[kictanet] [corrected version] [connecting the dots] The real reason why Africa struggles with eCommerce and Airlines

Thu Mar 7 14:37:52 EAT 2019

 Hi Victor, thanks for your comments.

On KQ-KAA marriage, I would speculate that a "too big to fail" dilemma might be the issue (like it happened in the US during the 2008 banking crisis). Perhaps there is concern on the kind of macro-economic shock-waves that would be felt if KQ went under. How much of its debt has Government guaranteed? How would KQ's failure impact the banking industry? Local currency? Agriculture etc.... 

These would be legitimate concerns imo. Rationale being that though the banking industry is private, it is still the "financial custodian" of our economy - hence stability and public confidence in the banking system are critical issues. On Agri, how deeply is the KQ route network meshed with time-sensitive fresh produce exports? etc.

Perhaps there would be less politics around it if there was a completely transparent and sober discussion of the rationale vs risks vs benefits? Have they looked at (or generated) other creative alternative options?
On making sense of international payments, it helps to look at it in terms of pre/post-scale scenarios/models: 

1. Who absorbs the losses that KQ makes in order to keep it afloat? Is it not other parts of the economy? So technically we, a poor country, are giving aid to rich countries. Perhaps that money would have been used better if our farmers, teachers and nurses were paid with it? 

2. Do we *really* need a flag carrier (with Nairobi as hub) to maintain our tourism and logistics industry? How does Tanzania manage to compete so well with Kenya without a hub or flag carrier? I think there is an unrealistic overestimation of just how much KQ contributes to our tourism economy. Especially since foreign carriers, who operate at massive scale, have been known to offer better deals (leading to over-capacity problems for local players). 

3. What if KQ, ET and other tiny sub-saharan Airlines amalgamated to one "Central Pan-Africa Airline" - a single multi-lateral African entity majority owned by all central-region (East, Central, West Africa) governments? How would that impact their global negotiating power when procuring finance, equipment, fuel etc? What about margins and profitability (especially given that it would incentivize accelerated removal of intra-africa trade and travel barriers)? Food for thought.

4. How can Africa ensure that African Airlines buy fuel directly from Africa (Algeria, Nigeria, Angola, Egypt and Libya) under a Pan-African pricing structure, and pay for it using a common African currency (or designated basket of multiple currencies or even G2G barter deals)? How would this impact on hedging costs and risks?

 5. Can an economically integrated Africa offer better financial services (funding / insurance) to collectively owned Pan-African airlines? .. etc.. etc.

 Some things only make sense at scale. The way thingscurrently are, KQ and similar African airlines (including ET, incidentally) are just "cooking kalongo". The entire African Airline industry does not make sense, as currently structured. 

So African Airlines' lack of scale means that an unsustainable bulk (guessing >75%) of their revenues will always end up with external value chain players. In such a case the airlines become a vehicle for wealth extraction that redistributes wealth from Africa to developed countries.
It would be great if a member of this group interested in looking closer at the topic (and with some time to spare), prepares a cumulative profit and loss statement for all 41years of KQ's operations to see the net gain for the country v/s contribution to value chain suppliers from countries. This could be compared with tourism industry revenues (after prorating KQ's estimated passenger traffic contribution v/s other airlines).
Brgds,Patrick.

Patrick A. M. Maina[Cross Domain Innovator | Independent Public Policy Analyst - Indigenous Innovations]

    On Thursday, March 7, 2019, 11:48:29 AM GMT+3, Victor Kapiyo <vkapiyo at gmail.com> wrote:  

 Interesting thoughts Patrick.
We don't offer these services locally, so how will Kenya get paid, if at all? Does KQ taking over local airports help?
1. International Vendors (Equipment / Systems / Fuel)2. International Hedge funds (e.g. Price / Currency hedges)3. International Insurance.4. Prioritized creditors (most likely international)5. International Airports.
On Thu, 7 Mar 2019, 11:22 Patrick A. M. Maina via kictanet, <kictanet at lists.kictanet.or.ke> wrote:

Correction: KQ revenues in 2018 were ~50 Billion. 

Dear Listers,
Whenever we have a spectacular failure in industry, we rush to attribute it to one or many of the five factors below:
1. Management competence (e.g. manifests through "culture" and/or lack of responsiveness to new/non-standard challenges; lack of awareness that competence is situational) 
2. Failed Strategy (e.g. markets respond better to competitors or are already locked-in. Strategy can fail even where the management is highly competent.)3. Corruption / conflicts of interest (includes nepotism, procurement challenges e.g. unethical vendor practices or blatant theft) 
4. External factors (e.g. global economic / geopolitical dynamics)
5. Force Majeure (sudden unforeseeable calamities - whether natural or man-made)

I'd like to put forward one reason, unique to Africa, that is seldom raised or addressed, yet it in many cases could be the primary reason why many African businesses struggle to remain viable despite adopting business models that succeed in other countries: The biggest obstacle for most African businesses is the structural operating environment. Simply put, Africa doesn't scale. 

* Scale is the reason that KQ's economic doom was sealed in 1977 when East African Airways was dissolved.
* Scale (not trust or delivery infrastructure) is the reason eCommerce simply can't and won't work in Africa (yet works in India) under the current circumstances. 
Certain types of businesses are simply not viable without scale. It doesn't matter what strategy, caliber of management or whatever else is used. Without scale, you have to swim upstream and perform miracles. No wonder we tell tourists that Kenya / Africa is "Magical". Only a magician can do certain businesses in Africa - under current circumstances.
For example KQ earns ~Ksh. 50 Billion annually. Where does the money go? Do you know who really benefits from African Airlines failure to leverage scale? Here's my list:
1. International Vendors (Equipment / Systems / Fuel)
2. International Hedge funds (e.g. Price / Currency hedges)
3. International Insurance.4. Prioritized creditors (most likely international)
5. International Airports.
The only country that doesn't get paid is Kenya. Due to lack of scale, we end up literally giving financial aid to rich countries. This is not a smart thing for a poor country to do.

Scale benefits are (in part) what makes Delta Airlines, for example, operate with double digit margins, earn Ksh. 4.4 Trillion in a year (enough to run our country for almost 2 years without borrowing) which translates to Ksh. 1.3 Billion DAILY PBT (profits before tax). Yes, a daily profit of Ksh. 1.3 Billion. That kind of performance is not magical - it's just smart application of basic economics and intelligent (strategically meaningful) politics + policies.

eCommerce? USPS (et. al) operation at scale is what made Amazon possible at scale. Prosperity is not just about efficiency - the size of market matters. It matters a lot!

Africa combined is the 8th largest economy in the world yet as individual countries we barely register on the global radar. Individual African countries are simply not viable. No amount of aid or borrowing will fix scale deficiencies - in fact, the lack of scale is what makes our current national debts worrisome and risky! 

The idea of "national pride" carriers is ancient and obsolete. We need Pan-African Champion Airlines (where countries buy shares in not more than three Pan-African Airlines - North, Central and South). This would immediately dissolve the perceived (delusional) national advantage of self-imposed barriers to open skies and regional trade.
The current heavy reliance on international markets is not smart at all (we are highly exposed to global shocks and geopolitics); it should be supplemented by sensible and massive intra-Africa trade. 

Pan-Africanism is not a sentimental idea, it is a rational and intelligent economic strategy. It is the only way to create a common and unified mindset that will unlock scale in Africa. 

Thankfully a good number of African leaders and technocrats are recognizing these challenges, hence the AfCFTA (African Continental Free Trade Area) initiative, which requires ratification of the Single African Air Transport Market (SAATM), the Protocol on the Free Movement of Persons, and the African Passport, as part of the integration process. 
As business people it is in our interest to support these initiatives as much as we can - but also to be vigilant of powerful (foreign state-backed) resource-extraction MNCs that would want to hijack or sabotage Africa's integration because it spoils their centuries-long plunder party.

How does my argument hold, in view of success stories like Equity and/or Safaricom? In science, we disprove arguments by looking for a 'black swan" (just a single instance of contradiction) - are they not the Black Swans? Nope! Equity and Safaricom have certain common business model aspects which allow them to operate "successfully" with limited scale. The most obvious being network effects - but there are other non-obvious factors which are out of scope of this article. Still these are still tiny and fragile operations relative to their scale-leveraged counterparts which earn tens of billions of shillings in revenues daily (and trillions annually). Our culture of mediocrity is what makes us celebrate our (relative) minions. Failure to think in terms of scale is dangerous.. it leads to (or encourages) predatory corporate behavior, comfort zones, mediocrity and other mental barriers.
Thanks for reading. I welcome your thoughts on the above.

Good day & Brgds,
Patrick A. M. Maina[Cross Domain Innovator | Independent Public Policy Analyst - Indigenous Innovations]_______________________________________________
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