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Tuesday, November 24, 2020

Is KQ headed for collapse?

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Kenya Airways plunged into a record Sh25.7 billion loss after tax for the 12 months that ended in March, the worst performance in the country’s corporate history.

It has also become one of the highest loss-making companies in East Africa .

The CEO, Mr Mbuvi Ngunze, attributed the unprecedented loss to intense competition from Middle East carriers, volatility of exchange rates, terrorism and travel advisories and fluctuations in fuel prices.

The record loss sparked fears that KQ, once one of the most profitable airlines in the world for its size, could be headed for collapse.

A leading shareholder, Mr Chris Kirubi of the Centum Group, asked the government to step in and rescue the airline.

“We cannot just sit back and allocate huge sums to some irrelevant sectors while ignoring our national pride to collapse as we watch. Let us rescue this sinking ship.”

He said that KQ was undercapitalised. “What is the strategy for this country towards rescuing KQ? It is a national heritage that we all must protect at all costs,” he said.

Mr Ngunze said KQ was going through hard times after heavy investments in new aircraft failed to earn the expected profits due to the difficulties experienced in the aviation sector in the year under review.

“We have had turbulent times but we are regaining our altitude,” Mr Ngunze told a press conference in Nairobi. “The board and management are working to review our strategy to respond to market dynamics.”

He said the company was looking for long-term funding to improve its highly-constrained cash flow.

“Profit and loss is only an opinion. Cash is king and that is our focus to revive this airline,” he said.

Buying aeroplanes was the biggest cause of the national carrier’s phenomenal loss. The cost more than doubled from Sh12.5 billion in the previous year to Sh26 billion in the year under review.

KQ bought 10 new aircraft, making its fleet the youngest in the region as it embarked on a 10-year transformation strategy known as “Project Mawingu”, which is meant to increase the number of destinations the airline flies to over the next decade.

The plan, however, ran into headwinds, partly due to cancellation of flights to western Africa after the region was hit by Ebola, and after several European nations warned their citizens against visiting Kenya because of the terrorist threat. The travel advisories drastically reduced the number of tourists flying into the country.

Tourism, which used to be Kenya’s second highest foreign exchange earner, touched its lowest ebb last after international tourist arrivals declined by 11.1 per cent and the sector’s earnings fell from Sh94 billion to Sh87.1 billion last year.

The airline now plans to sell seven of its 52 aircraft after results indicated that its fleet capacity was under-utilised during the 2014/2015 financial year.
Hedging agreements

KQ was also hard hit by changes in fuel costs after it entered into hedging agreements as fuel prices dropped. The Sh36 billion spent on fuel accounted for 40 per cent of the airlines costs.

Revenue from passengers remained flat, accounting for Sh90 billion out of the total Sh110 billion annual turnover, while income from freight and mail dropped by two per cent. Freight and mail had brought in Sh10 billion in 2014 but this dropped to Sh9.7 billion in 2015.

Passenger numbers increased from 3.7 million to 4.2 million, boosted largely by KQ’s budget airline, Jambojet, whose passenger number fell slightly shy of the half a million mark.

Loss before tax hit Sh29.7 billion, a figure strongly defended by the airline’s finance director, Mr Alex Mbugua, who said that a huge portion of the loss was due to one-off slips that will not recur.

“If you look at this figure, there is quite a huge amount for one-offs, including Sh5.6 (for) impairment, Sh2 billion accelerated depreciation related to assets we will have to sell and the hedging adjustments, which is unrealised at Sh5.8 billion, bringing the total to Sh13.5 billion.

So really, if you compare apples with apples then we would be talking about a loss of Sh16.3 billion, which we attribute to growth in fleet which has not been matched with growth in revenue,” said Mr Mbugua.

Heavy borrowing also added to the carrier’s finance costs, which stood at Sh4.7 billion, Sh2.3 billion higher than the previous year due to acquisition of additional fleet and short term financing costs.

The airline has a total outstanding debt of Sh130 billion and has since entered an agreement with Afrexim Bank to act as a financial advisor and to provide another $200 million bridge loan.

An undisclosed support from KQ’s biggest shareholder, KLM, was also received in addition to the government’s Sh4.2 billion shareholder funding
Kenya Airways, which is technically insolvent, expects to raise Sh1 billion from the sale of its aircraft and land in Embakasi to give it much-needed capital.
Travel advisories

Mr Mbuvi remained optimistic that resumption of flights to Monrovia and Freetown in West Africa — which accounts for four per cent of the airline’s revenue source markets — and the withdrawal of travel advisories by the UK government will boost KQ revenues.

“The fundamentals are in place. We have new fleets and we have a new airport and we are bullish that we will be able to turn around the business by getting more passengers and more revenue which we badly need at this time,” said Mr Mbuvi.

Yesterday, KQ was the biggest loser at the Nairobi Stock Exchange after announcing the disappointing results. Shares traded at Sh6.30 down from Wednesday’s Sh6.80. It also touched a low of Sh5.20 during the day’s trading.

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