How Kenya's ambitions to become regional aviation hub slipped

Kenya’s ambition to become a regional aviation hub has faced several significant setbacks in recent weeks, casting doubt on whether the country can truly become the top choice for travellers and airlines.

President William Ruto publicly criticised Kenya Airways (KQ) over its ticket prices, Boeing announced it would set up its regional headquarters in Ethiopia, and the Finance Bill 2024 proposed increased taxes on aircraft and aviation services.

President Ruto dismissed the national carrier Kenya Airways as too expensive, explaining that he opted to hire a private jet from a United Arab Emirates firm rather than fly KQ. Reports estimated that the President and his entourage spent around Sh200 million on the jet.

“As a responsible steward of public resources and in keeping with my determination for us to live within our means, the cost was less than travelling on a Kenya Airways flight,” Ruto said on X.

President Ruto’s remarks are perhaps the most damning from a senior government official and suggest that the state has lost confidence in the carrier and the industry. This comes as KQ struggles with its restructuring.

While it has always been challenging to get government officials to fly KQ even for official duties, senior officials have publicly regarded KQ as a strategic asset critical to making Kenya an aviation hub. Directives have been issued for government officials to fly KQ, although enforcement has been lax.

KQ has been seen as essential in positioning Kenya as a regional aviation hub, connecting travellers and airlines to the rest of Africa. The national carrier is central to Kenya achieving this, flying to many African markets from its JKIA hub.

Despite this, Dr Ruto’s remarks dampen these aspirations. This is even after billions have been pumped into the airline, some during his tenure as president.

The President offered some explanation for his use of the private jet, noting that it was a gift from friends.

“When I saw the debate in Kenya about how I travelled to the US, with people saying it cost Sh200 million... I am a very responsible steward. There is no way I can spend Sh200 million,” Ruto said.

“In fact, let me disclose here that the trip cost Kenya less than Sh10 million. I am not a madman,” he added.

Ruto’s explanation raises questions about integrity, as Article 76 of the 2010 Constitution states that “a gift or donation to a State officer on a public or official occasion is a gift or donation to the Republic and shall be delivered to the State unless exempted under an Act of Parliament.”

Another blow to the local sector followed Boeing’s announcement that it would set up its African headquarters in Addis Ababa next year. This decision weakens Kenya’s ambition to be the regional aviation hub and its attractiveness as an investment destination.

Ethiopia beat Kenya and South Africa, the other two markets under consideration. Ethiopia and its Bole International Airport are seen as competitors to Kenya and JKIA, both jostling for travellers and airlines connecting to Africa or from Africa to the world, while their national carriers – Ethiopian Airlines and KQ – compete for passengers and cargo.

The news came days after President Ruto returned from his visit to the US.

To support Kenya’s aviation industry, there have been proposals to replicate Ethiopia’s model of running its aviation assets, with a holding company owning the carrier, the airport, and other aviation companies.

Nationalising KQ

The proposal entailed nationalising Kenya Airways, currently 48 pe rcent owned by the government, and merging it with the Kenya Airports Authority.

The two entities would then be owned by a holding company – the Kenya Aviation Corporation – which would also own a third arm, the Aviation Investment Corporation. Bringing KAA within the fold would give KQ better access to JKIA and even preferential treatment.

The proposal mirrors how Ethiopia runs its aviation industry, which could be the most successful in Africa.

The Ethiopian Airlines and the Ethiopian Airports Enterprise are sister companies under the Aviation Holding Group, set up in 2017. The airports company runs the aviation hubs in the country. Other companies forming the Aviation Holding Group include Cargo Airline and Logistics Company, Ethiopian Aviation Academy, Ethiopian Inflight Catering Services, and Ethiopian Hotel and Tourism Services.

A similar structure exists for Emirates Airline, where the Dubai Airports Company manages the Dubai International Airport, the airline hub.

KQ has also been eyeing a partnership with South African Airways, although the plan now appears uncertain. The two carriers signed a partnership framework in 2021 to form a Pan African airline. SAA has faced its own challenges and has been reassessing its business.

During the same week that the President criticized KQ for being expensive and Boeing announced its move to Ethiopia, local airlines protested proposals in the Finance Bill 2024. They noted that some measures in the Bill would further diminish Kenya’s chances of becoming a key aviation hub in Africa.

The Finance Bill 2024 proposes to eliminate VAT exemptions previously granted to the aviation sector. The Bill proposes removing VAT exemptions on airplanes with unladen weight exceeding 2,000 kilograms but not exceeding 15,000 kilograms, as well as spacecraft including satellites and sub-orbital and spacecraft launch vehicles.

The hiring, leasing, and chartering of aircraft, except helicopters, will also be subjected to the standard VAT rate of 16 percent. These exemptions, players say, have been instrumental in stimulating growth and investment within the industry.

“The proposed deletion of these VAT exemptions threatens to undermine the substantial progress achieved in recent years, posing a significant risk to the sector’s sustainability and its contribution to Kenya’s economic growth,” said KAAO.

The organisation noted that subjecting aircraft and air services to VAT would result in a significant surge in acquisition costs for airlines and operators. KAAO added that this would, in turn, trigger escalations in air travel and charter services, cargo services, and the cost of owning and operating drones.

“In essence, the potential removal of these VAT exemptions will have a direct impact on our regional competitiveness and impact the advancement of Kenya’s aviation sector. Policymakers must recognize the multifaceted implications of such actions,” said KAAO.

“Preserving these measures is imperative not only for sustaining industry growth and encouraging investment but also for upholding Kenya’s position as a regional aviation hub and ensuring continued economic prosperity.”

The lobby for local airlines, including KQ, added that another impact of removing VAT exemptions would be seen in hiring, leasing, and chartering aircraft.

“Such a scenario could result in diminished accessibility and affordability of these vital services, impacting sectors reliant on aviation, including tourism, trade, and emergency response,” said KAAO.

“Additionally, the removal of exemptions for spacecraft and launch vehicles threatens to stifle investment in space-related endeavors, curtailing opportunities for innovation and collaboration in this burgeoning frontier.”

The industry has previously noted that high taxes have made the local sector uncompetitive. This is in the face of growing competition in the region, where, other than Ethiopia, countries such as Rwanda are strengthening their aviation sectors, posing a threat to Kenya’s market share. Additionally, Uganda and Tanzania have revived their national carriers, adding to the competition for Kenya.