per cent of a carrier likely to be valued at $100 million or more. 'The proceeds from the sale are all going to the government, because frankly we don't need them,' says Naylor.

While the airline's advisers, International Finance Corporation and Citibank, will not reveal the likely offer price of the carrier's remaining shares, KLM paid $26 million for its 26 million shares, valuing the company at KS46 a share or $100 million. While this set a benchmark the final offer price will obviously reflect market conditions at the time, says Maina Mwangi, senior manager with Citibank.

With the government retaining 23 per cent and KLM holding a 26 per cent stake, the aim is to float all the remaining shares on the stock exchange by the end of March. With recent changes in foreign ownership rules, some 14 per cent of the shares are to be earmarked for international investors, with 34 per cent destined for the Kenyan public and institutions and 3 per cent for employee stock ownership plans. The allocation policy will depend on the levels of takeup within the local market, but the carrier stresses that all the shares will be listed. 'The idea is that it's as close to a single event as possible,' says Davies. The share price will be set around mid-March, says Mwangi.

In steering Kenya Airways on to this vital point in its development, Davies has had to overcome some natural resistance and scepticism, but crucially the government stuck to its resolve. As with many an African airline, privatisation had frequently been discussed at Kenya Airways, but nothing ever happened. 'Now we have realised there is no going back on privatisation. But when it started it was like a joke,' recalls Kivindyo. Along with the financial restructuring and the introduction of financial controls and management accountability, Davies has overhauled the network, cut back on the fleet, instituted a major training programme, and introduced a quality management system. He believes he has been successful in 'getting the basics right', but adds that the choice of a partner was essential to the next development stage.

Enter KLM. As Kenya Airways is a small carrier with a limited network and resources and a lack of global presence, Davies believes a major partner like KLM offers the global reach, the access to expertise and the improved purchasing power that are crucial to its further growth. Kenya Airways has succeeded in upgrading its product and customer service, but the consistency of its service standards can be improved further with the help of KLM, says Davies.

Among the other major benefits expected from the alliance, he lists the use of KLM's flight scheduling knowledge to develop Nairobi's full potential as an international hub, and its expertise in computer systems; labour productivity; optimisation of flight procedures; maintenance; cargo operations; and yield management - Kenya Airways does not have a yield management system.

Inevitably, savings are also expected from joint purchasing in areas such as fuel, insurance and aircraft. 'We are targeting a 5 to 10 per cent unit cost lowering for Kenya Airways through synergies,' confirms Jack Pheifer, KLM's vice president strategy and commercial cooperation. Kenya Airways' costs have been on a downward curve since 1992/3 and are now just over 7 US cents per available seat km. 'The fact is that without a partner we've probably gone as far as we can in cutting costs,' says Naylor. 'There were no more easy fixes until KLM came along.'

KLM's shareholding gives it the right to nominate two members of the 11-person board and to nominate candidates for the posts of managing director and finance director, though the final decision rests with the full board. KLM also has a right of veto on certain strategic decisions such as fleet replacements or major changes to the network, but will not dominate the running of the airline on a day-to-day basis, says Davies.

The two airlines have established an alliance committee which will look at all the issues and establish the priority areas for action, and Davies is clear that this should be done quickly: 'We need an initial plan which will prioritise things within a month, absolute maximum.' Almost the first task will be to set up a network study, with a traffic distribution study in Africa, says Davies.

Davies stresses that a main goal of the alliance will be to look at Kenya Airways' network and to focus on scheduling improvements and connecting city pairs. 'We have concentrated very heavily on getting routes to work, mainly as individual routes. What we haven't done is spent a lot of time looking at the network holistically, as an integrated network.'

The first stage will be to develop a comprehensive system of feed into the Nairobi hub, connecting onto the international services of KLM and its partners, notably Northwest Airlines and Garuda. Kenya Airways' largest European market is London; other European destinations are Paris/Orly, Copenhagen, Stockholm, Frankfurt, Zurich and Rome. It also serves Dubai, Jeddah, Karachi, Bombay and Selibaby, Mauritania.

However Kenya Airways' connecting services in Nairobi are currently very poor: 'You could sit all day and talk about the misconnections,' says Davies.

Kenya Airways' 11-point African network is characterised by relatively low frequencies, with most destinations served around three or four times a week. 'I think daily is the minimum standard we have got to try and reach, and I would suggest most routes don't start working properly until they are double daily,' says Davies. The near term priority will be to increase frequencies rather than adding new African destinations.

The alliance committee's recommendations will in turn influence future aircraft acquisitions for both the African and the international network. Three Fokker 50s are used primarily for domestic services and a little on regional routes, while two B737-200s are already at maximum utilisation. The choice will be between 120-140 seat aircraft, or 80-100 seaters if the aim is to reach daily services as soon as possible, says Davies. The partners expect that two to four new aircraft will have been added by the end of the first three-year business plan.

KLM's Pheifer says the biggest job will be to improve ground services and initiate a rapid development of Nairobi airport, which needs better terminal facilities, particularly for transfer passengers. Pheifer says around $30 million will have to be spent; money is being sought from the Kenyan and Dutch governments.

KLM currently serves Lusaka, Dar-es-Salaam and Kilimanjaro over Nairobi and Pheifer confirms the carrier hopes that in a year's time all its services will connect with Kenya Airways in Nairobi. 'By the end of next year we will fly seven times a week to Nairobi,' he says. KLM currently serves 13 destinations in Africa and, though its Europe-Africa market share is just 7 per cent, Pheifer says the link with Kenya Airways will increase this to 30 per cent in eastern Africa. Pheifer also sees potential in the US market; about 170,000 US citizens travel via Europe to east Africa each year, alongside 600,000 Europeans.

Although KLM shares Davies' views on the development of Nairobi, the carrier does not expect to start adjusting its schedules until 1997 and definitely views its involvement as a longterm investment. 'Africa is not the prime area to work on for any carrier at the moment. On the other hand if you want a position in five years' time, you have to do something either in southern Africa or in east Africa.' With Lufthansa's alliance with South African Airways, KLM felt it could not pass up the opportunity being offered by Kenya Airways' privatisation, says Pheifer.

On international services a key issue will be whether Kenya Airways develops a common product along the lines of KLM/Northwest's World Business Class, or keeps a product specifically targeted at the Kenyan market. The former seems more likely, given KLM's views on common branding, and this would mean completely reconfiguring Kenya Airways' three A310-300s.

At present Davies describes Kenya Airways' business class product as 'leaning towards the Virgin Atlantic concept.' Indeed the carrier has enjoyed a steady increase in yields - including a 9.7 per cent increase in 1995 over the previous year - though this has been at the price of a slight decline in load factors. 'That's very nice to have, but we may get a better business result if we have slightly more business class seats but a slightly different product,' says Davies.

Kenya Airways will also need to decide whether to join KLM's powerful Flying Dutchman frequent flyer plan and Davies intends to proceed cautiously: 'It's getting the ratio between points earned and points burned - which airline you earn on and which you burn on - and we have to understand that before we go rushing in.'

The cost of these changes will be partially covered by KLM's commitment to provide an additional $3 million in services as part of the alliance agreement. 'The last thing we would want is for the profitability of Kenya Airways to be dented just at the time of flotation,' says Davies. However the carrier will inevitably have to reinvest some of its spare cash and take on some new loans as part of this latest development phase.

Meanwhile, Kenya Airways will be on the lookout for regional investment opportunities should African carriers such as Air Tanzania and Uganda Airlines privatise, says Davies. And, he adds, Alliance Airlines could be worth serious consideration once it is over its initial risky development phase, though how this squares with SAA's close involvement with the latter is unclear.

Domestic traffic remains important for Kenya Airways and accounts for 40 per cent of the total. A high proportion of this traffic originates internationally and is therefore relatively high yield. However the carrier is now facing competition on the trunk route from Nairobi to Mombasa from privately owned carriers Air Kenya and Eagle Aviation.

The KLM alliance will be a crucial factor in helping Kenya Airways combat the tough international competition it faces from sixth freedom carriers in particular. And, by the time Brian Davies and Malcolm Naylor are in need of a new contract in August, this second phase of the carrier's development should be well on track.

Source: Airline Business