Ngunze balancing the buck at KQ...

After several months in the doghouse, management at Kenya Airways (KQ) has bounced back from their worst-ever financial performance by announcing an urgent restructuring plan.

The ailing flag-carrier now aims to restore profitability under an 18-month turnaround strategy developed by consultants McKinsey & Company.

Many analysts are reserving judgement on the plan until further details are disclosed, but chief executive Mbuvi Ngunze promises that a slew of measures will help reverse last year’s devastating 25.7 billion shilling ($254 million) loss.

Ostensibly turning his back on ‘project Mawingu’, the 10-year growth strategy launched in 2011, Ngunze is pursuing an urgent overhaul of KQ’s finances in a bid to raise up to $346 million. Some $200 million of that will be generated from unspecified cost-cutting measures – job losses are widely expected – with the remainder coming from the sale of four Boeing 777-200ERs and other assets.

 

The flag-carrier also plans to convert $250 million of short-term debt into longer-term financing, while abandoning its fuel hedging policy after locking itself out of the recent downturn in oil prices.

Ngunze was, undoubtedly, thrown into the deep end when he took the helm in November 2014, replacing long-standing boss Titus Naikuni. “There’s nothing that prepares you for being the CEO,” said the bespectacled airline chief. “The buck stops with you. It’s definitely a challenging job.”

Within months of his appointment, the new boss was hauled before a Senate Select Committee to explain the flag-carrier’s disastrous 2014/15 financial result. Batting away allegations of corruption and criminal negligence, Ngunze was forced to defend KQ’s ambitious fleet expansion and its seemingly under-performing joint venture with Air France- KLM. Several prominent voices in Parliament would not be swayed and called on Nairobi to withhold bailout funds.

Ultimately, however, the Government sided with its 39-year old flag-carrier, rubber-stamping a $40 million loan to restore liquidity. The African Export-Import Bank also provided a $200 million bridging loan, giving KQ “breathing space” to finalise its turnaround plan. Half of the Afreximbank funds have now been received.

Asked about the root cause of the airline’s financial difficulties, Ngunze said rising violence by Somalia-based terror group Al Shabaab has had a “direct impact” on tourism flows to Kenya.

Al Shabaab’s most high-profile attack to date – the September 2013 Westgate Shopping Mall atrocity in Nairobi – claimed 67 lives, including citizens of the UK, Canada, France, the Netherlands and South Korea. Since then, the group has staged numerous assaults near the border with Somalia and along Kenya’s eastern coast, primarily targeting non-Muslim villagers. After the UK Government issued a travel advisory about the threat, traffic between London and Mombasa fell 40%.

“There has been, definitely, over time, a strong improvement in [the security situation in] Somalia... and what we see is Al Shabaab shifting their focus to soft targets,” Ngunze said, highlighting the April 2015 attack on a Kenyan university college in the border town of Garissa, which killed 147.

“Business traffic into Nairobi is more resilient but, definitely, the tourism traffic which requires [travel agency] insurance has taken a hit.”

The upsurge in violence came at a particularly awkward time for KQ, which has inducted 15 aircraft since the start of 2014: nine Boeing 787- 8 Dreamliners, two 777-300ERs and four 737- 800s. While some of the new wide-bodies were replacements for older 767s, capacity still rose 8.6% during fiscal 2014/2015.

Ngunze admits that the management team was wrong-footed by the slump in tourism but he also believes the situation has been exacerbated by sensationalist media reports.

“We are not saying that there are no risks. Terrorism risk is everywhere in the world today. But the travel advisories [issued by the British and other governments] are really focused on the coastal regions – places like Mombasa and Lamu – while the rest of the country is open for business,” he said. “That’s the big narrative that gets missed. So much attention is focused on a small part of the country.

 

“The narrative can be driven... if we allow the confines of terrorism to control us, we will be succumbing to it. Countries like Kenya and others that face a terrorist threat require support, not distancing.”

Behind the headlines there is, indeed, some cause for optimism in the Kenyan market. Jambojet, the low-cost subsidiary launched by KQ in April 2014, achieved a profit of 57 million shillings ($558,200) in the six months to September 2015.

That marked a dramatic reversal of the 237 million shilling ($2.3m) loss it recorded during its first six months of operations, validating management’s decision to transfer a portion of domestic traffic to the price-competitive, no- frills offshoot.

“Jambojet is really about growing the pie in Kenya on the one hand, and secondly also stimulating new flows of traffic,” Ngunze said, echoing the strategy adopted by South African Airways with its low-cost brand Mango.

He praised Jambojet for growing the domestic market by 25% “in a declining international environment”. The subsidiary presently serves six domestic routes from Nairobi with three 737- 300s and two Bombardier Dash 8 Q400s – the latter being leased on a temporary basis to deepen penetration of thin routes and gain access to airports with short runways.

“We are using the Q400s as a model to see whether there is an opportunity to bring in a different fleet type [alongside the 737s],” Ngunze affirmed, adding that ATRs are also being evaluated for thinner routes. “We’ve floated an expression of interest to determine what could be the possibilities, but we haven’t decided what that aircraft will be.”

The mainline unit, meanwhile, deploys 15 Embraer E190s for low-capacity, high-frequency services from Nairobi to three domestic airports and about two dozen foreign points.

Asked when Jambojet will also spread its wings beyond Kenya’s borders – potentially encroaching on some of its parent’s high-yielding regional markets – Ngunze was reluctant to give a timeframe. “First let’s focus on growing the Kenyan market and make sure that Jambojet is reliable domestically and really forms a reputation,” he insisted. “If you want to do something, do it well. There is no need to want to be all things to all men.”

That policy may have been imposed externally by the Government. In November, the Kenya Civil Aviation Authority declined to grant either Jambojet or Fastjet – a low-cost rival that has long sought to enter the Kenyan market – international licences.

Whatever the future holds for Jambojet, stabilising the 40-aircraft mainline operation is the clear priority. Heavy losses continued in the first half of 2015/16, with KQ haemorrhaging another 11.9 billion shillings ($116 million).

While management blamed that result on financing costs – the figure actually represented a 79% improvement on an operating basis – time is nonetheless running out. The flag- carrier’s negative equity position now stands at 33.9 billion shillings ($33.2 million), heaping pressure on management to generate positive returns under the restructuring plan. Failure to do so will almost certainly provoke a new gauntlet of fire in Parliament; one that Ngunze may not be able to placate.

 

It’s small wonder, then, that talk of rapid expansion is now firmly off the table. Project Mawingu’s vision of 119 aircraft by 2021 is dead and buried – replaced with a more cautious focus on natural growth.

“Today, we are in a tight liquidity environment, so clearly we must do the sensible thing to settle [into our existing] capacity,” the CEO concluded. “But the next step will be [to] make sure that we are also growing responsibly.

“In Europe, the thing is just to [increase the density on] our [existing] hubs... London, Amsterdam, Paris. In Asia, China Southern are now flying into Nairobi three times a week and we will look to extend cooperation with them... In America, it’s not dependent on us [when KQ launches flights]. It’s based on work that has to be done from a regulatory point of view. The Government is going through the [FAA’s IASA] Category 1 process.”

Frequency hikes, codeshare deals and safety audits may sound meagre for an airline that, until recently, planned to double in size by the end of the decade. But, having survived 2015 by the skin of its teeth, this is the new reality for Kenya’s flag-carrier.