Markets & Finance

Citigroup tips KQ on how to pull out of financial pit

Kenya Airways needs to inject addition cash or restructure its capital in order to pull out of the current financial pit, Citigroup has advised.

Some of the restructuring options given to the airline by the global investment bank include seeking financial aid from the government, conducting a second rights issue, disposing of assets and reconsidering buying new planes.

“Poor operating cash flow increases the need for a capital restructuring and or increase to meet its substantial capital expenditure commitments,” said Citigroup analysts in a note to international investors.

The analysts, however, warn that a rights issue could perform poorly as it would dilute the value of existing shareholders.

Kenya Airways’ debts stood at Sh131.3 billion at the end of September, up from Sh7.5 billion in 2012, following implementation of an ambitious expansion plan dubbed ‘mawingu’. Under mawingu the airline plans to increase its fleet to 68 planes by end of 2017 at a cost of Sh300 billion.

Citigroup advises KQ to consider deferring the purchase of three more Boeing 787s planes due in 2016, or even cancelling the transaction all together.

KQ has already deposited Sh27.5 billion for acquisition of eight Boeing 787-8 and Boeing 777-300ER aircraft scheduled for delivery between this year and 2015.

“Refinancing options include further sale-and-leasebacks on up to 23 aircraft currently on its balance sheet,” says Citigroup.

READ: New aircraft budget weighs heavily on Kenya Airways

KQ disposed of four Boeing 777-200 planes at a loss of Sh5.4 billion owing to depreciation, an expense it would avoid if it leased the planes. Leasing would however expose it to annual fees.

KQ expected to fund part of its expansion using additional revenue from an increased fleet and expanded destinations, but a drop in tourist arrivals owing to insecurity and fears over Ebola have scuttled the plan.

Mr Eric Musau, a research analyst at Standard Investment Bank noted that the airline’s passenger number had dropped from 70 per cent when the company was profitable to 64 per cent.

“Already we have noted that they are not within their plans, they are scaling back on expansion,” said Mr Musau. He said that it would be imprudent for the government to bail out KQ because the move would benefit private shareholders at the Nairobi Securities Exchange-listed firm using public resources.

The government owns 29.8 per cent of the carrier. The airline has hired a financial adviser to help restructure its debt even as it posted an after-tax loss of Sh10.45 billion for the six months to September 30.

READ: KQ hires debt expert after Sh10.5bn half-year loss

KQ’s management expect the consultant to help renegotiate the tenure of its debt and give the airline time to grow sales while cutting immediate cash demands.

Mr Musau warns that leasing of the large capacity Dreamliners may not be a good move as the factors causing low passenger numbers may disappear, leaving the airline without capacity to take advantage of a market turn.

Citigroup said it could not advice investors whether to buy or sell KQ share.

“Being the largest of only four listed African airlines, Kenya Airways offers an almost unique investment opportunity into the expected strong economic expansion of Africa and its significant implications for air travel growth, both passenger and air cargo,” reads the note to investors.