KQ’s Sh4bn loss eats into capital base

Kenya Airways #ticker:KQ narrowed its net losses by 28.8 per cent to Sh4 billion in the half year ended June, but the improved performance was not enough to stop the airline from sinking back into negative capital position.

The national carrier’s cost-cutting measures paid dividends as “other costs” dropped 41.3 per cent to Sh2.9 billion while revenue rose 3.1 per cent to Sh52.1 billion in the six months.

The airline, however, dropped back into negative equity of Sh3.8 billion, indicating the need for additional capital injection to soften the impact of its continued losses.

Biggest threat

The airline says higher fuel prices present the biggest threat to its margins in the short term.

“I just recall that when I started working for KQ, which was June 1 last year, the barrel was at $52. I just opened my phone now it's $75.99, which means $76, so just imagine this bigger cost has just grown like this over the last 12 months,” said KQ CEO Sebastian Mikosz after the release of the half-year figures yesterday.

“This is why the board has approved refreshed and a little reorganised hedging policy and as an airline we will start hedging soon and building our hedging position to protect our cash flow and to protect us against what seems to be not only an African problem but a worldwide industry problem.”

Taxpayers face a heavier burden of keeping the loss-making national carrier aloft after the government agreed to guarantee it loans provided by local and foreign lenders to the tune of Sh75 billion.

The Nairobi Securities Exchange-listed firm last year converted loans worth Sh50 billion from the government and local banks by issuing the creditors with shares.

Restructuring

The capital restructuring saw the company’s net worth improve from a negative Sh44.9 billion in March 2017 to a positive Sh470 million in December 2017.

KQ’s ability to pay short-term obligations is also in question after current liabilities exceeded current assets by Sh32.2 billion in the review period.

The wipeout of shareholder funds revives bankruptcy risks that the company had warned investors about.

“The effect will be to bolster balance sheet equity and capital structure sustainability with overall shareholder book equity becoming positive from the current negative position,” the airline said ahead of the debt-to-equity conversion transactions.

Plans to have the inaugural KQ flight from Nairobi to New York are in high gear, which could boost the airline’s top line.

Jomo Kenyatta International Airport has now achieved the Last Point of Departure Status, which allows it to facilitate direct flights between the two destinations. The first flight is scheduled to depart on October 28.

Sh100bn bailout

Analysts at Standard Investment Bank (SIB) had in 2015 estimated that KQ needed a bailout of up to Sh100 billion in the wake of its Sh25.7 billion net loss for the year ended March 2015 when it first sank into a negative net worth of Sh5.9 billion.

The Treasury, KQ’s single-largest shareholder with a 48.9 per cent equity, faces the puzzle of keeping the airline aloft.

The government last year converted some Sh27.2 billion of its loans to the national carrier into shares, with 11 local banks, including KCB and Equity, also making similar deals valued at Sh22.7 billion.

The State also offered guarantees of Sh52.5 billion to the Export-Import Bank of the United States of America, which funded the airline’s acquisition of several aircraft including the Boeing 787s.

Guarantee

A separate guarantee of up to Sh22.5 billion was offered to the local banks, which agreed to provide new loans of Sh17.5 billion to KQ.

The banks have already provided a total of Sh4.3 billion in new loans and which will be paid by the government should the airline default as it did on their original unsecured debt.

Government bureaucrats have also proposed a merger between the airline and the Kenya Airports Authority (KAA) to help the two share costs.

KQ’s continued losses underline the poor economics of the aviation business, with its chairman Michael Joseph acknowledging that the airline should not be run on the basis of making profits but delivering wider strategic goals, including boosting tourism and Nairobi’s status as a regional business hub.