KQ’s ambitious plan to fly out of its financial pit

Kenya Airways has traditionally released its full-year results at the Intercontinental Hotel in Nairobi, after serving investors, analysts, its partners and journalists a sumptous five-course breakfast.

A week ago, the national carrier uncharacteristically moved the venue to the Pride Centre, its outlying head offices in Embakasi.

After its chief executive Mbuvi Ngunze shared the latest numbers, the reason behind the change in venue was clear to all in the conference room; KQ, as it is known by its international code, simply does not have much money to spare and definitely none to spend in swanky hotels.

The global dip in oil prices since mid 2014 saw them book fuel hedge losses of Sh5.1 billion while a weakening of the Kenyan currency against the US dollar had cost them a whooping Sh9.7 billion.

KQ borrowed funds expensively, growing its financing costs by Sh2.3 billion to close the year at Sh7 billion with repayment of long-term loans and lease obligations costing the company Sh34.7 billion, a 110.8 per cent year-on-year increase.

This performance plummeted the national carrier’s net worth to negative Sh35.6 billion from the previous year’s negative Sh5.9 billion, wiping out shareholders’ value. KQ’s net loss was Sh26.2 billion compared to last year’s Sh25.7 billion - a new record in corporate Kenya.

But it was not all bad news; passenger numbers had grown by 500,000 to 4.23 million, revenues had increased five per cent to Sh116.1 billion while its operating loss contracted from Sh16.3 billion to Sh4.1 billion.

“A year ago, we were being buried. We are still here. Though we have reported losses, we are focused on turning around the company,” Mr Ngunze told his audience.

The strategy he was alluding to is called Operation Pride, a plan developed last year in conjunction with US consultancy firm McKinsey.

This prescription for the ailing airline is made up of 460 initiatives all aimed at “driving savings and generating revenue” and administration started a few weeks to the close of the financial year.

Documents seen by the Business Daily reveal a far-reaching initiative which will affect everybody who deals with the airline – from their caterers to employees, engineers to hotels.

The three-pillared blueprint aims at generating about Sh200 billion for the company over the next 18 to 24 months, funds management says will help keep its aircraft in the air.

Operation Pride aims to close the airline’s profitability gap, revisit and streamline its operations and lastly develop a capital raising strategy with a target of approximately Sh60 billion in a mix of debt and equity with a bias for the latter.

The first initiative, and which covers the big portion of the strategy, interrogates how best to pull the airline out of the deep financial pit it is in following consecutive losses.

It is this plan that is supposed to generate the aforementioned Sh200 billion through two broad means - revenue generation and cost-cutting.

Under revenue generation, KQ aims to book Sh14.6billion from asset sales which include land and aircraft. The airline sold two Boeing 777-200 aircraft and has two Boeing 777-300 in the market. However, it only booked the portion of the proceeds which had been wired to its account by book closure.

READ: Fuel hedging sinks Kenya Airways deeper into loss

KQ’s bid to raise funds from asset sales was further boosted by the disposal of its prime slot at London’s Heathrow Airport from which it booked a gain of Sh5.4 billion.

KQ also plans to roll out enhanced incentives (discounts) to travel agents, mainly those in international countries with the aim of growing bookings in these markets.

Locally, the airline works with almost all travel agents, leaving their discounts highly diluted by international carriers who heavily discount the crème of the agents they sign up.

Another proposal under revenue generation is firming up ticket sales deals with big clients like government, the United Nations as well as leading corporates like Coca-Cola. Many government officials, for instance, do not fly using the national carrier despite a decree ordering it being in place.

Those disobeying this rule argue that procurement rules require them to shop for the most practical and affordable services. One head of a parastatal told the Business Daily that KQ loses out to other carriers like Emirates mainly due to their “higher ticket prices.”

Such sentiment, which is shared by many ordinary passengers, saw KQ hire New York-based Seabury a year ago to evaluate its sales, ticketing and network planning functions and benchmark them with international best practice.

The hiring of Seabury marks a blend between growing revenue and the second major initiative in the overall plan – revisiting and streamline the firm’s operations which also includes developing new partnerships with an emphasis on Africa.

By hiring the consultant, KQ intended to optimise ticket sales and ensure that their planes are flying to the right places and that tickets are indeed priced competitively.

At the moment, about a half of KQ’s 54 destinations are not contributing positively to the company, partially explaining the airline’s persistent woes. The individually “healthy” routes are mainly African.

“From a turnover and direct operating costs analysis point, about 50 per cent of the routes are not contributing positively. A route may not contribute positively on its own but it generates significant value to the network,” said Mr Ngunze.

Even as management chases revenue generation, the Nairobi Securities Exchange-listed firm is implementing extensive cost-cutting measures that will even see changes in inflight meals.

The airline’s frugality strategy begins with its fleet. KQ has in the 12 months to March disposed seven of its planes, through sale or sublease, bringing its total aircraft to 36.

Its wide body fleet is now made of Boeing 787 Dreamliners while the narrow ones are made of the Boeing 737-800 and the Embraer 190 used for flights of up to four hours.

With the current fleet having “less variations”, the airline has started re-negotiating contracts with suppliers of parts (including engine supplier General Electric) and maintenance engineers.

According to Operation Pride documents KQ is “consolidating suppliers across different component categories” and also reducing “turnaround time for light and heavy checks.”

The airline is also adopting a lifecycle view as opposed to its present one-year cycle approach as well as negotiating higher volume discounts from a reduced number of suppliers.

With the less variations in aircraft, and new additions like the Dreamliner 787, the airline is “renegotiating all its ground handling and security contracts for all outstations for reduced cost of handling.”

KQ, which makes a total of 160 daily landings and takeoffs, has already secured discounted deals with its contractors at 17 airports including Maya-Maya Airport in Congo, Abeid Amani Karume in Zanzibar and Cadjehoun Airport in Benin.

READ: Treasury gives KQ Sh10bn loan for turnaround plans

The cash-strapped airline is negotiating seven other similar pacts including in N’Délé Airport in Central African Republic and Kigali International Airport in Rwanda and Addis Ababa Bole International Airport in Ethiopia.

These negotiations are expected to hand the airline savings of between five and 25 per cent. The airline’s passengers and crew are also going to have to adjust along with the airline as it is making changes to the way it hosts (in hotels) and feeds them in line with their thinned budget.

Locally, Kenya Airways books their passengers into hotels which are closest to the airport including Ole Sereni and Eka on Mombasa Road but also Serena on Valley Road.

The airline has had a preference for three to five-star hotels but going forward it will be hosting its passengers and crew in “low rate hotels that offer five star services.”

These include the upcoming boutique hotels that have been built in areas like Upper Hill. KQ has also started using hotel consolidators or hotel brokers to secure rooms in its destinations.

Consolidators, also referred to as hotel brokers, are travel companies that buy blocks of hotel rooms in bulk and then resell them to the final customer at discounted prices.

This shift in strategy has already churned out 25 per cent in savings, the Operation Pride documents show. The airline’s management has also stopped non-critical staff travel and channeled all travel request through a stringent approval process which the company says has resulted in 45 per cent savings in costs.

KQ currently sources its meals from several suppliers including Nas Servair and LSG Sky Chefs, a model it says has not been benefitial to them with volume discounts.

Furthermore, the airline says there is a “wide selection of beverage and meal components that do not consider service time, flight duration and guest value” leading to wastage.

Going forward, the airline will review its meal offering across the network, consolidate global suppliers, create a negotiating strategy and match meals to the time of day.

More importantly to the 11,500 passengers who use KQ every day is that the airline plans to develop a “lean inflight (meal) product while maintaining value and stock beverages informed by consumption analysis.”

Reduce payroll

The recent sacking of 80 employees still falls under the cost-cutting initiative. KQ on March 31 announced it intended to redeploy or sack up to 600 of its staff in a move that would cost it a maximum of Sh1.5 billion but reduce its payroll by about Sh2 billion annually.

The Kenya Aviation Workers Union, whose membership comprises about 2,500 KQ staffers, said the exercise would not affect more than the 80 but Mr Ngunze last week hinted to the contrary.

Operation Pride lastly speaks to strategising on how to raise capital with estimates currently at Sh60 billion.

KQ, which is majority owned by the Treasury and Dutch carrier KLM, last year appointed New-York based advisory PJT Partners as transaction advisers to streamline its books ahead of a debt and/or equity raising exercise.

PJT Partners oversaw the renegotiation KQ’s expensive and local short-term loans to longer tenures. The airline closed the year with Sh113.2 billion in total loans.

With many people having already carved out KQ’s epitaph and asking to be led to the burial site, the company’s chiefs are exuding confidence that they will surmount the current turbulence.

The source of their positivity is the Operation Pride blueprint which now has to deliver the goods or else.

“Some of the benefits already started but the many of the recurring benefits will be reflected in the 2016/17 financial year. We will have an update in the half year results.”