KQ signals fresh job cuts as it sinks to Sh11bn half-year loss

National carrier Kenya Airways Thursday signalled a possible reduction of its workforce barely three years after it let go more than 500 employees in a retrenchment exercise that was meant to cut its costs and help revive its flagging fortunes.

The airline, popularly known as KQ, said it had hired American consultancy McKinsey to help restructure its operations even as it sank deeper into the red with a Sh11.95 billion net loss for the six months to September, up from Sh10.45 billion.

The loss saw KQ’s share at the Nairobi bourse drop 5.7 per cent to Sh4.95 —the lowest since listing at the Nairobi Securities Exchange (NSE) in 1996.

Mbuvi Ngunze, the KQ chief executive, said the airline was having a fresh look at its staffing with the aim of matching it to the business model to reduce costs.

“Some (restructuring) initiatives focus on cost reduction and productivity improvement. We plan to have a fresh look at our people to determine the right size in terms of the number relative to the business model and the future we want,” Mr Ngunze said.

This review is part of a 24-item strategy McKinsey has crafted to be implemented over one and a half years. The restructuring, he said, would boost KQ’s bottom-line by about Sh20 billion, adding onto the Sh14.6 billion expected from sale of assets, including aircraft.

At Sh11.95 billion, KQ’s half-year net loss deepened 14.4 per cent from last year’s Sh10.45 billion, saddled by flat revenue growth that stood at Sh56.7 billion.

The airline, whose total negative equity position now stands at a staggering Sh33.9 billion from Sh5.96 billon in September 2014, stayed in turbulence as high finance costs, depreciation of the shilling and loan re-evaluation losses vigorously shook its wings in the period under review.

The airline’s share has shed nearly half its value over the past year, a blow to KQ investors who have since 2012 not received a dividend after the firm dipped into losses.

KQ shareholders consistently received dividends and the 2013 miss was the first time in 14 years they were not getting a piece of its profits. 

The KQ management in July contracted McKinsey to, among other tasks, review its current 3,964-strong human resource component which costs the NSE-listed firm Sh17 billion every year.

“We have been doing a lot of restructuring, you have seen we have actually reduced the number of people,” Mr Ngunze said in reference to a drop of KQ’s workforce by 76 from a year ago.

KQ last cut its workforce three years ago when it let go of 578 workers to curb a runaway wage bill that stood at Sh13.4 billion.

Staff expenses has regularly featured in the list of items that have consistently cut into KQ’s profitability as it (and fuel costs) accelerated faster than the airline’s revenues whose growth nearly stalled in the wake of low tourist numbers arising from local security challenges and last year’s Ebola outbreak in West Africa.

Early this year, KQ pilots and cabin crew accepted a pay cut and a freeze on pay rise until the airline returns to profitability, highlighting the centrality of remuneration as a cost element.

McKinsey‘s blueprint will also review KQ’s pricing, revenue management, sales, cost reduction and cash and financial optimisation.

KQ’s revenue remained flat at Sh56.72 billion, a direct effect of the recent sale of some of its aircraft, which lowered its operating costs by Sh8.3 billion to Sh58.9 billion and improved its operating loss position to Sh2.18 billion from the previous year’s Sh10.5 billion.

“From an operating perspective, this is a significant improvement, meaning that the business is fundamentally on the right course,” said Alex Mbugua, the airline’s finance director.

Finance costs continued to take its toll on the airline’s bottomline having increased 104 per cent to Sh3.5 billion on the back of heavy interest repayments for the Dreamliner planes it leased last year.

The airline also lost Sh1.3 billion in fuel hedging activities compared to a Sh681 million gain last year, but Mr Mbugua said the airline made Sh8 billion in fuel cost savings from the transaction.

Foreign exchange losses increased to Sh4.9 billion compared to Sh1.2 billion posted last year, following a re-evaluation of dollar-based short-term loans. The airline recently secured a bridge loan of $200 million (Sh20 billion) from African Export-Import Bank (Afreximbank), half of which has already been spent.

KQ said its long- and short-term loans stood at Sh115 billion and Sh52 billion respectively at the end of September. To shield itself from costly short-term interest repayments, Mr Mbugua said the airline had opened talks with local lenders to convert their Sh25 billion portion of debt into long-term credit with tenures of about seven years.

The financial statement released Thursday also showed that KQ’s expensive debt-financed fleet modernisation programme has pushed its total liabilities to Sh209.9 billion, more than its assets that are currently valued at Sh176.1 billion.

This means that if the airline was liquidated today, shareholders would be left with nothing and creditors would still be asking for an additional Sh33.9 billion from them.

Mr Ngunze said the firm was talking to the Capital Markets Authority on how to “reverse this position” even as they hold similar discussions with its major shareholders — the Kenyan government and KLM — on financing options.

“The long-term capital raising conversation is happening right now with our shareholders, with discussions including whether it will be equity, debt or a mixture of both,” he said.

Analysts from the Standard Investment Bank (SIB) noted that the next few months will be “critical” for KQ given the “financing environment and government’s ability to inject additional capital.”