Airline industry experts suggest rich operators like Emirates wanting to
control the hub of East Africa are carrier’s best bet. TEA GRAPHIC |
NATION MEDIA GROUP
By ALLAN OLINGO and A SPECIAL CORRESPONDENT
In Summary
FINANCIAL RESULTS
- According to the 2015 financial results, Kenya Airways had a turnover of $1.06 billion with direct operating expenses of $732.5 million.
- Financial costs: Grew two-fold from $23.1 million in 2014 to $45.2 million.
- Fleet ownership costs: Doubled to 249.9 million, up from $120.3 million a year earlier.
- Fleet expansion: The airline acquired five Boeing 787 Dreamliner aircraft, two Boeing 777-300 and three Boeing 737-800 in 2014 as part of its fleet modernisation programme.
- Overheads: Increased
to $236.1 million, up from $202.4 million mostly driven by support costs
for the expanded network and additional fleet.
fuel costs: According to Alex Mbugua, the airline’s finance director, KQ benefited from the global slump that saw fuel costs drop from $375.8 million in 2014 to $346.9 million in 2015.
With Kenya’s national flag carrier Kenya Airways (KQ) having
plunged deeply into debt, authorities in Nairobi may have no option but
to bring in a strategic partner with the financial muscle and capacity
to finance both the company’s long-term obligations and its 10-year
strategic plan.
The airline on Thursday announced it had made a loss of $251.1 million,
which it attributed to competition from Middle East carriers, hedging
losses and high operating costs. Last year, KQ posted $28.9 million in
losses.
Airline industry experts now suggest that, considering the
financial health of the global airline industry, the best prospect for
Kenya is likely to be a partnership with the rich Gulf airlines —
Emirates, Qatar Airlines or Etihad — keen to establish a foothold in
East Africa’s most profitable transport hub and the
lucrative connections and links it has with other transport hubs in
Asia.
Last week’s announcement by the airline of the largest corporate
loss in the country’s history, and the reality that the company is
plummeting towards insolvency, has undoubtedly put the Kenyan government
in crisis mode.
The snag, however, is that the preferred model for Gulf
airlines is a completely integrated outfit where an airline not
only owns hotels, car hire companies, catering services and pilot
training simulators, but also controls the airport.
The big question, therefore, is whether the Kenyan government
will agree to cede some of the functions of the state-owned Kenya
Airports Authority to permit a partnership as broad as allowing the
proposed Gulf partner to put in new investment in runways, airport
bridges and new cargo facilities, thus bringing Jomo Kenyatta
International Airport to world class standards.
During a meeting in Nairobi to release the results, a
shareholder, businessman Chris Kirubi, called for an end to the
partnership between KQ and Dutch airline KLM, which has been blamed for
some of the national carrier’s woes. The KLM owns a 29.7 per cent stake
in Kenya Airways in a deal struck in 1995.
However, Kenya’s Transport Cabinet Secretary James Macharia said
the partnership with KLM is necessary but the government will review it
to ensure it is mutually beneficial for both parties.
“It’s necessary to continue with KLM because it’s very difficult
for Kenya Airways to survive on its own. In the airlines industry,
mergers and partnerships is the way to go, but we have to protect our
interests,” Mr Macharia said.
KLM spokeswoman Lisette Ebeling Koning declined to comment on
the review but said that Kenya Airways had a solid turnaround strategy.
“KLM fully supports this turnaround plan as laid out by the
management team of Kenya Airways. We believe that we will extend further
our support through our joint venture with Kenya Airways,” Ms Koning
said.
Kenya Airways has also chosen Cairo-based African Export-Import
Bank (Afrexim) to advise it on debt restructuring and capital raising.
The airline hopes that by having Afrexim bank as its financial advisors
it will get a capital injection to pay off some of its debts and also
organise for a long-term capital injection.
Balance sheet restructuring
KQ chief executive Mbuvi Ngunze said, “We are currently engaged
in a balance sheet restructuring. We are pleased to announce that we
have signed an agreement with a financial advisor who will help us raise
capital and also restructure our debt,” said Mr Ngunze. “We are happy
that they have agreed to extend a $200 million bridging loan.”
Mr Macharia revealed that the bridge capital with Afrexim Bank
was arranged through the support of the Kenyan government, showing the
keen interest the latter has in the airline.
Kenya Airways also has a negative equity position, which means
that without the $200 million financing deal, the airline is technically
insolvent and will not be able to meet its financial obligations.
Mercyline Gatebi, an equity analyst with Genghis Capital, said
that the airline needs to support its working capital and this
short-term facility would help in running short term needs.
“Getting the bridge capital is positive news because it will
give them support and at the same time offset some of the debts they
have with local commercial banks,” Ms Gatebi said.
The airline will be receiving $100 million in the next week, with the remainder coming in six weeks.
The deal with Afrexim Bank, being a short-term facility, will
force Kenya Airways into a short repayment period, a position analysts
feel won’t work for the airline.
Daniel Kuyoh a financial analysts with Kingdom Securities, said
that the airline’s negative cash flow position could bring in the
challenge of paying back this money in less than two years, leading to
higher financial costs.
“The cash flow for Kenya Airways in 2015 stood at $31.1 million,
compared with $107.2 billion last year. This shows a net erosion of
$76.1 million. The bank will have to extend that facility for more than
two years for the airline to comfortably pay back the debt. Kenya
Airways will also have to come to the market through an equity position
to look for more money,” Mr Kuyoh said.
Mr Ngunze declined to reveal the terms of the financing
including the interest rates and the repayment period, citing a
confidentiality clause.
“We will use the bridge facility to finance our business and Afrexim will help us organise long term capital,” Mr Gunze said.
Last year, the airline received $41 million from the Kenyan
government and an undisclosed amount from KLM. The airline has also
disclosed that it is expecting $100 million from the sale of its
aircraft and its land in Embakasi, money that will be used in reducing
its debt obligations.
Alex Mbugua, the airline’s finance director 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 $54.6 million for impairment, $19.5 million
accelerated depreciation related to assets we will have to sell and the
hedging adjustments, which is unrealised at $56.6 million, bringing the
total to $131.7 million,” Mr Mbugua said
Mr Kuyoh said that moving impairment losses of planes sold into
the reserves is the reason for the drop in shareholder equity from
$275.3 million in 2014 to $57.8 million in 2015.
The financial result also shows that Kenya Airways didn’t retain
any capital, thereby putting the reserves in a negative position.
Ms Gatebi said that the shrinking in shareholder equity is as a result of the company depleting its retained earnings.
“The retained earnings have been cut off because of the
consistency in loss reporting in the past three years. The airline has
spent all its retained earnings and chalked up debt. That has pulled the
equity line further down,” said Ms Gatebi.
The airline said that it was renegotiating its hedging, ground
handling and hotel contracts in a bid to reduce its operating costs
which stood at $732.5 million.
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