- Associating Safaricom profitability with Michael Joseph is a media fallacy
- Associating KQ turnaround with a monopolist like Michael Joseph an even bigger fallacy
When 70 year old former Safaricom CEO Michael Joseph’s took over as Chairman of the Board at troubled Kenya Airways (KQ) in 2016, he was quick to promise to take national carrier out of turbulence and return it to profitability in the shortest time possible.
At that time, Joseph boasted: “I took Safaricom from a small non-existent company to be the biggest most profitable company in East Africa before I stepped down as CEO in 2010 and continued to manage M-Pesa on a global level,” he remembers. “So, I have a legacy in Kenya which I want to preserve and that is being successful and this is just another step in the way to be successful.”
What a red herring!
Two years and a staggering USD230 million government guaranteed bailout later, the so called “Pride of Africa,” is still the embarrassment of corporate Kenya reporting a monumental nett loss of Sh5.97 billion and paying Michael Joseph, his board and expatriate management millions of dollars in salaries and other benefits.
What many optimistic Kenyans failed to appreciate when Joseph walked into Kenya Airways was that Safaricom’s phenomenal growth, corporate success and market dominance was essentially the result of a heavily protected mammoth monopoly in which the national government had a 35% stake.
Michael Joseph had very little to do with Safaricom growth which continues 8 years after his exit. If indeed Michael Joseph was that good, why has he not accepted a performance based management contract; meaning they take responsibility for KQ losses and earn from its profits?
With the proposed KQ merger with Kenya Airports Authority (KAA), Joseph is essentially admitting inability to operate in a free market and reintroducing his monopolistic tendencies to the sensitive aviation sector in which competition is dictated by international best practices.
The proposed KQ-KAA merger must not be allowed to happen since it seriously undermines the greater public interest as it seeks to declare KQ the primary service provider of all aviation services and deprive Kenyans the benefit of better services and better pricing.
KAA is the autonomous body charged with the responsibility of providing and managing all airports in the country.
The cabinet approved the proposed merger between KQ and KAA due to lobbying by groups with vested interests of powerful individuals who over the years brought KQ to its knees and are now seeking to embezzle KAA’s Sh3.5 billion annual revenues.
There is no evidence anywhere in the world to show that the national airline also owns strategic international airports. Neither is it true to allege that KQ recovery efforts will be aided by the merger. Plans to make Nairobi a regional transportation hub have been in place even when KQ was a profitable airline.
If the ill conceived proposal to merge KQ with KAA goes through, Kenya Airways will run Jomo Kenyatta International Airport (JKIA) for a minimum of 30 years and in the process send Michael Joseph into retirement with his reputation as “the man with the midas touch” intact.
The danger with monopolies is that they wield a lot of economic power, which enables them to exploit factors of production such as labour and capital. In the aviation sector in which competition is high and margins are low, the industry is likely to suffer irreparably should the merger go through.
Monopolies as advocated by Michael Joseph usually intended to eliminate competition and be dominant enough to decide to pay the salaries they want or demand capital from the financiers at the interest rate they want; and they charge the price they want for their products and services.
Monopolies adversely impact economy and for the proposed KQ-KAA merger will serve to redirect air traffic to other competitive regional airports such as Kigali and Addis Ababa.
We can confidently predict that when KQ-KAA monopoly happens, it will not be efficient to reduce its operating cost and thereby enhance our social welfare. Because such a monopoly lacks incentives to reduce costs due to the absence of pressure or competition, this translates into uneconomical cost per unit of output.
Firms which enjoy monopoly or face limited competition are able to make a lot of profits and lack the incentives to keep their cost as low as possible because they can transfer such costs to the consumer, regardless of the effect of such transfer.