Ideas & Debate

It will take strong leadership to hoist Kenya Airways out of loss-making phase

Kenya Airways CEO Titus Naikuni. Photo/FILE
Kenya Airways CEO Titus Naikuni. Photo/FILE  Nation Media Group

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.

The rights issue may have been driven by their long term funding plan, but it provided a shot in the arm both from an equity deterioration buffer perspective as well as much needed cash in the bank.

That may not have been the aim at the first instance, but given the airline’s current situation, that has been the inadvertent result. But it remains a shot in the arm, an alleviation of the symptom but not a cure for the cause.

The overall costs will not reduce with the fleet expansion and the accompanying operational costs for new destinations.

The airline will be forced to find smarter ways to not only remain competitive, but to also stay afloat.

The fat, which is not apparent to the naked eye in the published accounts, exists somewhere within the direct costs as well as overheads and does not simply end with this phase of the staff rationalisation programme.

Labour protagonists
As the airline utilises the available room on its debt equity ratio to borrow for capital expenditure and cannot turn to shareholders for more capital in the short to medium term, the only way to free up working capital is through deep cuts on both its fixed and variable costs.

The labour protagonists will continue to push for reinstatement of retrenched staff, but will have a big hill to overcome in convincing stakeholders that the airline can continue to sustain a high wage bill.

Hiring new staff on cheaper contracts and automating as many ground functions as reasonably possible might be the start of a leaner airline, but a beginning that is fraught with labour issues that will not go away in the short term.

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.

Delivering growth in a shrinking revenue and high cost environment is not for a non-swimmer management. It will take a strong team of swimmers on the right side of the limping plane to get the airline out of this morass over the next couple of years.

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Twitter: @carolmusyoka