Business Daily (Nairobi)
Veronica Njuguna
11 November 2009
Kenya Airways has just presented its half-year results.
The media, hungry for good news, went off on a limb and reported a rebound in KQ's fortunes due to the improved net profit margin of 2.6 per cent and the improved figures in net profit.
These reports have missed the true facts in Kenya Airways.
Closer scrutiny in the figures will indicate that chief executive Titus Naikuni and his team have a very tough job ahead of them.
This is clearly the worst time to be the CEO of an airline, let alone Kenya Airways.
Increased supply
The first point of concern that one needs to look at is that of capacity measured by Available Seat Kilometres (ASK) vis-à-vis Revenue Passenger Kilometres.
Simply put, KQ increased its supply in the market by 6.4 per cent in the fist half of the year.
However, this did not yield increased revenues-indeed the revenue per kilometre dropped by 4.7 per cent. What does this mean?
It could mean that KQ's network expansion and increased frequencies are not generating the kind of revenues that the airline badly needs at this time.
It also could mean that KQ is selling a premium product at a huge discount.
Owing to the economic melt-down, the takers of these increased capacity are fewer as indicated by the lowered cabin factor currently standing at 66.1 per cent from last year 73.8 per cent.
For Naikuni and his team, they will have to decide to look at more innovative ways of making their network expansion work moneywise.
This might involve reducing frequencies to match demand while still retaining market presence.
It is highly unlikely that KQ will get away with raising its ticket fares simply because the market cannot afford and also because the competition will gladly lower the fares and steal its market shares.
Industry observers will notice that KQ's closest competitor Ethiopian Airlines has matched KQ on all the new routes opened and even started operations to Mombasa.
The KQ pricing and network team has to really re-think their pricing and network in a market that is shrinking and that has increased competition.
Another area of analysis for Kenya Airways should be the cargo performance.
The cargo numbers have dropped dramatically by 14.8 per cent with dismal figures posted in the Far East and Middle East.
Even in the areas with some amount of cargo growth, the reason given for growth is increased frequencies.
When you combine the cargo numbers with the passenger numbers a worrying trend is evident.
Kenya Airways is flying more frequencies, flying bigger aircraft, which are unfortunately carrying very unhealthy numbers in terms of passengers and cargo.
Taken a step further it translates into a simple fact, KQ is running a very expensive operation.
For this operation to be sustained, Kenya Airways will have to grow its numbers by leaps or bounds or simply scale down its costs to a manageable size.
Given the current state of the global economy particularly in KQ's predominant source markets for cargo and passenger (Far East and Europe), it will take a near miracle for full recovery in cargo volumes.
Fuel prices have stabilised in the last year, meaning that there has been more predictability in the financial planning for Kenya Airways.
This is the first time when fuel costs have gone down, something with the financial team should be happy about.
The hedging entries that severely dented the last financial results now came back to help redeem the balance sheet through the reported incomes from the cash flow hedges.
That is where the good story ends and the tough work begins.
While the fuel prices have ceased on their erratic movement, the cash reserves for then national carrier have been sliding downwards.
Kenya Airways bankers must be cringing at the shrinkage in the cash reserves, which have shrunk by more than 45 per cent in the last year alone.
Does this therefore mean that KQ is eating into one of its strongest pillars-- its cash balance to keep going?
If this shrinkage continues then the airline will have a tough time borrowing to finance even the delayed Dreamliners.
The Board and the management team of Kenya Airways have to make some tough decisions if they plan to survive in the next year.
If things continue in the same trend, they will be lucky to post a 5.2 per cent operating margin.
This is lower than the 5.6 per cent in the last financial year.
As if this is not bad enough, the business must generate an extra half a billion to cater for its increased wage bill from the union settlement.
Cash cow
Mr Naikuni can console himself that the airline's schedule integrity is at an all time high; however he must decide how to create a cash cow to produce all the different yields for KQ's very needy calves.
How will he generate more revenues to accommodate the network expansion?
How will squeeze out every penny out of a market that cannot and will not pay more?
How does he buoy up his finances to a point where he can borrow cheaply in the market?
From where will he get the funds to pay his now increased wage bill?
A 19 per cent increase in labour costs during a global recession is not a laughing matter and this will also have to be looked at.
Will Mr Naikuni and team devise a plan to get his labour team to generate more, or will he opt to slash his labours cost by leaning out?
That for many is the real story behind the Pride of Africa's half-year results.
The writer is a Nairobi-based financial analyst.
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