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Kenya Airways' stay in the skies troubled with new Sh29 billion loss

By Paul Wafula | July 31st 2015

Nairobi: The management of national airline Kenya Airways was yesterday at pains to assure investors of a turnaround in the carrier’s fortunes after announcing the biggest loss by a local firm listed in the stock market. But can the airline be rescued? That was the question on the lips of most investors yesterday as the unpalatable news of the heaviest loss in Kenya’s corporate history sank in.

The Sh29.7 billion loss (Sh25.7 billion after tax deductions) reveals the headwinds that Kenya Airways, one of Africa’s most successful carriers in recent years, has flown into, with the airline telling investors that it will have to sell part of its prime land in Embakasi and seven older aircraft to reduce its debt, a process known as asset stripping.

The airline's management hopes that this, and a Sh20 billion external loan it is pursuing, will keep its planes and pilots in the air, without reducing its ability to compete against deeper-pocketed competitors, including Ethiopian Airlines.

KQ revealed its losses were turbocharged by the unexpected drop in international oil prices. This blew a Sh5.8 billion hole in its hedging strategy.

Hedging is an airline industry practice where companies enter into agreement to purchase fuel at a specific price. Should the price fixed end up being higher than the actual price in the open market as happened to Kenya Airways, then it ends up making losses.

Things got more hairy with Sh5.6 billion in impairment costs and a Sh2 billion depreciation of assets it sold, declining tourist numbers and procurement of new aircraft.

"There has been a reduction in tourist numbers. We are a significant carrier of tourists into the country," Managing Director Mbuve Ngunze, who took over from Titus Naikuni, told investors in Nairobi yesterday morning.

This is the third year in a row that the airline posted losses. Last year it made a Sh4 billion loss before taxation and Sh10.8 billion in 2013, adding up to Sh45.3 billion in pre-tax losses in three years.

The news seeped into the Nairobi Securities Exchange yesterday and cut the airline's share price value by more than 20 per cent.

KQ said it expects to raise Sh10.2 billion ($100 million) from the land and aircraft sales, although it owes its suppliers over Sh20 billion.

But the airline said it will continue to meet its obligations after it secured a loan of a similar amount as what it owes its debtors from the Afriexim Bank, a lender based in Cairo, Egypt and established by African governments.

KQ did not reveal the terms and duration of the loan, citing confidentiality clauses, but any time a company goes to borrow when in distress, it finds it harder to negotiate terms below the market rates without solid guarantors for the debt.

The results for the financial year ending in March 2015, show the company widened its pre-tax losses by over 600 per cent. It had made a loss before tax of Sh4.8 billion last year.

Some unhappy shareholders expressed their disappointment during the investor briefing.

"I was one of the most vocal shareholders against 'Project Mawingu' (the airline's 10-year strategic expansion plan) but I was never listened to. Just how much have we lost since the rights issue?" asked an investor, Mr Rakesh Gadani.

Kenya Airways' management declined to answer some of the questions asked by Mr Gadani in the heated exchange on grounds that he could be briefed at a later session it had convened specifically for analysts.

Other investors pleaded with the Government to come on board in good time to prevent an imminent collapse of the airline.

"We must support the airline as a country by using it. If this airline goes down, many people will also go down," Alois Chami, a vocal retail investor said at the briefing.

Mr Ngunze took over from Naikuni who left when the airline was just starting on its negative growth, and was yesterday hard pressed to explain how he expects to turn around the company.

The Government had recently given the airline a Sh4.2 billion loan to meet its running costs. Shareholders and analysts raised concern over the airline's ability to survive any longer after it posted a negative equity of Sh6 billion.

The national carrier has been on an aggressive aircraft-buying programme under its Project Mawingu that has seen its fleet rise from 43 to 52, including two freighters.

Management told investors it has completed the first phase of its fleet renewal programme that involved the acquisition of seven aircraft, among them five Boeing 787 Dreamliners.

"These investments, however, coincided with a difficult business environment driven by the incidence of terrorism in the region together with adverse external factors like West African Ebola crisis and the effects of travel advisories," the airline said.

"These factors cumulatively had a negative effect on the Kenyan tourism and aviation sector. As a result, both the operational and financial performance of the airline for the period under review has been adversely impacted," the airline told investors.

KQ revenues were up four per cent to Sh110 billion on an operating loss of Sh16.3 billion.

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