Will KQ survive the debt trap?

“This is bullshit,” Chris Kirubi, a Kenyan businessman and a key Kenya Airways (KQ) shareholder, scathed over a Shs796.7b loss that Mbuvi Ngunze, the KQ managing director had presented during an investor briefing in Nairobi, Kenya last week.

“Kenya Airways should be taken off the market, leave it for private investors… We need to buy out KLM, get them out and try to have an EAC common market strategy,” Kirubi said, highlighting to journalists that shareholders were not only concerned of continued non-dividend payment but also worried about the troubles that continue to bedevil one of Kenya’s largest investments.

Kenya Airways (KQ) has for at least three year posted losses, but the company’s negative fortunes continue to worsen jumping from a half year loss of Shs323.9b in 2014 to Shs796.7b for the year ended March 2014. In 2013 the airline posted a full year loss of Shs105.4b.

The losses have put the airline in a tight financial position with experts such as Aly Khan Satchu, a Nairobi-based financial analyst, warning that KQ might find itself in bigger trouble if the losses are not immediately arrested”.

“Whereas KQ is a good share, continued losses are wipping out investor confidence. The airline is borrowing heavily. This is not sustainable,” Satchu said in an email exchange.

Kenya Airways, according to the 2014 financials has Shs1.2 trillion in short- term loans, Shs496b owed to suppliers and Shs353.4b is cash due in advance of carriage. On the other hand, long-term loans stand at Shs2.9 trillion.

The airline during an investor briefing also announced it would borrow Shs620b from Afrexim Bank to finance its working capital with a view of embarking on a long term strategy to return to profitability.

At the Nairobi Stock Exchange the above announcements immediately impacted the KQ share declining by 7.3 per cent to sell at Shs195.3, before falling further to Shs176.7 at close of last week.

Similarly in Kampala the share fell by 0.81 per cent, closing the week at Shs246 at the Uganda Securities Exchange.
However, the above figures, not considering the declines, suggest the KQ share is still trading at a premium if viewed against the company’s fundamentals including a huge debt burden and long durations of non profits.

Why KQ is posting losses
KQ’s falling fortunes, according to experts point at an ambitious expansion that has weighed heavily on its books.
The airline, according to its 2014 financials has doubled its fleet cost, jumping to Shs802b with overheads rising to Shs795.7b.

KQ has grown its fleet number from 17 aircrafts in 2003 to 47 for the year ended March 2015.
According to Satchu, Kenya Airways has in a space of five years acquired 15 Embraer aircrafts from Brazilian manufacturer Embraer S.A and an additional three 787-8 Dreamliners from Dublin-based AWAS.

The Dreamliners, however, Kenya Airways said in May would be acquired through a lease agreement, conceding that underlying fundamentals would not allow it to buy the aircrafts directly from Boeing as earlier planned.

AWAS said in May it would purchase and leaseback the three Dreamliners to Kenya Airways with the first aircraft having been delivered on May 6, 2015.

A Dreamliner costs an average of Shs787.5b ($225m) and Kenya Airways which borrows to pay staff salaries, according to a February Barclays Bank Kenya investment report was in no shape to buy the aircrafts.

“Not considering the desire to expand, it would be foolhardy for KQ to buy Dreamliners given that Middle East carrier are buffeting on aviation numbers across the globe,” the report notes.

The airline, the report further notes has had challenges of growing its passenger numbers, amid travel advisories issued by mostly European countries.

Ebola, according to KQ also ate into its revenues, given that the airline had to suspend a number of flights to West Africa, one of its key revenue destinations.

Performance
Despite posting a loss of Shs796.7b, Kenya Airways’ revenue increased by 3.8 per cent to Shs3.41 trillion.
However, the airline’s fleet costs doubled to Shs802b in the period considering that the airline signed a deal to acquire three Dreamliners, spiking overheads by 17 per cent to Shs795.7b.

The loss, which according to analysts was the highest in Kenya’s corporate history could minimally be hedged by a Shs176.7b fuel cost recovery that is likely to be realised in the near future.

“We have had turbulent times and this loss is obviously significant,” Ngunze said at a press briefing, “however it is important to know that we have made significant investments at a time when the industry is generally going through hard times.”

The performance has called into question KQ’s viability with some prominent shareholders, including Chris Kirubi calling for the nationalisation of the airline.

At Shs796.7b, the airline’s loss was nearly eight times the Shs105.4b net loss it reported in the same period in 2013.
Standing at Shs5.8 trillion, KQ liabilities have outstripped the airlines’ assets, which are currently valued at Shs5.6 trillion.

The airline, however, continues to operate, relying on additional debt to meet its obligations, including paying employees’ salaries and suppliers whom it owed Shs616.9b by end of March.

KQ ownership
KQ is 29.8 per cent owned by the government of Kenya with Dutch carrier KLM, owning a 26.73 per cent stake.
The rest of the shares are held by private owners with the company’s stock traded on the Nairobi Stock Exchange, Dar es Salaam Stock Exchange, and the Uganda Securities Exchange.

Tit bits on kq

Kenya Airways was founded in 1977, after the dissolution of East African Airways. The carrier’s head office is located in Embakasi, Nairobi with its hub at Jomo Kenyatta International Airport.

As of January 2013, Kenya airways was ranked fourth among the top 10 carriers that operate in Africa by seat capacity, behind South African Airways, Ethiopian Airlines and EgyptAir.
Accidents and incidents
As of October 2014, Kenya Airways has had two fatal accidents and two hull loss accidents.

On July 10, 1988, a Fokker F27-200, registration, approached the runway too fast and made a belly landing at Kisumu Airport, skidding down the runway for some 600 m (2,000 ft).
On July 11, 1989, a Boeing 707-320B, overran the runway at Bole International Airport following a brake failure.

On January 30, 2000, Flight 431 scheduled for Abidjan–Lagos–Nairobi, plunged into Atlantic Ocean a minute after it had taken off from Abidjan’s Félix Houphouët-Boigny International Airport. There were 179 people aboard, of whom 10 were crewmembers. Most of the occupants were Nigerians. 169 people perished.

NUMBERS
Shs796.7b
The loss in Shillings that Kenya Airways posted for the year ended March 2014.

Shs246
The amount in Shillings that the Kenya Airways share sold at the close of last week at the Uganda Securities Exchange.

47
The number of aircrafts currently owned by Kenya airways.