Tuesday May 29, 2007
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Investors need not be jittery over KQ

By Kap-Kirwok Jason

The pain of loss of loved ones in the Kenya Airways plane crash still throbs with every heartbeat, every thought.

Hopes and cherished dreams, having been cut adrift, but beyond this reality, life will go on. Wounds will heal. Memories may linger, but time will provide the ointment that will soothe and soften the sting of remembrance.

There is another group of people who also need some healing. There is the nervous investor who fears that the air crash might translate into a dip in the fortunes of the airline. And there is the traveller who may suffer bouts of anxiety concerning the safety of travel in general and by KQ in particular.

There is a simple cure for the nervous investor: It is called the fundamentals of airline economics. The airline business, traditionally, is notorious for its cyclical nature. There are four distinct phases. The expansion phase is driven by GDP growth and characterised by increased passenger demand, higher revenues and a rush to cash in on increased seat capacity. This often translates into aircraft orders which, if new, need at least two years before delivery. Since profit attracts competition, this phase is also characterised by new market entrants.

As supply outstrips demand, growth only occurs if the economy expands. Any slow-down in growth triggers a downturn phase, passenger demand diminishes, yields drop and airlines begin to consider capacity reductions.

In the third or stabilisation phase, the slowdown in GDP growth settles, airlines typically institute cost-cutting measures and reduce yields to fuel passenger demand. The final or recovery phase is triggered by an upturn in the economy. As growth picks up, passenger demand increases, revenues and yields rise as airlines reap the results of cost-cutting measures.

The net result is another phase of expansion. In the 60 years since international air travel came into its own, this has been the typical cycle, only temporarily interrupted by shocks such as terrorist attacks, outbreaks of pandemics or large-scale military conflicts.

The question is: Is Kenya Airways immune from this cycle? The answer is, thankfully, yes, at least for the medium term. A combination of factors accounts for the fact that KQ has largely defied the typical cycle since privatisation more than a decade ago.

The effects of cost-efficiency, strategic manoeuvres and weak competitors in its principal market (Africa) have ensured consistent profitability. Even with increasing pressure from Gulf-State airlines and European carriers, KQs strength and head start will ensure it continues to increase market share.

Besides Africa, long-term growth will come from Asia, mainly China and India. Today, every US citizen makes on average 2.2 air trips a year. The figures are just 0.02 trips for India and 0.06 for China. There is, therefore, a huge potential for air travel in these countries.

As for the anxious traveller, it is important to remember that such bouts are short-lived. The fact that KQ management has started compensating relatives of crash victims is a reassuring sign that it understands speedy compensation as part of the recovery strategy. A complementary strategy should be to separate fact from fiction.

While Africas air safety record is among the worst, KQ is not a typical African airline. Its standards are at par with the best in the world. If the assessment of African safety were based on the main carriers KQ, South African Airways, Ethiopian Airways, Air Maroc, Air Mauritius and Egypt Air and not the decrepit, fly-by-night airlines, then it compares favourably with safety records of international airlines.

The message to the nervous investor is this: KQ is a solid international airline with a great future. If performance were to dip, it is a consequence of the cyclical nature of the industry. A recovery phase will follow if commitment to strategy remains. In any case, air travel is the safest mode of travel and accidents happen to even the best.

The writer is a former strategy director with Kenya Airways

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