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Kenya Airways restructuring plan to propel airline out of the red

2015 11 14

In Summary

- The airline posted a $119 million loss in its half year, due to higher finance costs that rose to $35 million and a $13 million loss on its fuel derivatives, compared with a $6.8 million gain over the same period last year.
- Kenya Airways is hoping that a restructuring plan, with expected savings of $346 million, will propel the national carrier back to profitability. However, the plan is dependent on lenders agreeing to restructure the company’s short term debt obligations.
- Chief executive officer Mbuvi Ngunze said from next week the airline will embark on a one-and-a-half year 24-item McKinsey crafted restructuring plan that will see the airline save more than $300 million. The plan involves possible job cuts, cost reduction, pricing and productivity improvement.

 

Kenya Airways is hoping that a restructuring plan, with expected savings of $346 million, will propel the national carrier back to profitability. However, the plan is dependent on lenders agreeing to restructure the company’s short term debt obligations.

The airline posted a $119 million loss in its half year, due to higher finance costs that rose to $35 million and a $13 million loss on its fuel derivatives, compared with a $6.8 million gain over the same period last year.

Chief executive officer Mbuvi Ngunze said from next week the airline will embark on a one-and-a-half year 24-item McKinsey crafted restructuring plan that will see the airline save more than $300 million. The plan involves possible job cuts, cost reduction, pricing and productivity improvement.

“We hope the plan will boost our bottomline through a $200 million saving, adding to the expected $146 million from the sale of the grounded aircraft and land, which is at an advanced stage,” Mr Ngunze said.

The airline is also in discussions with local banks to convert its short-term debt of $250 million into long-term debt, with tenures of about seven years.

“We are currently in talks with local banks so that we can renegotiate the terming of some of these short-term facilities to enable us to reduce our repayments and interest costs,” Mr. Ngunze said.

KQ’s finance director Alex Mbugua said the airline has seen great improvement from an operating perspective, saving $80 million in fuel hedging contracts that helped the direct costs decline by 17.5 per cent, year on year, to $34.8 million.

“We have also managed to improve our operating loss position to $218 million from the previous year’s $1.05 billion. This means that the business is fundamentally on the right track,” Mr Mbugua said.

The airline also announced that it has drawn half of the $200 million facility it received early this year from African Export-Import Bank (Afreximbank). Its long-term loans stand at $1.14 billion, while its short term debt is $517.8 million. Since 2014, the airline has borrowed $1.04 billion from Afreximbank.

However, the outlook for the second half of the year is not favourable for the airline due to fluctuating exchange rates and high interest rates. In the half year to June, the airline made foreign exchange losses of $49 million related to revaluation of loans, and a $15 million loss on long term loans.

In the near term, the airline plans to stop hedging as it positions itself to benefit from the falling oil prices.

Of great concern however is the increase in the company’s negative equity position to $33.9 million, from $5.9 million in March, which the firm attributed to revaluation of dollar-denominated long-term loans and cumulative losses.

Mr Ngunze said that they will be speaking with Capital Markets Authority with a view to rectifying the airline’s negative equity position soon.

Analysts say the next few months will be challenging given the financial environment and the government’s ability to inject additional capital.

“The airline management has been keen to emphasise the importance of Kenya Airways to the economy beyond its profitability — a discussion that is intended to elicit support for a government backed bailout plan,” Standard Investment Bank said in their investor note.

In October, Kenya Airways received two Dreamliners, completing the fleet ownership programme that sent the company into massive debt. “We received the fleet through a special financing arrangement,” Mr Ngunze said.

“We have seen the net finance costs go higher than last year. We are also feeling the interest costs impact and expect this to continue into the second half of the year,” Mr Mbugua said.

The airline’s revenue growth has remained flat, at $567 million, with Kenya contributing 11 per cent of its total revenue; the rest of the continent contributed 60 per cent.

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