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

Plane model at Kenya Airways (KQ) headquarters in Nairobi, November 8, 2022. [Boniface Okendo, Standard]

Is the national carrier Kenya Airways finally turning the corner or it’s a case of playing up some of the numbers to obscure the truth?

This is perhaps among the questions that many may have been asking this past week after the company published its half year financials.

The carrier played up the fact that it had reported an operating profit for the first time in six years, which stood at Sh998 million in the six months to June this year from a loss of Sh5 billion last year.

There was, however, little talk about its net loss that had more than doubled to Sh21.7 billion during the period from Sh9.9 billion the previous year.

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.

Traditional dancers entertain visistors at JKIA when KQ made its maiden trip to New York City. [File, Standard]

“For the longest time they were below the line but for the half, they were operationally profitable, which means that the business is actually viable. If they can deal with the legacy issues that have plagued the company for many years they have struggled, it is still a viable business and they are attractive,” said Elvin Khama, portfolio manager at Orient Asset Managers.

Skewed revenue sharing formula dims KQ’s fortunes

“The airline should now focus more on capitalising the business for long term growth. With the recovery from Covid-19 and restrictions on travel having eased up, they can now open up new routes and take advantage of economies resurging and growth in the travel industry.”

Additionally, headwinds such as a weak shilling, he noted, would always be there.

Last year, for instance, the carrier in its half year results noted that aviation was still suffering the impact of Covid-19 pandemic. It further noted that high fuel had dampened the performance, which were 65 per cent higher when compared to a similar half in 2021.

KQ said if it adjusted the fuel price spike, the operating profit for the period would have been Sh1.5 billion as opposed to the Sh5 billion loss it reported.

Oil prices have since dropped and have been hovering at around Sh11,600 ($80) in the recent months down from a peak of Sh17,400 ($120) per barrel early last year.

The industry has however been grappling with other curve balls including the weak shilling for the local industry, which other than pushing up the cost of servicing loans, it also has an impact on cost aviation fuel for players like KQ whose home economies are not oil producers.

Mr Khama noted that KQ also has to grapple with other factors such as its legacy debt.

“The airline has debts, we have unpredictable fuel prices, we have the weakening shilling and it is technically insolvent. These are areas that they will have to look into,” he said.

In its search for a strategic investor, the carrier also has to grapple realities such as the flight by investors from the local market and instead preferring to invest in markets such as the US, where return on interest has been growing as the country’s central bank increases interest rates.

The US Federal Reserve has in recent months been raising its key interest rate to reach 5.5 per cent in July, the highest in 22 years.

This has resulted in many foreign investors cash out of markets like Kenya to invest in the US. Khama noted that this could slowdown KQ’s search for a strategic investor. The carrier is hoping to attract an investor who can pump in money that will partly help it deal with its legacy debt challenge.

“It is a catch 22 situation. We are seeing capital flight from NSE. If the Federal Reserve Bank increases the rates again, we will see more capital flight. KQ will mainly bank on the government for support,” said Khama.

The state has however in the past said it would not continue injecting cash into the carrier past December this year.

The Kenya Kwanza administration maintains that KQ has in the past proven that it can sustainably run without government support.

“Aviation is a strategic industry for the economy. It is vital for the tourism industry, exports of fresh produce and maintenance of Kenya’s position as a regional hub,” said Treasury in budget documents for the current financial year.

“The Kenya Airways had demonstrated that Kenya could become a global aviation hub. To support the aviation industry, the Government will develop a turnaround strategy for Kenya Airways. A critical plank of this strategy will be a financing plan that does not depend on operational support from the exchequer beyond December 2023.”

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.