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September 26, 2018

Radical Surgery Required at KQ Before Bailout

A Kenya airways(KQ) flight at JKIA.Photo/File
A Kenya airways(KQ) flight at JKIA.Photo/File

Kenya Airways has broken yet a new record (low) reporting the worst corporate loss in Kenyan history.

In the 12 months up to 31 March 2015, the national carrier managed to make losses amounting to Sh29 billion.

To put things in perspective, consider that the market values Kenya Airways at Sh19 billion or thereabouts meaning with a net loss of Sh25.7 billion as it reported Thursday, it has a negative equity of Sh6 billion.

Billionaire investor, Chris Kirubi, couldn’t agree more with this reality. He angrily said the company did not have a viable business and that its stock was worthless. Before we get into the numbers, some more colour.

Management’s faces were predictably glum, almost expressionless as they glibly reported the record losses.

You have to give them a medal for courage for actually facing investors to tell them they lost them money.

Kirubi was not buying it. The company should be delisted, he fumed.

I found his fury hilarious, for not too many years ago, he accused me of being negative for grilling management over fuel hedges during an investor briefing.

Back to the numbers.

The company remained in the business of ferrying passengers and cargo with aeroplanes to and from various destinations.

For the period under consideration, it sold tickets and cargo space worth Sh110 billion.

This makes it the second largest company by revenues on the Nairobi Securities Exchange behind only Safaricom which raked in Sh164 billion when it last reported full-year earnings.

To generate those revenues it spent Sh76 billion on marketing, salaries, commissions and so on.

Management further told investors that the cost of owning the fleet of planes to run its business came to Sh25 billion for the year.

Part of this of course is money it pays to lease planes but also it had to write down the value of some planes it plans to dispose off after realising they were not worth what it had valued them for in its balance sheet.

Taking that into account left the company with Sh8 billion out of the Sh110 billion revenues, then deducted overheads worth Sh24.5 billion putting it in a loss position of Sh16 billion.

This would suggest it was now operating with expensive bank overdrafts to finance its daily operations.

Indeed, the company reported a further Sh4.5 billion as interest paid on bank loans it has taken and also hedged on fuel prices but lost Sh1.64 billion to add to its misery.

International accounting rules require that it also recognise in its books any unrealised profits or losses, a process known as marking to market.

Here again it booked losses of Sh5.7 billion on fuel derivatives with another Sh1.3 billion of losses was not even itemised, the narrative was clear.

End result, a record Sh29.7bn in losses.

“Let them close shop and go!” Some reacted.

“Delist the company”, Chris Kirubi said.

It was poor tourism numbers that got us here, management said as a way of explanation.

The question is: Is Kenya Airways worth saving?

For starters, we should look at these numbers with three possibilities in mind.

One, that this is the first true and accurate picture of the business we have seen in years following the appointment of a new CEO and captures all the bad from previous years.

Two, that the new CEO had to make it as bad as possible such that from here it can only get better.

Three, that this will now engender the necessary political will for the restructuring of the company into a leaner, more efficient operation including cutting down a bloated but unionisable workforce.

The airline has some mitigation measures it spelt out.

It has appointed Afrexim Bank of Cairo to advise it on raising capital for its operations, It will raise some money from sale of airplanes and land.

But this is not enough, There must be a purge.

As much as Ebola and travel advisories hurt passenger numbers in the past year, the continued trend of making losses has been a hallmark of most of the current management for the last few years.

In other words, they have to also bear responsibility for the company losses.

In short they have been mismanaging the company.

They must go.

It is not enough for management to always be blaming externalities for its losses: Ebola, fuel prices, global meltdown, Eurozone crisis, travel advisories, competitors etc.

That is precisely why they are in management. To understand both the internal and external environments and create a strategy that helps the company overcome these odds.

Before government and anyone else injects any money into KQ most of the top level management must leave and fresh blood to work with the new CEO brought in.

Parliament and EACC must investigate claims of impropriety in some of the big ticket deals the company has made in the past especially in the acquisition of aircraft and institute the necessary penalties.

The US government which has pledged to work with Kenya on mega corruption matters must be persuaded to also investigate Boeing, the American Exim bank and several entities registered in the US in such places as Delaware that have been involved in the purchase of aircraft for any corrupt practices.

This company must be cleaned up.

It remains the most connected airline in Africa with more destinations on the continent than any other airline.

It remains the de facto national carrier for many West African countries.

It stands to make money hand over fist on the East African regional routes as business between these countries heats up and businessmen crisscross the various capitals.

In short it has a viable business and deserves to be kept in business. But only if drastic measures are taken to streamline the company first.

Mbugua is a communications consultant and comments on topical issues.

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