KQ profit: A story of success or illusion of sunshine?

The loss, which it attributed to the weakening shilling against the US dollar, is one of the worst the carrier has posted over a half year.

KQ management said the performance was, by any measure, a success. Chief Executive Allan Kilavuka said the firm had been anticipating to make an operating profit by the end of this year, adding that having done it over the half year meant it was ahead of schedule.

"We are very excited because operationally, for the first time in more than six years, we made a profit of close to Sh1 billion. What that demonstrates is that the business is viable," he said.

"I think we should celebrate that... this is success for us."

Michael Joseph, chairman of the KQ board, echoed the sentiments, saying it was good news.

"For many years, we have accepted that we have produced bad news. This is really good news, it is something that we can be proud of. A profit of this magnitude is incredibly good for KQ," said Joseph, adding that were it not for "something that is completely out of our control, the operating profit would have been larger".

The net loss at Sh21.7 billion perhaps pours cold water on the celebrations.

The loss, the airline said, was due to the weak shilling which had depreciated to an average of 140 to the dollar in June compared to about 124 in January.

This resulted in the airline booking forex losses as well as incurring higher loan repayment costs.

Had the shilling stayed at the same level as last year, the loss would have narrowed to Sh6 billion. The operating profit would have also been at Sh1.4 billion.

Major improvement

Analysts noted that being profitable at the operational level was a major improvement following the many years the carrier has been in the red. They, however, noted that the huge debts were still a factor that would continue to stand in the way of the airline being profitable.

KQ last week clarified that the cash injections from Treasury is not free money but shareholder loans that the carrier would eventually repay.

Kilavuka said the carrier will by next year have turned around and would operate without government's cash injections comfortably.

"We are looking forward to next year. We had promised the market that we will turn around by 2024 and these are early signs that we are on the right track to turn around by 2024," said Kilavuka.

"We are confident about the turnaround. We need to deal with the legacy issues, maybe that is the only condition precedent. If we do not deal with the legacy issue it will be difficult for us to turnaround. From an operational point of view, we have demonstrated over this first half we are operationally viable and what we are suffering from right now is the legacy debt."

Ambitious project

He added that the airline will shortly engage a financial advisor or investment banker to lead the process to choose a viable strategic investor. He noted a number of firms had already showed interest.

The carrier's woes that have led to more than a decade of losses can be traced to a range of factors that include an ambitious expansion project started in 2009. To implement Project Mawingu - as it was called - the airline borrowed heavily to finance aircraft acquisition and route development, with the aim of flying to nearly every African capital.

But shortly after the project started implementation things went haywire.

Factors beyond the carrier's control such as terrorist attacks in the region that spooked tourists source market, Ebola outbreak in West Africa - a key market for KQ - as well as competition from Gulf carriers and the Ethiopian Airlines - which offered much lower rates than KQ, were at play. There was also the recurring challenge of repatriating dollars from some of the African markets.

To get out of the hole that Project Maiwingu got the airline into, it has in recent years been implementing project Kifaru - a three-year plan - focusing on route rationalisation, fleet resizing, employee productivity and focus on the customer to get back its mojo.

Kilavuka said KQ is mid-way in implementation of the project and that it has "implemented a lot of things".

"We are now going to the second phase where we want to achieve stabilised growth and also restructure the balance sheet," he said.