By Günter Endres in Nairobi and Dar es Salaam  Photography by Kevin Phillips

Titus Naikuni has turned around the fortunes of Kenya Airways in the short time he has been running the East African carrier

The proud Masai of East Africa’s Rift Valley are renowned for their semi-nomadic lifestyle. Like his kinsmen, Titus Tukero Naikuni, group managing director and chief executive of Kenya Airways, hates standing still and has not stopped moving since taking the helm at the airline in February 2003. In the short period since, he has examined every aspect of the airline’s operation, sweeping away wastage and unprofitable activities and building a team in his own mould. The result is a carrier that ended its last financial year to March 2005 with positive results in every principal operational and financial measurement, making it Africa’s most profitable airline in terms of operating margin among the carriers ranked in the Airline Business annual financial rankings. Its remarkable progress continued in the first six months of the current financial year.

TITUSBut it was different when Naikuni took office. Although the airline had become profitable after privatisation and the acquisition of a 26% stake by KLM in 1996, its progress was faltering. “I found an airline that had done well after privatisation and was beginning to rest on its laurels. It was sometime in the year 2000 that profitability had started to diminish,” Naikuni recalls. “Complacency had crept in, and I also found a lack of realisation within the whole organisation about the worsening position, especially among senior and middle management. What I had to do was bring what I call ‘shock therapy’ into the organisation.”

The greatest shock was felt among top management, which he cut by 50% and replaced five out of seven in crucial positions, while also redefining their roles. “The top had got it wrong,” he says, “not the bottom. I talked to staff at every level and told them how bad things were going and of the need for urgency in reversing the decline.” Not everyone within the airline welcomed the sharp wake-up call, and there was some resistance, although this was largely underground. However, the force for change he had unleashed had become so powerful, Naikuni says, that the resistance soon crumbled.

Naikuni was not deflected by pockets of criticism. His geniality and mild manner hides a steely edge, honed by years of toil within the Magadi Soda Company, where he worked his way up from when he joined as a trainee engineer in 1979 to managing director by 1995. A two-year secondment as permanent secretary in the Ministry of Information, Transport and Communications, with a wide range of responsibilities, further enhanced his profile. Those who know him well are keen to point out that in spite of having wielded the axe, his style is not dictatorial, rather more consultative and visionary. A notice in his office that says “none of us is as strong as all of us” gives some insight into his collective approach.

Naikuni initiated the Kenya Airways Turnaround Project, employing a consultancy as facilitator, which, together with 40 of Kenya Airways’ own staff at a lower level, started examining a number of projects identified by them. “I monitored progress very closely to ensure these were implemented,” he says, “and we delivered 80-85% of what we set out to do within 18 months. There were a lot of doubting Thomases who had said that this could not be done. But we proved otherwise.”

Stopping the waste
The two main elements of the plan were to eliminate waste and increase revenues. “I don’t like talking about cutting costs,” Naikuni says, “there is nothing wrong with costs, it is wastage that is bad.”

Two subsidiaries stood out for their negative impact on the balance sheet – Flamingo Airlines and Kencargo. Flamingo Airlines had been set up in 2000 to provide feeder services from domestic points with a fleet of two Saab 340B turboprops. “When we started looking at wastage,” he continues, “we soon found that our domestic subsidiary with two small aircraft had a completely duplicated, monolithic structure with its own management and operational set-up. It was not surprising that it was losing money heavily.” Naikuni closed down Flamingo Airlines and merged domestic flights into the mainline operation, with the result that these now produce a small profit.

“Then we looked at Kencargo. This was a joint venture between Kenya Airways, KLM Cargo and Martinair and it started because when Kenya Airways was privatised, it had no experience in cargo. Initially it was a good idea to have such a subsidiary and it soon developed its own strength. However, it was not viewed as part of Kenya Airways, but as a separate organisation dominated by its two Dutch owners,” Naikuni observes. “We all agreed that the time had come to move out of Kencargo and set up KQ Cargo, which is now part of our own commercial department.” Since this took effect, cargo revenues have been growing by 30-40%, he says. Naikuni adds that Europe still accounts for the majority of its cargo business, but that there is an increasing emphasis on the Far East, especially China, which is moving into Africa in a big way, investing in the oil industry and trading electronic goods for fresh produce. Tourism into Africa from the East is also growing.

Gateway to the East
This is reflected in a new route to Guangzhou, with other points in China and the Far East being considered, along with eastern Europe. Naikuni also says that Kenya Airways intends to serve Paris from the middle of 2006, which should give the airline another European hub operation similar to that with KLM at Amsterdam. These plans are part of a strategy to develop the intercontinental network in tandem with its growing African routes through the Nairobi hub.

A 49% equity investment in regional Tanzanian carrier Precision Air Services also facilitates access for its intercontinental passengers to the famous tourist attractions in Kenya’s neighbour through the Nairobi hub. Managing director Alfonse Kioko, who moved from his position as Kenya Airways general manager for the Middle East and Asia to Precision Air, outlines three reasons for the Kenya Airways investment. “Precision Air was a profitable company, it had a good reputation,” he says, “and it was regarded as the second national carrier with full traffic rights.” Today, Precision Air has the biggest network in Tanzania, serving 11 destinations from hubs at Dar es Salaam, Kilimanjaro, Mwanza (Lakes region) and the spice island of Zanzibar, providing seven daily connections to Nairobi in total, now operating two ATR 72 and four ATR 42 turboprops, with a Boeing 737 due to be leased next year. Commercial director Hugh Fraser says that all routes are continuously monitored and a weekly performance meeting enables the airline to perceive trends and take action.

Having largely achieved what was set out in the Kenya Airways Turnaround Project, Naikuni was determined that the airline should continue to move forward. “We have started our Performance Improvement Programme [PIP]. Again we are using the same principles. We let junior staff run the programme, guide them and monitor progress. What this also does,” says Naikuni, “is develop the high fliers and lets us know what happens on the ground. We are already seeing some results.” According to finance director Neil Canty, the most significant challenge faced by the airline is reducing the high cost of fuel, which accounts for 26% of expenditure. “We have put in place a fuel hedging policy that buys management time to deal with sudden changes,” Canty says, “but the longer-term solution is the way we burn fuel on an operational basis and we are appointing a fuel manager to develop an appropriate strategy.”

The Kenya Airways fleet and how it is operated will be the central feature of this new strategy. Having completed its most recent fleet renewal with the delivery of the third Boeing 777-200ER last June, the airline has since concluded an eight-year lease agreement with Singapore Aircraft Leasing Enterprise for three 737-800s for delivery this summer. The new, longer-range 737-800s will replace old 737-200s, whose leases expire this year, giving the airline greater reach within Africa. A new fleet development plan envisages the acquisition of six to eight additional aircraft between now and 2010, which will require a commitment soon, says Canty. Although Kenya Airways now has an all-Boeing fleet, Naikuni confirms that he is negotiating with both Airbus and Boeing. “What matters to me is the bottom line, not which company supplies the aircraft,” he says.

Canty says that for operational efficiency, the airline has been graduating towards a preference for new aircraft, with a broad objective of a 60/40 split between owned and leased aircraft to provide a balanced portfolio. “Owned aircraft give us the flexibility to sell if the need arises, although we take residual value risk,” he says, “while leasing is a bit of a straitjacket.” The lease of the new 737s and the replacement of the two owned 340B turboprops will skew this balance, but Canty says this can be corrected in the next acquisition period. The fleet currently comprises 21 aircraft, of which 11 are owned and 10 on operational leases, including three owned 777-200ERs, five leased 767-300ERs, four owned 737-300s, two owned and two leased 737-700s, three leased 737-300s and the two owned 340Bs.

On a wider African front, Naikuni professes a degree of frustration with the lack of progress made in opening air transport markets. “The Yamoussoukro Declaration was first signed in 1988, and we are now in 2005 and nothing has happened,” he says of this pan-
African liberalisation blueprint. “It is too ambitious. Can you do this for the whole of Africa? I don’t think so. What we need to do is to start on a regional basis, have open skies in West Africa, East Africa and southern Africa.” Naikuni says there are two issues that should have been addressed. Yamoussoukro does not have a single champion who can move the process forward, and it does not address the concerns of the smaller countries and those without their own airlines, which fear being sidelined by stronger members.

East African open skies
The East African Community, which comprises Kenya, Uganda and Tanzania, is now discussing open skies and Naikuni is confident that this will happen in the not-too-distant future. He can even foresee a new tri-national East African Airways, from whose demise Kenya Airways was born in 1977. “I do not see a politically driven East African Airways, but I can envisage a private initiative. We are now quoted on the stock exchanges of all three countries and nationals can invest in the airline. That to me is a way towards such a concept, and it could happen,” he remarks, “but we can’t go back to a state-owned situation and repeat the mistakes of the past.”

West Africa is still a difficult area, although an increasing level of trade between East and West Africa is an encouraging sign, in spite of language still being a barrier. Following the merger between Air France and KLM, Naikuni sees the latter’s strength in the region as a good vehicle for increased access to West Africa. “We have been discussing with Air France how we can align ourselves and we have been given the go-ahead to join SkyTeam [its IATA Operational Safety Audit has been completed as a step on the way to this goal].” Kenya Airways is already flying to the Ivory Coast, Mali and Senegal, but intends to serve more destinations, possibly in a codeshare with Air France.

“My vision is to fly to every capital in Africa. So people can fly wherever they want. We can’t fight poverty if Africans cannot travel. I would also like to see a time when Europe will make it easier for Africans to access the European Union.”

Clearly, Naikuni’s work is not yet done, but already he can walk tall in the self-belief that while he remains in charge, the airline is in safe hands. Kenya Airways is the good news that Africa has been waiting for.

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Source: Airline Business