Opinion and Analysis
It will take strong leadership to hoist Kenya Airways out of loss-making phase
Posted Sunday, November 11 2012 at 21:03
- The airline’s management should brace itself for the unwelcome greater scrutiny on its network planning, procurement processes and labour policies. The route expansion will have to deliver revenue diversification potential that ensures single regions do not generate a 30 per cent revenue impact that Europe has on the airline.
Passengers on a Pan Am flight heard this announcement from the captain, “Ladies and Gentlemen, I am sorry to inform you that we have lost power to all of our engines and will shortly crash into the ocean.”
The passengers were obviously very worried about this situation, but were somewhat comforted by the captain’s next announcement.
“Ladies and Gentlemen, we at Pan Am have prepared for such an emergency, and we would now like you to rearrange your seating so that all the non-swimmers are on the left side of the plane, and all the swimmers are on the right side.”
All the passengers rearranged their seating to comply with the captain’s request. Two minutes later, the captain made a belly landing in the ocean. He once again made an announcement, “Ladies and Gentlemen we have crashed into the ocean.
All of the swimmers on the right side of the plane, open your emergency exits and quickly swim away from the plane. For all of the non-swimmers on the left side of plane... “Thank you for flying Pan Am.”
Last week, our national carrier Kenya Airways had an investor briefing to announce its half-year results.
From my Twitter feed, it was obvious that the left side of the room remained totally stunned by the Sh4.8 billion reported loss, while the right side fumed at what was obviously going to be a clear defensive strategy for the job redundancies made earlier this year.
So I waited to see the results that were published the following day in the newspapers and read the publication with much consternation.
The consolidated income statement was not the cause of my dismay, rather the consolidated statement of cash flows was.
Cash is the lifeblood of any business, whether it is the maize roaster at Dagoretti Corner or the supermarket chain with 50 branches across Kenya.
Cash generation is the oil that greases the operating cogwheels of any business. It is required to pay suppliers and overheads such as rent, labour costs and utilities.
If your business does not generate enough cash to run its operations, it then has to be drip-fed intravenously through expensive overdrafts and lines of credit from bankers and suppliers.
This in turn eats at the operating profit by reducing the profit margin of the goods and services produced. So judging from Kenya Airways’ half year results, it generated only Sh252 million from its operations in the half year ending September 30 compared to Sh4.1 billion in the same period last year, a 94 per cent drop.
This was caused largely in part by the significant drop in revenues from Sh54.9 billion to Sh49.8 billion (a 9.3 per cent drop) coupled with a marginal increase in expenses of Sh1.4 billion or 2.6 per cent.
The cash flow reduction is clearly illustrated as short term borrowings have gone up by Sh1.4 billion (although this figure could include the current amounts due for long term borrowings) while supplier payments are being stretched as the trade payables have increased by another Sh2.4 billion.
The timing of the rights issue in April was ostensibly to raise the equity for the airline and improve its debt to equity ratios for the further leveraging the airline needs to undertake to grow its fleet for its future expansion.
However, looking at the airline’s statement in changes in equity, if the rights issue had not happened when it did, Sh6.2 billion would have been wiped out from the equity arising from the operating losses as well as losses from the cash flow hedges that have caught the airline on the wrong side of the very necessary derivative bet for a few years now.