Kenya. Turbulent times for the Pride of Africa

Kenya airways records the biggest loss in East and Central Africa. What is the future of the company?

Early Thursday morning I attended an investors briefing for Kenya Airways in a hotel in Nairobi. On entry, I was given a big document to check out the financial reports of the FY 2014/15. While I knew that the company was trading in turbulent times, what I saw shocked me. I knew the company would continue its losing streak but the figure I saw was really record breaking. I had not seen something like that before. The company reported losses in excess of sh 29 billion ($290 million). That was the biggest loss ever for not only Kenya Airways (KQ) but also for any company in the East and Central Africa region.

Reading this figure discouraged me from reading the other pages but being the person I am, I had to read the document and crunch the numbers. The numbers were traumatizing to say the least. On my left, sat Dr. Chris Kirubi, one of the biggest shareholders of the company. I have interacted with the billionaire for years but I have never seen him that disappointed.

The numbers

Kenya airways financial chart

1 year performance of Kenya Airways

In the FY 2014/15, KQ’s turnover increased by 4% to sh110 billion. Previously, the company had a turnover of sh106 billion. This was the only good news.

The direct operating costs increased by 1% to sh76 billion while the overheads increased by 17% to sh 17 billion. In addition, the company reported a pre-tax loss of sh29 billion and a net loss of sh25 billion.

The total assets increased by 17% to sh 182 billion from sh 148 billion in 2014. This was attributed to the company’s aggressive purchase of new fleets including the new Boeing 787s. On the other hand, the company’s non-current liabilities increased by 87% to sh 106 billion while the total current liabilities increased by 28% to sh81 billion.

“Clearly, these numbers don’t make sense for any company, leave alone a listed public company. How can a company that prides itself as the pride of Africa have more liabilities than assets?” remarked Chris Kirubi, calling the numbers ‘bullshit’.

The market reacted angrily. Shares of the company fell by nearly 30% during the intraday trading. This downward trend is expected to go on for a long period. The Nairobi all share index also fell by 1.8%. YTD, the bourse has fallen 5.6%.

Nairobi All Share Index

1 year chart for Nairobi All share index


Before the release of the data, the company ran an aggressive media campaign asking for support by Kenyans. In the campaign, billionaires, including Manu Chandaria, Vimal Shah and former attorney general Sir Charles Njonjo praised the company for its exemplary service and performance. Little did they mention of the financial problems the company was facing.

In their investor briefing, the company attributed its losses to a number of factors, including the recent travel advisories by European countries, the ebola crisis which made them suspend the West African routes, competition by the Eastern airlines such as Emirates and Etihad, closure of the runway, exchange rate volatility, and the fuel price volatility.

In Kenya, the recent attacks by Al-shabaab have had significant impacts such as the decline in tourist numbers in the country. In fact, a recent report stated that tourist numbers in Kenya declined by about 25%. Apart from the terrorism act, the travel advisories from the West accelerated the decline. The Ebola crisis in West Africa had a direct impact on the company as many people from Europe and America avoided the continent. The Western media companies such as CNN and Fox accelerated this by misadvising people on what was really happening. Africa was not under an Ebola outbreak. Only 2 countries had instances of Ebola.

What shocked many observers was the fact that fuel costs increased significantly despite the massive global oil decline. To date, the global oil prices have reduced from the triple digit numbers to the $50s. In addition, the company purchased a new fleet of Dreamliner’s, whose fuel consumption is 20% less than the other planes the company owned.

In addition, the Kenyan shilling has fallen more than 10% YTD and is currently trading at sh102 against the dollar. The losing streak will continue because the mitigation measures put across by the central bank seem not to work. In fact, the newly appointed governor of the central bank recently stated that the fall is now beyond his capabilities signalling increased weakening.

On a regional comparison, the largest airline in the continent, Ethiopian airline reported impressive results for the FY 2014/15. South African airline also released impressive results.

Invasion by the East

Bloomberg transport index chart

1 year chart of Bloomberg transport index

African airlines are facing an increased invasion by companies from the Middle East economies. To date, Emirates, has more than 20 flights in and out of Africa. Other airlines such as Etihad and Qatar airways are increasing their flights to the African continent. As a result of their massive economies of scale, the companies can afford to cut their fares at the disadvantage of African airlines, most of which have lots of debts.

“I always use Emirates from and to Nairobi. Why on earth would I use an expensive company just because its Kenyan?” lamented Erick Onyango, a frequent flyer.

The same sentiments were echoed by Martin Oduor, who flies frequently between Nairobi and Kisumu. He prefers to use Fly540 rather than Jambo Jet which is owned by KQ.

“Jambo jet is relatively expensive than Fly 540. I have to do this to save money,” he said.

Way forward

To remain competitive, KQ must come up with drastic measures. Analysts such as Geoffry Oduor from Stanlib believes that the company must embrace other East African airlines. By combining the muscle of the 5 countries, the fact is that the company will have more leverage to the African market than when it operates as a single airline.

Another view is that the company’s shareholders must consider replacing the entire board with a better board of directors. The current senior management has been accused of so many things such as nepotism in employment opportunities.

According to Chris Kirubi, the shareholders need to accept the delisting of the company from the NSE. Also, he proposes that they buy out KLM, which is the biggest shareholder. By doing this, Kirubi believes that they will turnaround the company in the same way they did at ICDC which is now called Centum.

Many critics have accused the government which owns 25% of the company of plotting to bring down the company so that a strategic buyer can buy it at a cheaper price. Remember, where there is smoke, there is fire. The rumour could be true. It is therefore important for the shareholders to intervene and save the company.



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