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The East African : March 3rd 2014
The EastAfrican 48 FLYING FOR AS LOW AS $21.8 Jambo Jet finally takes to the skies Fo≥ the second time in a decade, the KQ boa≥d has app≥oved the ≥ollout of the lowcost ca≥≥ie≥ By PETERSON THIONG’O The EastAfrican started selling tickets to the public, formally marking the airline’s return to a business model it abandoned 10 years ago. But will KQ get it right this time J round given that its first attempt flopped so dismally in 2004? Willam Hondius, Jambo Jet chief executive, believes so. He landed in Nairobi in September 2012 to take up the role of general manager of KLM Royal Dutch Airlines, the company that owns 26 per cent of Kenya Airways. Two months later, he was seconded by KLM as the project manager for Jambo Jet. Mr Hondius presented his busi- ness plan to the KQ board for approval in September last year. In his presentation he pointed out that between Nairobi and Mombasa, passengers make 20 million trips via road and air every year, about 10 million from the Kenyan capital to Kisumu and a further five million from Nairobi to Mombasa. At least 37 per cent of the passengers said they would consider flying at the airline’s early booking price of Ksh2,850 ($33) one way — it is Ksh1900 ($21.8) excluding taxes and airport levies. Customers available “We only need to take just a frac- tion of this traffic and we shall be in business,” said Mr Hondius. On April 1, Jambo Jet will launch operations using three Boeing 737s — one reserve plane and two in fulltime operations — borrowed from Kenya Airways. Initially, the airline will fly from Nairobi to Eldoret, Mombasa and Kisumu. “We are targeting about 500,000 passengers in our first year…of which we estimate 30-40 per cent will be first time fliers,” said Mr Hondius. The targets seem achievable. Fastjet, the Tanzanian-based lowcost carrier, carried 350,000 customers in its first year, with the company filling 78 per cent of the available seats on its network. Kenya is seen as a deeper market, making it possible to hit the figure. The number of cheap, short-dis- tance flights across East Africa keeps increasing. To succeed in this segment, an airline must manage costs, lure customers away from rival airlines and give passengers value for their money. Value for their money will be measured by the airlines’ ability to keep time and take fliers as close to their destinations as possible without hurting their pockets. Also, low-cost airlines keep costs down by using small, relatively inexpensive aircraft that can handle several flights each day. But how will the airline make money from charging such outrageously low prices? Except for holidays, very few people tend to book their flights early. In fact, Fastjet says, though it of- fers an early booking price of $20 on its Tanzanian routes, only 11 per cent of the 350,000 customers it carried in the year to December paid the minimum price, with the average revenue per passengers at $97. “Customers will need to book early as typically airline tickets become more expensive as the flight date nears,” said Mr Hondius Secondly, the airline plans to adopt a different cost structure from its parent company, aiming to cut fixed costs as much as possible. It will outsource HR, finance and 500,000 ambo Jet, the low-cost subsidiary of Kenya Airways (KQ) has BUSINESS MARCH 1-7,2014 Kenya gets extension on suga≥ impo≥ts By GERALD ANDAE Special Correspondent KENYA HAS secured an extension of special safeguards on the importation of duty-free sugar from the Common Market for Eastern and Southern Africa (Comesa), giving the country more time to complete reforms in the ailing industry. Foreign Affairs Principal Secre- tary Karanja Kibicho said Comesa’s top decision-making organ had agreed to extend the import quotas by one year. The decision allows Kenya to limit the entry of imported sugar to 350,000 tonnes needed to meet the annual production deficit. “Our request for extension of Kenya Airways has launched low cost flights within the country. Picture: File NO EASY RIDE ON REGIONAL ROUTES Jambo Jet is expected to fly to regional destinations within four hours of Nairobi, meaning that it will fly to all countries within EAC, placing it in direct competition with Fly 540, Jetlink, Air Uganda and Rwandair. Low-cost airlines have lower fares and fewer comforts — the price of the meal is not included in the ticket price for instance. Rival low cost carrier Fastjet plans to start flying from Nairobi to both local and regional destinations. Kenya Airways will also still fly to these destinations, as will Fly540. Precision Air— which is 41 per cent owned by KQ — is expected to offer competition on the Tanzanian routes. Precision Air is said to be in talks with KQ for the Nairobi-based carrier to raise its stake in the former, by injecting up to $30 million into it. Precision chairman Michael Shirima said last month that his firm had approached KQ, which owns 41.23 per cent of the airline, for financing. ground handling functions, leaving it with the sales role, which it sees as core, given the airline is seeking to run an aggressive marketing campaign, said Mr Hondius. Also, the airline will hire cabin crew through a third party, meaning that they are unlikely to be unionised. Kenya Airways employs its own cabin crew, who have a collective bargaining agreement that puts their minimum entry level salary at about Ksh100,000 ($1,140). Using a third party should help the airline bring the cost down significantly. “We want to keep our costs down and maximise plane utilisation to help lower our costs per flight,” said Mr Hondius. Late 2012, KQ was taken to court over its bid to send home 578 workers to sustain its operations. Staff costs had more than doubled, having risen from Ksh6 billion ($71 million) in 2007 to Ksh 13.4 billion ($158.6 million) in 2012. KQ faces increased competition, The number of passengers the airline is targeting in its first year of service especially from Middle East carriers such as Etihad Airways, Emirates, Qatar Airways and Royal Air Jordanian, which are opening up more routes on the continent where the Kenyan carrier draws nearly the safeguards was approved by the Council of Ministers and is now awaiting approval by the Comesa Summit,” said Mr Kibicho on Wednesday in Kinshasa, where Comesa was holding a meeting of its Heads of State. Mumias Sugar Company wel- half of its $1 billion revenues. Jambo Jet said it will fly the planes nine times a day and aims at cutting its turnaround time — the time between when the plane lands and when it is back in the skies — to about 50 minutes. “We shall only clean, fuel and restock our planes in Nairobi… so when they fly to say Mombasa, the turn around time will actually be 40 minutes maximum,” said Mr Hondius. The airline has acquired its own booking platform, which lowers the cost per customer. It estimates that using booking platforms like Amadeus would cost it about $10$12 per customer, but its own system costs about $2. Pay through Mpesa The low-cost carrier is also banking on increased usage of mobile money and card payments to help drive down booking costs. Last week, it entered into a partnership that enables passengers to pay for travel tickets from their phones, making it cheaper and easier to book flights. Customers can pay through M-Pesa, Airtel Money and banks such as Barclays, Standard Chartered, CfC Stanbic, NIC, Faulu, Bank of Africa, DTB, Ecobank, I&M and First Community Bank. The new platform allows Jambojet.com customers to pay as they book their flights. The confirmation is sent to the customer via SMS within a few minutes of payment. “These platforms enable us to cut bookings via agents hence delivering true low-cost pricing to our customers…we are not saying that customers cannot use agents, but if they do, they have to bear the cost,” said Mr Hondius. On average, agents charge 7 per cent of the value of a ticket as booking fees — a significant amount for a low cost carrier. Comesa grants Kenya safeguards on sugar importation into the country. Picture: File comed the decision as the right step to help the industry deal with outstanding matters before the country opens up to dutyfree imports.“It gives us room to streamline our affairs,” said Mumias Sugar managing director Peter Kebati. Kenya Sugar Board executive officer Rosemary Mkok said the industry needed the safeguards to fully achieve the market conditions set by Comesa. “We must work to clear all the outstanding deliverables and achieve global competitiveness,” said Ms Mkok. Kenya is required to, among other things, privatise stateowned millers, diversify the revenue chain, transit to using early maturing cane, and move away from the current tonnage-based payment for sugar cane to one that is linked to sucrose content in the cane delivered. Only a handful of these conditions have so far been met. Privatisation has effectively stalled because many of the stateowned firms have huge amounts of debt that need to be cleared before they are sold. Sugar millers returned total losses of Ksh6.1 billion ($71.7 million) last year, according to a financial report presented by the Treasury to Parliament.
February 24th 2014
March 10th 2014