Uphill task for new Kenya Airways chief after the release of results

Investors in Kenya Airways will keenly watch CEO Mbuvi Ngunze’s moves as he strives to lift the airline’s prospects in the face of challenges from Ebola and security advisories.

Investors on the Nairobi Securities Exchange will be keenly listening to what Mr Ngunze has to say, taking into account the fact that the counter is down nearly 30 per cent this year.

KQ releases its half-year financial results Thursday with management warning that the Ebola outbreak in West Africa is likely to impact earnings.

“We estimate a reduction in revenue equivalent to four per cent of our annualised turnover as a result of suspension of flights to Sierra Leone and Liberia,” Mr Ngunze said on October 14.

READ: KQ sees Sh4bn revenue loss after West Africa flights ban

The airline’s long term prospects look better, with a strategic plan in place to improve operational efficiency and financial performance by minimising costs.

External challenges such as the impact of travel advisories are also seen to be short term.

The company has been valued at Sh13.8 billion, from January’s Sh19.8 billion. Trading at an average of Sh9.45 a share Wednesday and Sh9.20 the previous day, the company’s counter is just coming off an eight-year low witnessed in mid-October when it dipped to Sh8.75 a share.

The price has remained below the 1996 IPO offer price of Sh11.25 for the past four months, without taking into account inflation over the years, share splits or bonuses.

Analysts say that in the short term a return to profitability is among top priorities for a firm which has posted two successive losses of Sh3.3 billion for the year that ended in March and Sh7.8 billion the previous year.

“The main concern is the load factor which has come down, which leaves the airline in danger of being unable to fill up the new aircraft they have bought. Finance costs also come to mind because they are paying for the new aircraft,” said Standard Investment Bank (SIB) analyst Eric Musau.

KQ plans to spend up to Sh87 billion ($1 billion) on the acquisition of new aircraft in the current financial year. In its 10-year plan, KQ is betting on new and more fuel-efficient planes to increase carrying capacity and a presence on untapped intra-Africa and Asian routes.

READ: Fleet financing pushes up KQ debt to Sh89bn

In the year ended March 31, 2014, long and short-term debt was Sh89 billion while revenue stood at Sh106 billion. The debts have largely been sourced from international lenders who are able to offer softer terms compared to local lenders.

Little change in strategy

The need to finance the debts means that the airline can ill-afford to hold idle capacity on its fleet. And yet that idle capacity can only be reduced with more passengers and improved customer service.

READ: Tough task for Titus Naikuni’s successor at Kenya Airways

The airline has turned to more efficient aircraft such as the Boeing 787 Dreamliner and has begun taking deliveries of additional Boeing 737-800 aircraft. It has also retired its ageing Boeing 767 fleet.

According to Genghis Capital analyst Florence Kimaiyo, fuel is KQ’s biggest cost component accounting for about 40 per cent of total operating costs.

“Retiring some of its aging and fuel inefficient planes will go a long way to mitigate its fuel component.

‘‘Factoring in the current oil glut persistent in international markets, KQ is in line to widely benefit from fuel cost savings and probably pocket considerable returns in fuel hedging endeavours,” said Ms Kimaiyo.

“We also see improvement in infrastructure, especially at the Jomo Kenyatta International Airport, coming into benefit the airline,” said Mr Musau.

The aviation industry worldwide remains volatile, requiring strong management. Kenya Airways has done well when compared with other international airlines, said Mr Musau.

In-house succession in the top office means that KQ is likely to retain its course with little change in strategy, said Ms Kimaiyo.