For the past two months, employees of Kenya Airways have pressed the national carrier to abandon its on-going restructuring plan.

The more the carrier’s chief executive Titus Naikuni has insisted he needs to cushion the firm against spiralling operational costs by cutting jobs, the more the workers have dragged the airline into legal battles and public embarrassment.

But beyond KQ’s troubles at home, the airline has bigger problems that could explain Mr Naikuni’s do-or-die stand on the restructuring plan.

KQ is being squeezed from all sides: The domestic market is attracting new suitors, KQ’s rivals in its bread and butter African market are getting smarter, regulators are getting stricter, and macroeconomic factors like fuel prices are conspiring to frustrate the airline.

On Thursday, at the company’s AGM, Mr Naikuni told shareholders that the rising labour costs had made the firm uncompetitive and threatened its profitability, a claim the sacked workers dismissed.

The workers say the sacking was improper since another firm, Career Directions Ltd, had been contracted by KQ to recruit staff to take over most of the positions. Some 578 employees have lost their jobs.

READ: Kenya Airways sinks $9.5m in laying off workers

The court case by the workers against KQ comes up for hearing on Friday, while, at the Nairobi Securities Exchange, the airline’s stock has been bleeding.

READ: KQ to defend itself over staff cuts

Last week it was trading at Ksh11.80 ($1.5 cents) the lowest in the past year, having plummeted from the Ksh32 ($3 cents) high it hit late last year.

So why is Mr Naikuni braving shareholder activism and sacked workers’ protests?

For starters, the latest company data shows that KQ derives only five per cent of its revenue from Kenya, 49 per cent from Africa and the rest from Asia and the Middle East.

From where Mr Naikuni sits, KQ is an African carrier, an international business, and not just a Kenyan operation.

In addition, KQ faces fierce competition, especially in African skies, with Ethiopian Airlines — a national carrier that is subsidised by Addis Ababa — and Middle East carriers like Emirates, Etihad and Qatar — all substantially bankrolled by their deep-pocketed governments.

Ethiopian Airlines has a business model similar to KQ’s, and competes directly with Kenya’s national carrier on the same routes. Emirates has been raising the ante on major destinations (including China and India).

South African Airways and Arik Air (Nigeria) have also been going for a bigger slice of the cake, especially within the Southern African and Western African regions.

“KQ still possesses competitive advantage over other African airlines. Nairobi’s central-eastern location in Africa is well-placed to serve the major intra-Africa and Asian traffic flows. Its relationship with strategic shareholder KLM provides revenue and cost benefits,” analysts at Citigroup said in their latest investors update on KQ.

In terms of market share, Ethiopian Airlines carried 3.3 million passengers to and from Africa in 2010, compared with KQ’s 3.1 million, out of a total of 15 million passengers. Currently, the companies are carrying about the same volumes.

KQ competes against local low-cost carriers Fly540 and JetLink Express which have cheaper fares. The company also deals with Air Uganda, African Express Airways and Rwandair.

As such, KQ plans to launch a low-cost carrier, Jambo Jet, to be operational by the end of this financial year.

READ: Will Kenya Airways get it right this time on low-cost carrier?

“The high yields on the African route have attracted international airlines, which add impetus to the competition the airline faces,” said investment firm Old Mutual in a research note, adding that KQ must expand its destinations on other continents to reduce its reliance on African routes.

Globally, airlines are operating in a harsh economic environment owing to the recession triggered by the Eurozone crisis.

In Africa, a poor aviation safety track record, particularly in West Africa, has negatively affected the development and patronage of the continent’s airlines.

Airports can no longer manage the surging traffic while governments dilly-dally in solving the capacity problem, largely due to economic challenges and politicking that have hurt funding for capital-intensive projects.

In Kenya, the planned construction of a second airport next to JKIA is riddled with controversy.

The International Air Transportation Association last week said that jet fuel prices had risen to an average of $138.7 a barrel as of September 14, an 8.5 per cent year-on-year increment, and 3.9 per cent higher than the previous month’s price.

IATA expects jet fuel prices to average $129.2 a barrel, translating into an additional $32 billion in the aviation industry’s fuel bill this year.

In the year ending March 2012, KQ reported a 53 per cent drop in its net profit to Ksh1.66 billion ($19 million), on the back of a 44.6 per cent rise in operational costs to Ksh77.2 billion ($917 million) mainly linked to higher fuel prices and increased hedging costs.

Future plans

KQ plans to double its fleet in five years and more than tripling it in 10 years — to primarily capture the African and Asian markets.

However, the success of the expansion plan will be determined by KQ’s ability to tame its costs, and raise the required funds for the expansion of the hub airport, JKIA.

Standard Investment Bank, a Kenyan broker, says if demand for air travel is not as robust as anticipated, KQ is likely to scale down its planned expansion.

“KQ has already cancelled two unprofitable routes, Muscat and Rome, a signal that the airline will increasingly focus on profitability rather than increasing capacity and route network,” said analysts at SIB in their latest research note on KQ.