Passengers boarding a KQ plane at Entebbe International Airport in Uganda. Plans by Kenya Airways to start a mobile phone service could see it diversify revenue sources and get better margins from a mobile-based booking and paying system that would enable customers to buy tickets online.
IN SUMMARY
- Analysts see the entry of KQ in the mobile service sector as a long-term strategic investment that could offer long-term rewards, especially given the airline’s unique position due to its network and the number of customers it carries.
- Roaming as well as calls in Africa and between countries on the continent are some of the most expensive in the world.
- According to an analysis of the MVNO segment done by Deloitte, companies entering this segment need to add subscribers to their network faster while keeping the client acquisition costs at a minimum.
Plans by Kenya Airways to start a mobile phone service could see it diversify revenue sources and get better margins from a mobile-based booking and paying system that would enable customers to buy tickets online.
Africa’s third largest airline by passenger numbers said on Thursday it had signed a partnership with Airtel that will allow it to set up mobile virtual network operations (MVNO), increasing its value proposition to clients through lower roaming charges and potential booking and payment of fares through handsets.
Under the terms of the deal, KQ will lease excess capacity on the Airtel network and resell it to its customers across the African markets where Airtel operates, with the airline targeting customers who normally use roaming services.
“Through this partnership with Airtel, we are optimistic that our passengers will soon be enjoying a service that allows them better calling rates while in Kenya or roaming within the wide Airtel network,” said Titus Naikuni, the chief executive of Kenya Airways.
If approved, KQ will join Equity Bank’s subsidiary Finserve, Tangaza Pesa and Zioncell, all of which have received the green light from the Communications Authority of Kenya (CA) to start the service, though they have not formally launched yet.
The key advantage in running an MVNO is that it reduces operating expenses, enabling telecom companies to be more competitive.
Typically, estimates Deloitte, fixed costs like building a network account for 75 per cent of total costs for traditional mobile operators compared with 25 per cent for MVNOs.
Analysts see the entry of KQ in the mobile service sector as a long-term strategic investment that could offer long-term rewards, especially given the airline’s unique position due to its network and the number of customers it carries.
KQ operates the most extensive airline network on the continent, connecting over 50 cities across Africa, and has the ambition of flying into all African capitals by 2016.
Thus, the carrier flies thousands of company executives and businessmen with operations across Africa as well as tourists flying into the continent. Last year, the airline carried over 3.6 million passengers.
“The details are not out… but the first contact that passengers have with a new country is at the airport; people buy new SIM cards at this point… so if KQ can offer the same on board planes it gives them an advantage,” said a research analyst who did not wish to be named as he didn’t have full details of the deal.
The middle class factor
Given that in Africa, most of those who can afford to fly are in the middle class, KQ may end up getting customers with a higher spending pattern, which could be a huge plus.
For example, while the average revenue per user (ARPU) for Safaricom customers is about Ksh500 ($5.7), the ARPU for customers using smartphones is about Ksh1,200 ($13.8). Most KQ customers are expected to be above this threshold.
Roaming as well as calls in Africa and between countries on the continent are some of the most expensive in the world. For example, it is more expensive to make a call from Kenya to Uganda, than from Kenya to the US.
The move to launch the MVNO mirrors a decision by Virgin Group, which owns Virgin Atlantic Airlines to launch its own mobile network. The UK group gives Virgin mobile customers a discount of 10 per cent when they purchase products offered by the group.
For KQ, launching its own network would enable it to build its own mobile-based booking and paying system, enabling customers to buy tickets online.
Though the airline already has a similar service through the M-pesa platform, owning its own mobile money network would help it get better margins.
But most importantly, the network could offer an innovative way for the airline to get customers to redeem their loyalty points.
KQ offers customers loyalty points, which it then marks as a liability on its balance sheet; having customers trade the points for airtime or data could also help it cut down on this.
If indeed KQ proceeds to set up the company, it will be the second company that it is setting up in recent months. Earlier this year, it launched JamboJet — a low cost carrier.
Equity’s MVNO is seen as targeted at the mass market, especially the bottom end of the pyramid where the majority of its customers are found.
“The challenge for KQ is getting enough traction,” said Kuria Kamau, an analyst at Kestrel Capital.
According to an analysis of the MVNO segment done by Deloitte, companies entering this segment need to add subscribers to their network faster while keeping the client acquisition costs at a minimum.
“At the early stage of market entry, if an MVNO can’t give potential customers enough reasons to give up their current mobile service operator and provide enough subsidy to compensate for the switching cost, they will lose attractiveness to potential customers. In the future, if an MVNO can’t attract enough customers in a short time to lower operation costs, it will definitely be eliminated by the market,” said Deloitte.
The East African
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