Why KQ opted for rights issue

Kenya Airways (KQ) has launched a Sh20.7 billion ($250 million) rights issue, which closes on April 27. The transaction aims to raise cash to enable the airline expand passenger and cargo aircraft fleet and also venture into new markets. Jackson Okoth spoke to Titus Naikuni, KQ chief executive officer, on the airline’s growth strategy, outlook and events on the global aviation scene. Below are excerpts.

Question: Why is Kenya Airways doing a rights issue?

KQ CEO Titus Naikuni. He is optimistic the airline will raise more funds from the right issue . The State and KLM have already taken up 49 per cent of the issue. Photo: Standard

Answer: The main reasons for doing this rights issue is to enable us expand operations and double the fleet over the next five years.

We have already ordered for nine 787 dreamliners, which are due for delivery starting 2014. We must make pre-delivery payments for these aircrafts two years in advance, equivalent to between 20 to 30 per cent of the aircraft’s price. And this is why we need the cash now.

While we could have borrowed from banks, we have decided against this because we want to safeguard the firm’s debt-equity ratio.

Out of the $3.6 billion needed, we shall raise $2.2 billion through debt and part of the remaining amount in a rights issue, which is a cheaper option.

We plan to increase the airline’s fleet to 102, while freight aircraft will increase to 12 during the 10-year growth strategy period.

Q: Which markets are you looking at in the expansion plan?

A: We intend to go into Asia, especially the Indian and Chinese markets. Unlike in the past years, China is rapidly opening up for business with the outside world and its products are now readily available in Kenya.

A lot of activity is taking place in Africa’s infrastructural investment, opening up opportunities for contractors from China, keen to do business with the continent. There is also a huge trade expansion between Africa and India.

Q: The price of fuel and the shilling exchange rate has remained volatile for the better part of last year. How has these two elements affected the airline’s bottom lines?

A: A volatile exchange rate against the US dollar and other major currencies has had a very minimal impact on our operations. This is because some 90 per cent of all our revenues are paid in dollars. We have been able to deal with the issue of escalating fuel prices by passing on some of this cost to the customer.

We have hedged 80 per cent on fuel this year and will do 45 per cent next year, to cater for changes in the price of fuel.

Q: Several banks are providing finance to investors keen to participate in this rights issue. What measures are in place to ensure investor interests are protected from what occurred during the Safaricom IPO?

A: Investors who failed to get shares during the Safaricom IPO did not get their refunds. We have ensured that this does not happen during the rights issue by having a robust refund process.

Q: The Nairobi Securities Exchange is already down as a countdown to the next general elections begins. Is your timing for this issue right?

A: If elections are to be conducted at the end of the year, we are still eight months away. The market is already down but we cannot wait for the situation to change while we are struck with old aircraft and a lean fleet. The airline needs to go on with its plans and we cannot wait for the political scene to sort itself out first.

Q: A picture of the global aviation industry is not encouraging. The euro zone crisis is yet to reach its tail end while instability in the Middle East threatens oil price levels. Why is KQ optimistic?

A: The conditions prevailing in North America or even Europe cannot replicate in the markets here.

Africa has a population of one billion people while airlines only carry 40 million people within the continent in a year. This means that unlike other markets, there is still headroom for growth in Africa. Further, the state of roads and the railway network in most African countries remains poor, meaning that air transport remains the only viable option for many here.

Q: What is your outlook for cargo business?

A: We are looking at opportunities in Africa, China, India, Europe, Russia and South America.

Already, our cargo fleet is operating on a full load in and out of these markets, carrying spares, chemicals, vegetables, pharmaceuticals and live fish.