How JKIA can be shielded from loss-making airports

In the last three months or so there have been frequent articles supporting or opposing the controversial proposed merger of the Kenya Airports Authority (KAA) with Kenya Airways. Those against the merger plan dwell predominantly on the losses Kenya Airways has been posting, arguing that the KAA, which is doing well, should be shielded from such a deal.

This article will take a different approach, highlighting areas that each of the two organisations should focus on.

Kenya Airways and the KAA are both necessary for Kenya’s development. Examples abound that explain the importance of a port to a country. Britain, for example, grew to its peak in the 1700s and 1800s no less due to its powerful navy and control over sea trade. The country dominated the main form of trade as spices from India and hides from America found their way to countries separated by vast oceans – all controlled by the British Navy that operated out of numerous ports.

She had a vast number of ports that allowed it to access the Atlantic Ocean and subsequently many opportunities for colonialisation. Britain did not only have many ports, she also had many vessels under her control. In Kenya’s case, one could draw parallels with the ports (KAA) and the vessels (Kenya Airways).

Those against the proposed merger cite Kenya Airways’ poor performance. Airline business is very volatile, and very few airlines in the world post profits year in year out. It is worth noting that between 1995 and 2010 Kenya Airways was one of the very few airlines in the world that posted profits. Bankruptcies are a way of life for US aviation industry and every major airline has had to reorganise in recent years.

European Airlines have not been spared either. Alitalia and Air Berlin, once formidable airlines, have stopped operations while Air Belgium and Lufthansa have filed for bankruptcy. The reason for losses in the airline industry is attributed to volatile (rising) fuel prices, excess seat capacity and low fares occasioned by competition. The very long planning horizons complicate operations. Changes take long to effect and even longer to realise results, a situation complicated by impatient boards and the public.

For its part, the KAA began posting a surplus in 2004, which continues to date. The airports and airstrips that KAA run include Jomo Kenyatta International Airport (JKIA), Moi International Airport, Eldoret International Airport, Kisumu International Airport, Wilson Airport, Wajir Airport, Lokichoggio Airport, Malindi Airport, and Ukunda Airstrip. Additionally, the KAA is mandated to maintain other airstrips in the country. Out of the eight airports that are managed by the KAA only three post profits, with more than 80 per cent of the revenue generated by JKIA alone. The loss-making airports compete for resources with the other three and especially JKIA. This is the major reason why until recently little or no development took place at JKIA.

Characteristics of airports that perform well include split of non-aeronautical and aeronautical revenue, source of revenue, spread of the revenue and high domestic traffic. Non-aeronautical revenue accounts for only 20 per cent of total revenue realised by the KAA. The world best practice split is 40 per cent non-aeronautical to 60 per cent aeronautical revenue. Well-performing airports realise over 50 per cent from non-aeronautical sources.

Dubai Airport, for instance,e realized 52 per cent of its revenue from non-aeronautical sources in 2017. Spread of revenue is the other characteristic. Well-performing airports have revenues spread across several customers. The KAA derives 60 per cent of its revenue from Kenya Airways. The third characteristic is the domestic traffic. This is a measure of internal self-sufficiency of airline passengers. Countries like the US, Canada, China and India have large domestic markets.

In sharp contrast over 70 per cent of passengers at JKIA are transit passengers. This means that this traffic could easily transit from any other airport and the likely candidates are Bugesera, Addis Ababa, Entebbe and Dar es Salaam.

This suggests that for Kenya to develop Kenya Airways must be supported to survive. There are several ways of doing this, including creating a special purpose vehicle that promptly bails out organisations in financial distress. We have waited far too long to consider bailing out Kenya Airways. What is important to note is that airlines’ planning horizons are long, and prompt bailout will shield the airline from negative publicity which does not do the business any good.

The KAA must change its model. As pointed out earlier, the split aeronautical and non-aeronautical revenue is 80:20, a dangerous split that needs to be addressed urgently. The following suggestions will assist. Out of the Sh12 billion revenue generated by the KAA Sh10 billion is generated by JKIA. All the airports and airstrips therefore compete for resources, both financial and human capital. This explains why facilities at JKIA remained poor for so many years with smaller loss-making airports and airstrips competing for resources generated predominantly by JKIA.

To shield JKIA from such internal competition models used in South Korea, for instance, would be worth considering. This would involve creating companies fully fledged with independent boards to run the profitable airports. With government support an authority would then oversee the non-profitable airports, support them until they break-even when they would then become independent entities. Incheon International Airport is run by an independent company while the Korean Airports Authority oversees the other airports in South Korea.

Such a model, however, needs capable human capital. Both the airports authority and the airline have not been good at retaining talent. There has been lamentation that they are both run by expatriates. Both organisations have in the past attracted top-notch Kenyan managers who had they stayed on would have been ripe to hold those positions. As a country there must be proactive attempt to locate, nurture and deploy talent.

Dr Kobuthi holds a PhD in Strategic Management and has served at both Kenya Airways and Kenya Airports Authority as a general manager.