Kenya Airways CEO Update – Building a Network Strategy and Adding New York

Transcript

Sebastian MikoszI think we finish a very important first phase of a difficult time, which was a very important financial restructuring. Over the last year, we went into some debt issues, cashflow issues. Thanks to the support of the Kenyan government, there is a new balance sheet that was developed within KQ, KQ being Kenya Airways. We converted that into equity. We were given sovereign guarantee from Kenyan state. KLM remained our industrial shareholder and main partner.

Until the end of last year, we were focused on stabilizing the financial situation. Now, my job and the job of my team is to focus on the industrial changes and the industrial development, which of course means growing the network, but continuing also working on the cost side. We have some of our social issues which we need to address, which is changing increasing productivity.

Basically, I think that we are in the phase of really shifting Kenya Airways into a profitable company. We're still not yet there. There's lots to be done. But since seven quarters now our results are consistently improving. So I believe we're on the good path. Opening a nonstop connection from Nairobi to New York is of course, a very big event. This is by the way, the largest project we have in KQ currently, it's launching this flight.

We decided it for two, three main reasons. First of all, there is already an existing traffic. There's more than 100000 U.S. tourists coming to Kenya every year. We also have a lot of corporate traffic. There is 50 companies, U.S. companies that elected Nairobi as their hub for Eastern Africa. There is also of course, the potential of working with Delta on all the beyond New York. For us, it's also a strategic decision of going into the North American continent, which we have the technical capacity, because the 787 can fly nonstop from Nairobi to JFK. It's going to be a 15 hour flight, so a long flight.

We believe that the comfort of this connection will really attract a lot of passengers. Of course, from an overall perspective, an airline needs to grow where the biggest markets are, and for sure, New York is just the biggest market on the East Coast of the United States. We're trying to connect to what is the biggest market on the East Coast of Africa. It all makes it for us a really, even I would say symbolic breakthrough.

It's been, as you said, long term and existing project. We open the sales in January and we're going to operate first flight 28th of October this year. The forward bookings are just exactly how we predicted, knowing that the biggest challenge is still ahead of us. Summer, September, are the months where we focus the biggest increase, because there is quite a short forward booking in Africa. Generally speaking, African customers and we are an African carrier, are booking not too much in advance.

On the U.S. market, we just finished our first promo tour. We're going to do three more. It's looking well. I'm optimistic, but I don't disregard the challenge that is ahead of us. For me as a CEO, the biggest challenge of running an airline is always to run a profitable airline, because we are not sponsored. We are not anyhow supported, so the state has gave us a second breathe. But the Kenyan state expect us to be profitable.

We are on a market which is highly competitive. Kenya is one of the most open market in Africa. We have 26 operators flying to Nairobi, most of them daily, some of them even double or tripe daily. The market is being extremely competitive on an unfortunately still pretty small market. The African market overall, for all the continent is still less than a hundred million passengers a year. So the basket to share is not too big.

It is growing, and for sure, Africa has a potential. However, it is not growing at the path as Asia or the U.S. or the said moment Europe, just because the GDP per capita is growing on the constant but slower path than on all the continents. The challenge is remaining infrastructure. There's a lot of states in Africa, we're still lacking good international level of infrastructure. It's been all built but it takes time. It's a boiling, booming place. But still running a profitable operation is really, really challenging.

For the moment, we have already five wide body aircrafts, which will be back within the next 24 months, two Dreamliners that are coming back, which were subleased, and we have three 777s, which are coming back to our fleet. It's already a pretty big shift because our local fleet will grow by one third. We're just in process of creating a five year plan. The plan exists but we're in process of discussing it with the board of Kenya Airways.

This plan definitely assumes grow of our medium range fleet. We are a very happy operator of the Embraers and of the 737s. These two fleets, we're aiming at growing these fleet. Of course, we also have two regional carriers. One of them which is full subsidiary called Jambo Jet, operating Q400s, and here we also see lots of potential. We already order few aircrafts and some more to come. We have our Tanzanian partner called Precision Air, in which we are a shareholder operating ATRs.

Here, we also see quite a lot of potential for growth. Well, maybe not within the next months, but within a year or two, they'll be definitely something to do. The strategy of Kenya Airways will remain as it was for the last year. We are and we want to be mainly an intra-African carrier. We are operating more than 40 African destinations, and we're going to grow not only the number of destinations, but also the number of frequencies.

On many markets where we're present, we fly for example three, four, weekly, and our target is to shift to daily flights, or we fly connected flights called third flights, to one city through another. We want to detach them and have direct flights. Within the next four weeks, beginning of June, we're launching a nonstop flight to Cape Town from Nairobi, it's going to be five weekly. We're launching a direct flight from Nairobi to Mauritius, so it's already this year.

We have quite a significant number of new African cities we want to open. Of course, we're having a close look in a few cities in Asia, particularly Beijing, which has a potential of being a sky team place with the new airport. We are also looking very carefully at few additional European destinations. All of these decisions should come not later than the last quarter of this year. That will go together with the announcements of the fleet. This is what, the plan that we have now.

In Kenya Airways, we had a pretty bad experience of hedging. Hedging is generally a complicated and very emotional element. With my management, we started bringing back hedging as our policy. So with every airline, we will protect ourselves against the volatility of the market through hedging instruments. That's, I would say the basic element. Of course, we're also observing and forecasting. As always in our industry, everybody was forecasting that the fuel price going to go down, just prove that it's not the way, the fuel is going up.

This morning, it's $78 brand barrel, which was 52 not later than six months ago. This volatility is of course the challenge, because you cannot always fully protect yourself through hedging instruments. We have some, I would say baffles in levies, but yes, if the price goes up, we're going to revisit our budgets for the next two years, for sure.

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