How KQ captain plans to navigate raging financing storm

National carrier Kenya Airways has in the past three years maintained its dominant position in the Kenyan public discourse — for not so inspiring reasons.

In the six months to September, for instance, flat revenues saw the airline post a Sh11.95 billion net loss up from the Sh10.45 billion it posted during a similar period the previous year.

For the company’s management, this long flight in turbulence has produced exceptionally nervous moments whose end is badly and rapidly needed.

The Business Daily’s Mugambi Mutegi talked to the airline’s chief executive, Mbuvi Ngunze, about these prickly issues and how he plans to captain the airline into a stable and profitable territory.

What is your opinion on what got KQ into the tight position it finds itself in now?

KQ was caught in the eye of a storm. We had continually invested and did well until around 2012 when, on the back of that good performance, the company adopted a strategy to reinvest.

That decision coincided with elections, airport fire, terrorist attacks, Ebola, a confluence of factors one could not have anticipated. These events left us with assets that did not have the right cabin factor and high financing costs.

Then oil prices dropped. My new commercial strategy is how to ensure the company is effective even in a time when bad things are happening around us. We can ask, should we have hedged as much as we did? However, hindsight is 20/20.

You were KQ’s chief operating officer for three years. Did you think the job was going to be this tough when you accepted to become CEO?

I was clear about the need for extra financing, the need for commercial diagnostics and on the need to relook the hub setup. I was also clear that we needed to tighten our cost management.

I probably underestimated how long it would take to get the financing. I thought we would get the $200 million bridge financing within a year but it has taken much longer, straining the business.

So no regrets?

In a job like mine, you do not look back and say we have regrets. The aircraft we fly do not have rear-view mirrors.

A report by Genghis Capital recently said that KQ’s negative net worth of Sh33 billion could persist in the next four years even if the airline’s profit position improves. Is there any credibility in that forecast?

The negative equity is a function of both the losses we have and the exchange rate impact. All our long-term loans are translated at the current exchange rate and that is then reflected in the balance sheet.

About Sh15 billion of our negative equity position is in relation to the mark to market position of our assets based on currency. Part of the recapitalisation plan aims to address this position.

Can you give us some insights into how KQ’s long-term capital raising plans are going?

In the next week or so, we will confirm the appointment of an international transaction advisor with experience in aviation. They will take our financing plan, ensure it is bankable and then go to the market to raise the right mix of debt and equity, long-term debt and equity.

KLM and Kenya Airways will be part of this but there is need for others to participate since the capital requirement is quite significant, in the region of Sh60 billion. Shareholders can only make their commitments when the transaction adviser finishes his work.

The whole process, including getting the cash, is expected to take between six and nine months.

Assuming that this goes according to plan, how long do you think KQ will take to get back to profitability?

If everything holds constant, I would like to see a break-even point within the next one to two years. If you look at the operating part of the business, we can come back to positive territory but you are left with how to fund the business, including hedging, forex and others.

McKinsey is currently assisting you to implement a turnaround strategy. What tangible achievements have been made so far?

McKinsey challenged our five-year plan and we worked together to build a new one, which we presented to our stakeholders.

To execute the plan, we brought in a different arm of McKinsey called Recovery and Transformation Services (RTS) that helps us drive execution.

For instance, we have created the position of chief transformation officer who reports to me. This office has a representative from RTS and some members from my office.

Our 24 turnaround initiatives have been broken down to work streams involving 250 KQ employees. McKinsey is assisting these teams come up with annualised targets.

During the release of your half-year results, you hinted at a possible staff retrenchment. Please comment on this cost-cutting measure.

We are looking at how many staff we need to deliver our business plan. What I have said, both publicly and internally to my staff, is that there is nothing sacred within the organisation right now.

Once we complete the work-stream in relation to staff, we will confirm the right head count level and productivity targets.

If the time comes when we have to talk, I will respectfully go back to my staff and tell them what needs to be done. In a restructuring situation, it is inevitable that there might be some staff cuts.

You recently sold two planes to an American firm. You are also disposing of land in Embakasi. Has the cash from these deals hit your account?

We already have a deposit on the two aircraft but the final amount will be settled when they fly out.

The two planes were secured through the US Export-Import Bank. Their offices were shut last week causing a delay in finalising the deal.

I cannot comment on the sale price but the money we get from the two aircraft will be enough to settle the debt in relation to their acquisition.

The land deal is also near completion. Income from these two transactions will most likely be captured in the full-year results.

KQ has a huge debt burden of Sh157bn. You were to request local banks to convert Sh25bn of their short-term portion into long-term. Has this happened?

Yes. We asked our banks for a two-year moratorium and also extend the loan tenures to allow the business come back to profitability, generate cash and comfortably pay them back.

Nine out of 11 local banks have accepted this grace period and have also agreed to extend the loan repayment period.