Kenya Airways is (still) in financial difficulty. Why national carriers are struggling
Jomo Kenyatta International Airport in Nairobi, Kenya offers flights to more than 56 destinations in 39 countries. This should be a remarkable feat in these final days of the global COVID-19 pandemic.
Among the brightly colored planes on the ground stands out the black, red and green tail of the Kenyan flag. This aircraft livery belongs to Kenya’s national flag carrier, Kenya Airways. The airline, proclaimed Pride of Africa under his name, was founded in 1977 following the breakup of the East African Community and the dissolution of East African Airways, a joint venture between Kenya, Tanzania and the Uganda.
In 2019, Kenya Airways carried over 5.1 million passengers while its low-cost subsidiary, Jambojet, carried an additional 726,000. These were operational milestones to be celebrated by the airline and the country. But these pleasing figures did not change the fortunes of the airline.
Kenya Airways’ losses tripled to $333 million in the 12 months to December 2020 as COVID-19 containment measures reduced passenger numbers to their lowest level since 1999.
Kenya’s national airline is not alone in its difficulties. Over the past two decades that I have studied in the industry, national carriers have gone bankrupt in ever-increasing numbers. For example, Delta Air Lines, one of the largest carriers in the world, recorded an annual loss of $12.4 billion in 2020.
While it is useful to keep Kenya Airways and Delta Air Lines in mind when it comes to the impact of the COVID-19 crisis on international airlines, this does not answer the larger question of why airlines seem to go from one crisis to another. To understand this problem, it is necessary to examine the nature of the airline industry, the factors that shape it and the challenges it faces in achieving profitability.
Tale of two airlines
In recent years, Kenya Airways has received a series of government bailouts and is reportedly seeking additional government support due to COVID-19 related losses. He even sought to raise funds by applying for permission to operate the highly profitable Jomo Kenyatta International Airport. This request was blocked by Parliament, citing a possible loss of jobs and public revenue.
Previously, the Kenyan government’s decision to bring in a strategic investor in 1995 resulted in short-lived profitability before the airline plunged back into losses.
Meanwhile, US airlines received direct bailouts for the September 11, 2001 terrorist attack of $15 billion and a $25 billion COVID-19 package. Between these bailouts, the financial crisis led to the bankruptcy of all major US carriers which benefited from debt restructuring and pension fund bailouts.
In short, the history of airline bailouts around the world is long and costly.
The COVID-19 pandemic is simply the latest major setback for the industry. The International Air Transport Association, the international trade lobby group for airlines, has described the pandemic as the worst shock to air travel and the aviation industry since World War II. In its 2020 annual report, it said global revenue per passenger-mile fell 66% and airline operating revenue fell 60% to an after-tax loss of over $118 billion.
Without government aid to airlines worldwide of over $173 billion, many of these airlines would have failed.
The truth is that airlines hold a special place in people’s hearts because they often carry the name and flag of the countries they represent. But this emotional attachment is not enough to ensure the financial sustainability of national airlines. Kenya Airways, South African Airways and Ethiopian Airlines survived against all odds, but the cost was high.
When the Wright brothers first flew in 1903, it was unclear that commercial air travel would ever become common practice. In fact, most governments have had to intervene directly or indirectly with financial support to foster the development of their national airlines. Many governments owned these carriers outright while others used various subsidies to support their operations.
But in 1978, major changes were triggered by the US Airline Deregulation Act. This act liberalized the commercial airline industry, ending the role of the US federal government in setting fares, assigning routes, and controlling market entry. Internationally, the United States has also begun to push for change.
As a result, governments around the world have begun to step back from ownership and support roles. The market was now expected to determine the fate of airlines and it has often not been kind to the global airline industry.
The major economic recessions of the early 1980s and 1990s were followed by the attacks of September 11, 2001, and the global financial crisis of 2008. In each case, the global airline industry suffered record losses. Airlines went bankrupt or merged with other carriers to survive.
In addition to major shock events, airlines are vulnerable for a number of additional reasons.
The first is that the industry is very sensitive to economic cycles. When economic activity slows, the airline industry is one of the first to feel the effects.
Additionally, airlines need high-cost assets like aircraft and highly trained personnel including pilots, flight attendants, and mechanics to perform safe, high-quality operations.
Third, airlines need substantial infrastructure to support their business. These include airports, air traffic systems, and training and maintenance facilities.
But those that survived – and the new ones that took off – did so because of growing demand across the world. According to the International Air Transport Association’s 2019 Annual Review, the global airline industry carried nearly four billion passengers and 64 million tonnes of cargo in 2018. The pandemic has brought the airline industry back to 1999 levels. .
It’s hard to be an airline
Airlines offer the fastest and safest form of long-distance travel, provide direct and indirect employment, and contribute to tourism and economic development.
For these reasons, nations and regions have a stake in the health and well-being of airlines.
But how many airlines is too many or too few?
There is no simple answer to this question. High-income countries with large domestic traffic bases like the United States may support a handful of carriers to carry the bulk of their commercial passengers. Countries without a large domestic traffic base like the United Arab Emirates have to rely on attracting international and connecting traffic.
But low-income countries struggle to support a single carrier. Examples of airline failures during the pandemic include Air Mauritus, Avianca (Colombia), LATAM (Chile) and Philippine Airlines.
In Africa, it may take a region to support an airline as the industry needs a large base of potential customers and significant investment in assets and infrastructure.
In 1999, African countries signed the Yamoussoukro Decision which commits members to liberalize air services. The Single African Air Transport Market and the African Continental Free Trade Area have broadened the vision. Liberalizing air service agreements would allow airlines to tap into a larger base of potential passengers, skilled workers and government resources.
The talks between Kenya Airways and South African Airways are a tangible expression of the vision to create a regional carrier structure strong enough to withstand the unpredictable winds of the aviation industry.
Read more: Airline tie-up for Kenya and South Africa: Possible rewards and risks
Perhaps 2022 will be the year Africa puts aside purely national aspirations and rises up to make the goal of a single sky with a few strong and safe airlines a reality.