[kictanet] [rescuing KQ - the fallacy of home Airport advantage..] The real reason why Africa struggles with eCommerce and Airlines

Wed Mar 13 23:07:17 EAT 2019

 Hi Ali & interested listers,
Just a quick reply with examples to show that Airport advantage is an outdated fallacy. At best it can only buy time (postpone the inevitable) - which sadly will not secure investor interests over the long-term.
Airline business is inherently volatile (thus higher than normal risk exposure for investors) due to significant impact of multiple external factors (fuel prices / currency fluctuations / geopolitics / regulations / market dynamics / strategy failure / competitor actions / bad luck etc) on typically thin margins. More so, if there is lack of scale.

My view is that, for sustainability (and risk reduction for investors), the KQ management needs to generate more bold ideas and creative strategies (e.g. a contextualized, policy backed distribution paradigm - ideally with an aggressive push for scale advantages).
A few examples: 

1. SAA - (which is an SOE) is reportedly insolvent. SAA has preferential treatment at its home airport / hub (ORTIA - also an SOE) in JB and that has not helped keep it in the black.
https://simpleflying.com/south-african-airways-bankrupt/
2. Emirates Airlines reportedly struggles to remain in the black after "posting an 86% drop in half-year profits (FY18/19) as the Middle East's leading carrier was hit by a hike in oil prices and currency devaluations. It recorded a profit of just USD $62 million in the first half of the 2018-2019 fiscal year compared with $452 million in the same period last year. It's net profit in the six months to September 30 was also impacted by other challenges and expected tough months ahead. Emirates, one of the world's biggest airlines, and which flies to more than 150 destinations, said the cost of fuel amounted to a third of its expenses."
https://phys.org/news/2018-11-emirates-airline-half-year-profit-oil.html
3. State owned UAE National flag Carrier (Etihad Airways) is reportedly struggling with losses (due to a failed strategy of growth by acquisition). It runs Abu dhabi (UAE's capital city) airport. 
"In its last two reported financial years alone, the airline hemorrhaged nearly USD $3.5 billion in losses."
https://www.apnews.com/7f9a0fa4bdca40ebad98b4d89fd773ee
4.Qatar Airways is reportedly in the red with a USD $69M loss, which it attributes to the GCC geopolitical standoff:https://www.reuters.com/article/us-qatar-airways-results/qatar-airways-blames-69-million-annual-loss-on-gulf-dispute-idUSKCN1LY0N1
5. Loss making Air India is reportedly in ICU (apparently investors don't even want to touch it):https://www.news18.com/news/opinion/why-no-one-wants-air-india-stake-accumulated-losses-more-than-indias-health-budget-in-fy18-2053171.html 
6. Struggling Jet Airways (India) has reportedly grounded 25% of its fleet. https://simpleflying.com/jet-airways-struggling/
7. A high-level analysis of Middle East (Etihad, Qatar, & Emirates) flag carriers business model and strategy in an attempt to explain why they are struggling:http://fortune.com/2019/03/11/etihad-emirates-qatar-airways-crisis/
The key point is that times have changed and ideas like "flag carriers" and "hub models" are now obsolete concepts in the face of emerging business model innovations:
https://skift.com/2018/09/04/why-do-national-airlines-still-exist/
https://books.google.co.ke/books?id=7j1ZBwAAQBAJ&lpg=PA199&ots=qb5nOKChGw&dq=airline%20hub%20model%20obsolete&pg=PA199#v=onepage&q=airline%20hub%20model%20obsolete&f=false
Brgds,Patrick.
Patrick A. M. Maina[Cross Domain Innovator | Independent Public Policy Analyst - Indigenous Innovations]

    On Monday, March 11, 2019, 7:15:28 AM GMT+3, Ali Hussein <ali at hussein.me.ke> wrote:  

 Patrick
I think you missed the thrust of my argument. Mine was NOT about rescuing KQ. I'm all about a major REBOOT of how this country treats its Air Transport Assets. Call it what you may. For all I care, KAA can take over KQ if that will look better in the Public Domain. Bottom line is that these two critical National Assets need to be operated as one. We are deluding ourselves if we think we can win otherwise.
Regards 
Ali Hussein

Principal

AHK & Associates

Tel: +254 713 601113

Twitter: @AliHKassim

Skype: abu-jomo

LinkedIn: http://ke.linkedin.com/in/alihkassim

13th Floor , Delta Towers, Oracle Wing,

Chiromo Road, Westlands,

Nairobi, Kenya.

Any information of a personal nature expressed in this email are purely mine and do not necessarily reflect the official positions of the organizations that I work with. 

On Fri, Mar 8, 2019 at 12:13 PM Patrick A. M. Maina <pmaina2000 at yahoo.com> wrote:

 Ali, Actually I responded to the main substance of your points. Based on what you wrote, it appears that you support the idea of KQ taking over of KAA because you believe there are certain strategic benefits - and you cited ET and EK as examples. 

The main (public domain) reason as to why KQ wants to take over KAA is to avoid imminent collapse (I believe within the next 12 months). So supporting the takeover means you are supporting KQ's rescue - or is there another interpretation? 

While we may be on the same page with regards to the need to rescue KQ, our approaches are different. Your arguments in support are largely emotional and speculative (i.e. not based on an objective analysis of facts/data). It would be very easy for me to refute them all - with facts / data - but what is the point, since at the end of the day we both agree that the most important thing right now is for KQ to be rescued?

Where I see material divergence is that you are taking an all-or-nothing perspective (not entertaining alternative rescue/bailout ideas), whereas I am proposing that multiple options be considered, just in case the KAA plan does not work out. I'm just worried that an all-or-nothing approach is very risky given what could potentially be at stake. Do you agree?
I'm sensing some tactical ambivalence though from your contradictory comments. Smart move, but makes it difficult to engage.
Brgds,Patrick

    On Friday, March 8, 2019, 11:10:55 AM GMT+3, Ali Hussein <ali at hussein.me.ke> wrote:  

 Patrick
I note with a bit of surprise that you've really not responded to any of the points I raised. And by the way I never mooted the point of rescuing KQ. :-) 
Let me weigh in one last time on this issue:-
The KQ saga CANNOT be looked at from a purely commercial perspective. The very competitiveness of the country and the region may well depend on KQ. We cannot piggy ride (pun intended) on someone else to ship and transfer critical human resources and goods in and out of our country. I also recommend that you read the book The Myth of Capitalism to understand the consolidation that is going on in the Airline Industry among others.
Regards

Ali Hussein

Principal

AHK & Associates

Tel: +254 713 601113

Twitter: @AliHKassim

Skype: abu-jomo

LinkedIn: http://ke.linkedin.com/in/alihkassim

13th Floor , Delta Towers, Oracle Wing,

Chiromo Road, Westlands,

Nairobi, Kenya.

Any information of a personal nature expressed in this email are purely mine and do not necessarily reflect the official positions of the organizations that I work with. 

On Fri, Mar 8, 2019 at 10:47 AM Patrick A. M. Maina <pmaina2000 at yahoo.com> wrote:

 Thanks for weighing in Ali. 

Personally I support the idea of rescuing KQ because it is a Kenyan company, employs thousands of Kenyans, and is an important ecosystem component for key sectors like Agriculture, Hospitality and Tourism. 

It would have been great if KQ management had generated several options - rather than put all eggs in one (politically volatile) basket which, if it backfires due to political roadblocks, could lead to major losses for investors - including Government - and cause ripples across key sectors (e.g. banking).
If I were to advise KQ stakeholders, I'd ask them to consider generating additional options (and testing them in parallel) so that they can further reduce the overall exposure for their investments. 

Here's one idea (not sure if they have already explored it - but it could be worth a try):

Right now we have UG and TZ trying to build their own airlines (and investing billions in the same - while taking major learning curve risks, yet just next door we have KQ, with 41 years of valuable experience, that needs a bailout). We also have Rwanda, with a tiny economy (1/8th of Kenya) struggling with loss making Rwandair that might never be viable. Then there's ET, which claims to have a profitable business model (though enjoys government subsidies e.g. tax exemption and super-low gov. mandated wages). All these countries are (save for a few random misunderstandings / suspicions) friendly neighbors with shared economic and strategic interests...
Is it worth trying to revive the idea of "East African Airways" (or something similar) by getting these four neighboring countries to work together with Kenya for scale benefits? Has that idea been explored? 

If it works, KQ would get its bail-out, hopefully with less political friction, but could lose its "national flag carrier" status as a trade-off (which it will lose anyway if it goes under). 

The idea would require engagement and support at head of state levels (the advantage of that being speed and clarity in terms establishing feasibility / buy-in and moving forward - if there is buy-in). 

I think the most important (and pragmatic) goal at this time is to stabilize things, protect local investors' interests (including government) and avoid shocking the economy. So it is worth trying out different options to see what ultimately works best for the country. 

Brgds,Patrick.

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

    On Friday, March 8, 2019, 12:27:14 AM GMT+3, Ali Hussein via kictanet <kictanet at lists.kictanet.or.ke> wrote:  

 Patrick and all
In relation to KQ your argument is flowed. Let me explain why.
If country specific scale is the issue here then Emirates and Ethiopian (which..surprise, surprise..is a profitable African Airline that has achieved scale).
These two Airlines have combined critical air transport infrastructure to give themselves unfair advantage. Ethiopian has executed a mini-hub strategy and acquired stakes in other African airlines. Great strategy and execution, which by the way would not be possible without the Patient Capital of the Ethiopian Government. 
Did I hear someone say KAA/KQ merger? 
Ditto with Emirates. 
Emirates has been a loss leader for the Emirate of Dubai until very recently. The growth and prosperity of Dubai as a destination was anchored around the Emirates Group which controls the airline and other air transport infrastructure. The strategy has been so successful that today DNATA (
Description
Dubai National Air Transport Association), the  Emirates Group subsidiary, provides aircraft ground handling, cargo, travel, and flight catering services across five continents in 70+ airports. 
Scale? The only thing that stops us from scaling is that we have been told for so long that we can’t manage our own affairs until we have come to believe it.
Let’s not perpetuate this defeatist attitude. 
My two cents. 

Ali HusseinPrincipalAHK & Associates+254 0713 601113 

Twitter: @AliHKassim

Skype: abu-jomo

LinkedIn: http://ke.linkedin.com/in/alihkassim

"We are what we repeatedly do. Excellence, therefore, is not an act but a habit."  ~ Aristotle

Sent from my iPad
On 7 Mar 2019, at 11:48 AM, Victor Kapiyo via kictanet <kictanet at lists.kictanet.or.ke> 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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