Part A (Compulsory): Question 1 Management Research Paper

Part A (Compulsory): Question 1
Introduction
KQ was founded by Kenya's government in 1995 and headquartered in Nairobi near its main hub, Jomo Kenyatta International Airport. It is publicly traded in Nairobi Stock Exchange, Dar es Salaam Stock Exchange and Uganda Securities Exchange. The biggest shareholders are Kenya's government, with 48.9 % of shares, KQ Lenders Company Ltd., a consortium of banks that own 38.2%, KLM owns 7.8%, and the rest are held y private owners. The airline's CEO is Allan Kivaluka, who is in an acting capacity after Sebastian Mikosz retired. The airline has been making losses (before tax) since 2013. Its passenger numbers have increased steadily since 2008 and number of employees have been reducing reaching their lowest point in 2017. The company has increased its fleet size, and as of 2018, it had 45 aircraft. The airline was serving 53 destinations in 41 countries as of November 2017. KQ also has a low-cost carrier, Jambojet and African Cargo Handling Limited. The airline also partially owns majority shareholding gin Kenya Airfreight Handling Limited and a 41.23 of Tanzania carrier, Precision air.
How can KQ position itself in the market?
KQ needs to cancel loss-making routes – the expansion plan envisioned when the company launched Project Mawingu must have been short-sighted. Adding any new route would add a new set of challenges to the airline. For each new route, the airline has to find an aircraft to serve the route. A new route also comes with a new marketing budget. New partnerships and alliances have to be forged to allow the airline to fly that route. All these and other challenges would be compounded if the airline sought to add many routes. KQ was planning to add as many as six routes per year. Thus, the move to increase routes and destinations should have been let to come up organically rather than actively introducing them and marketing to prospective customers. It was not coincidental that when the airline sought to increase its destinations under an aggressive expansion plan, the company incurred heavy losses. Therefore, KQ should cancel any new routes, especially those that are loss-making, and focus on improving the airline's operations' efficiency. New routes would only be added as per demand and not to meet strategic objectives set out by the airline's management. It can also leverage a partnership to understand new routes/destinations before investing to serve the destination. Code sharing with other airlines can help reduce the overhead and act as experimental projects for new routes before KQ starts investing and flying the route.
Short-sighted purchase of new aircraft – The new aircrafts the company purchased, coupled with an aggressive expansion plan, increased the operational overhead and led to heavy losses. In the wake of heavy losses the airline made in 2015, the management decided to sell Boeing B737-700. Five other new airliners were sub-leased to improve cash flow and enable the company to reposition itself to avert insolvency. The aircrafts had been acquired a few years earlier to serve the new routes the company had planned to introduce. In 2012, KQ's fleet size was 34, and in 2015 its fleet size was 52. That was a very aggressive expansion plan, but it put the company at a disadvantage. New aircraft are expensive to purchase and pay insurance premiums. Quickly increasing the fleet size increased these two expenses, and the routes/destinations served were not profitable enough to cover the operational overhead of operating those routes. Rather than pursuing an aggressive expansion plan, the airline can ensure it conducts an in-depth market analysis. If the route is economically feasible, the airline can lease an aircraft to service the route in the short run. Only when the airline is convinced that the route is profitable can it acquire a new aircraft to serve the route.
Reduce Shareholder's interference in the airline's running – While it was understandable that the government has to ensure that its flag carrier is operational, too much/micromanaging the operations of the company would hurt the airline in the long run. When the airline was privatized, it dictated that the top management had to be held by Kenyans. The rationale to dictate the airline's operational structure and hiring policy was to ensure that the citizens benefitted. However, it seems that the government has softened its stand on the issue. In 2016 hired the first non-Kenyan chairman of the board, Michael Joseph, and in 2018 hired Sebastian Mikosz as the Kenya Airways Group managing director and CEO. The company had started making losses even when it was under the stewardship of top Kenyan managers. When the two foreigners took the helm of the company, losses reduced significantly. Since the company was privatized, the government should allow it to run without much interference. KLM got blamed for interfering with the operations of the company. When the company incurred heavy losses, KLM was blamed for 'considered intrusive in the flag carrier's running.' If the two major shareholders have interfered with the company's operational framework, their conflicting approaches coupled with a vested interest in each decision would eventually affect the airline adversely.
Invest in better prediction models (especially demand prediction) – one of the main reasons the airline is making losses is because of very low passenger load factors. Between 2008 and 2018, the airline's passenger load factor was below 70% six times. That means, averagely, the plane is filled with less than 70% capacity. In 2015, the passenger load factor was 63.6 %. These are very low numbers, and for every empty seat, the airline is making a loss. Thus, the airline should invest in better predictive models to inform its routes and how best to avoid low passenger load factors. It will also need to invest in marketing and offering competitive prices to increase its passenger load factor.
Additionally, with better demand prediction models, the company would have a more efficient and likely profitable expansion plan. It would not go on to venture into new markets without strong evidence that it would be profitable. Therefore, KQ needs to invest in marketing and better demand prediction systems to ensure its passenger load factor is high, at least over 80%. It would also ensure the fleet's best utility, especially the bigger planes, which consume more fuel and have higher operating overhead. Thirdly, prediction systems also need to be used when using fuel hedging. The company claimed it suffered heavy losses in 2016 because of fuel hedging. It is important to invest in finding experts or systems that would accur...