KQ is back to profitability and when I look at your numbers, the sweet spot for me was in the revenue growth, 22 percent up to Sh91.5 billion. What drove this turbocharge in your top line?
That top line is the highest the company has ever reported for half year and if everything goes according to plan, we expect to have the highest profit ever for the full year.
Remember, we have not significantly increased our fleet, if anything we have rationalised it.
We made sure that we were flying to the right destinations in line with Project Kifaru 1 where we looked at the network, the fleet, our destinations and optimised them.
We closed down the routes that were not making money, and started new ones. Our subsidiary, Jambojet, did the exact same thing. Those are the decisions that increased our top line.
Now that the airline is back to net profit territory after a decade, are these the set of earnings that finally tell us that Covid-19 and its hangover are finally behind KQ?
Yes. Covid-19 can only be an excuse on the balance sheet going forward because it depleted it but, we can no longer use Covid-19 because travellers are back and in fact, they are 19 percent higher than in 2019.
We need to make sure that our yields are holding and that we are growing. We have grown with the current optimised network. What just need to expand the capacity and then increase our frequencies.
When KQ released its half year earnings last year (HY2023), the foreign exchange impact was massive and a key factor in the Sh21.7 billion loss. Ever since Kenya refinanced the US$2 billion Eurobond in February, we have seen the shilling claw back. This has been a huge tailwind for KQ, no?
It’s important to remember that KQ has a lot of US dollar obligations and so because of the strengthening of the shilling, the revaluation of those obligations translated into a gain and of course, that helped us this year just like it hurt us last year when we registered the loss.
The single biggest debt item in your books, the facility attached to the US Exim Bank, was taken up by the government providing a boost for your numbers. Walk us through that conversation you had with the exchequer around this debt and what that means going forward.
In 2017 when we did our first balance sheet restructuring, the government guaranteed the US Exim loan that we had taken to purchase Dreamliners and this meant that if KQ defaulted, the government was on the hook.
In 2019, Covid-19 happened and so we were unable to service the loan. Therefore, the lender went back to the guarantor (the government of Kenya).
The government deemed it wise to take over the loan and on-lend it to KQ. The beauty about this is that first, it takes away the risk to the government because if the US Exim called a default it would require the government to pay the entire loan in one shot and that would hurt the National Treasury.
When they take over the loan, they agree on the tenure between themselves (government of Kenya and US Exim) and then they on-lend to us in Kenya shillings, which helps us a lot.
For the avoidance of doubt, has the tenure of the facility taken up by the National Treasury and on-lent to KQ also been extended?
That’s correct, the tenure has been extended to give us a breather when it comes to paying back this loan.
KQ is now scouting for a strategic investor who can inject some equity into the business. By how much do you seek to reduce the debt in your balance sheet through this capital injection?
We want to remove any potential risk of being unable to pay our loans as and when they fall due. We want to re-balance our debt-to-equity ratio and of course, when the new investor comes, they will increase their equity and part of that money will be used to pay down the debt, but a bigger portion will be used for growth.
Speaking about rebalancing the airline’s debt-to-equity ratio, I think currently you are playing around 13:1. Where would you like this to be once the rebalancing takes place?
We believe that it shouldn’t exceed 2:1 and that progressively we should be in line with best business practise and moving to 2:1 would be fine. Part of that could be our large shareholders converting their debt-to-equity to help in this rebalancing
How far are you in the process of identifying and onboarding a strategic investor?
At the moment we are considering two potential financial advisors whose technical abilities we are assessing. We will take them through the board approval and issue the award in September. About the strategic investor, we are currently scouting for potentials and have spoken to a wide range. We believe that by December, we will have either one or two and then we will be able to progress that.
In the recent past, we have seen players from the Gulf being quite aggressive in looking to this region for their Africa expansion strategy. Would a Gulf airline be the sort of potential investor that KQ is scouting for?
The strategic investor should be suitable for Kenya and for Africa. What we are hesitant to do is to have strategic investors who come here only for their benefit.
Some of these carriers or investors are not necessarily good for Kenya or Africa because their aim is to grow their hub yet what we are interested in is to grow our hub here.
If you do not create big aviation hubs in Africa, you will in effect be creating a big hub elsewhere. Aviation is critical for economic development and that is what the Middle East carriers have realised and they want to kick in now and take advantage of the potential.
