How Kenya benefits from government bailout of KQ

Reports on the financial performance of Kenya Airways have elicited much debate in which the national carrier has been baptised as a loss-making entity.

On the surface it is a valid claim to baptise it so. But having followed the discussions around KQ for some time I have come to the conclusion that there is need for a deeper analysis of the airline’s performance.

Years ago KQ was performing well without State subsidies especially because of profitable routes but life is not always a straight line.

Many airlines across the world closed shop in the last one and a half years, including Jet Airways of India, Germania of Germany, Flybmi of the United Kingdom, Wow of Iceland, Small Planet of Poland and Avianca of Brazil. There are reports of other prominent airlines about to go bust.

According to IATA, airlines historically operate more at a loss than at a profit. Between 1990 and 1993, global airlines made a loss of Sh2.5 trillion. The losses hit Sh3 trillion between 2000 and 2005 of which a considerable share was covered by government bailouts.

High gravitational pulls in the aviation sector across the world often see airlines get state intervention through subsidies.

Though, how much is given to airlines is a closely guarded secret by most countries subsidies have assisted loss-making airlines and have been classified as restructuration aid for carriers that were formerly state-owned.

Subsidies in the US aviation sector have a long history. Most US airlines are only able to operate domestically because they have a subsidy of between Sh10,000 to Sh20,000 per passenger. In 2003, German LTU, a privately owned airline, benefited from Sh13.7 in state aid.

Spanish national carrier Iberia Airlines received sh85.7 billion in 1992 and Sh66.6 billion in 1996. Air France received Sh350 billion in 1994, Alitalia Sh170 billion in 1997 and Austrian Airlines Sh57.1 billion in 2009.

Government bailout of state and private airlines could be attributed to the fact that although airlines post accounting losses, they post economic profits to the countries they operate from.

Airlines contribute about Sh88 trillion, an equivalent of 2.4 per cent to global GDP. The air transport industry is one of the most efficient sectors per worker. It has an output of Sh6.5 million per worker per year, translating to about three and a half times the average across the world economy as a whole and exceeds most sectors of the economy.

Here at home, KQ has been accused of getting bailed out by the Kenyan taxpayer. These reports only reach the public because reporting standards in Kenya require company information to be made public. In some cases, especially in the European Union, governments try to hide subsidies that have been given to airlines in the form of state aid.

Separately, EU aviation guidelines also ensure that airports receive 25-75 per cent of their eligible costs and states pay for infrastructure to access airports, including road and rail systems. This leads to the competitiveness of airports as tourists on short stay are quickly able to travel to shopping districts.

This is not limited to the West but also in the Gulf states, who are the immediate competitors of Kenya Airways.

The Dubai government has spent Sh780 billion to expand Dubai International Airport and Sh3.2 trillion to finance expansion of Dubai World Central Airport.

There are two railway lines that feed into the Dubai Airport, making it easy to move in and out without the need of a taxi. Abu Dhabi expanded its airport at a cost of Sh1 trillion and Qatar’s Hamad International Airport consumed Sh1.7 trillion.

In other cases, airlines are allowed to achieve monopoly profits that are not subject to tax. Since 2004, Sh4.2 trillion has been granted to airlines from UAE and Qatar, including Qatar Airways, Etihad Airways and Emirates. This way many carriers are able to give unfair competition to the likes of Kenya Airways.

Noting that Africa cannot comfortably do this without the International Monetary Fund raising eyebrows, such information is only reported when parties get into World Trade Organisation (WTO) disputes.

It is therefore the aviation industry that facilitates globalisation of production, which creates a multiplier effect on the world economy. When businesses engage in travel of executives, they report a substantial impact on their ability and intention to innovate through the potential to serve a bigger market.

Besides creation of jobs, travelling also enables global marketing of goods and services, providing a competitive transportation medium especially for time-sensitive products and trade with distant markets.

Air transport remains an enabler of investment both into and out of countries and regions since it is one of the key considerations that influence where international companies choose to invest.

Ask yourself why the Ugandan and Tanzanian governments are restarting their national airlines, and Rwanda and Ethiopia continue to heavily support the growth of their national carriers. What are they seeing that we Kenyans are not?

The impact of Kenya Airways cannot be wished away and the government can only be expected to support the national carrier in a much bigger way.

Ngamate is a business lecturer at the International College of the Cayman Islands.