Kenya Airways Reduces Operating Loss by 75 percent in FY 2015/2016 in Turnaround Strategy

Kenya Airways Limited (KQ) today reaffirmed its progress towards recovery after it recorded a 75 per cent reduction in operating loss from Kshs 16.3 billion in 2015 to Kshs 4.1 billion as per the group financial statements for the year to 31 March 2016.

The operating loss improvement of Kshs 12.2 billion was underpinned by a growth in cabin factor to 68.3 per cent, with an increase in passenger numbers from 4.18 million to 4.23  million, a reduction in direct operating costs, overheads and fuel, and an increase  in  fleet costs. Despite this improvement, the group incurred a loss before tax of Kshs 26.1 billion compared to Kshs 29.7 billion in the prior year, an improvement by Kshs 3.6 billion, 12 per cent.

Three significant items negatively impacted the financials. The US dollar strengthened significantly against the Kenya shilling (12.9%) and other currencies resulting in an increase in foreign exchange loss of Kshs 9.7 billion. The group’s cost of borrowing increased in the financial year incurring an additional Kshs 2.3 billion in interest expense. In addition, the movement in international oil prices during the year unfavourably impacted the Group’s fuel hedges resulting into an additional Kshs 5,093 million in realised fuel hedges losses. However, the company registered an improvement in the mark to market valuation of fuel hedges of  Kshs 2,614 million in the year.

It is important to note that excluding one-off impacts related to asset sales, compensation for late delivery of new aircraft, write-offs, impairments and provisions, the group broke-even at operating loss level, an improvement of Kshs 11,139 million while loss before tax improved by Kshs 2,513 million.

Read: 60 percent of Kenya Airways Revenue Comes from Africa

Mbuvi Ngunze, Kenya Airways CEO said: “The results were achieved in a tough aviation context, in which airlines continue to be weighed down by wild currency fluctuations, volatility  in fuel prices, and a changing commodity price environment. An industry forecast by IATA indicates that African airlines will continue to be in negative profit territory in 2016, despite overall improvement in performance. In conjunction with the overall trajectory of the results, a number of other key performance indicators for Kenya Airways also showed marked improvements.”

Operation Pride

 As part of the airline’s turnaround strategy Operation Pride – whose main planks are closing the profitability gap, refocusing the business model as well as optimising the capital of the company – KQ has rationalised its fleet through selling off and leasing some of its surplus aircraft, and monetised certain assets. A staff right-sizing exercise is ongoing. The plan aims  at both revenue and cost-side improvements. These actions have already reduced fleet costs by about $7 million from July 2016, thus improving the airline’s liquidity.

Mr Ngunze commented: “One of the key goals of Operation Pride is a reduction of the gap in profitability, which is on track. We have also revised our network to improve connectivity and ability to sell flights to more destinations within the network, while densifying our Africa presence through increased frequencies. We are turning the corner and are in a better place, strategically. Most significantly, and in a difficult global business environment, we are improving our business and keeping a tight lid on our costs. I thank all our employees, shareholders, partners and associates whose cooperation and input made these improved results possible.”

Consideration of long-term options in relation to the Company’s capital structure

 After extensive internal review of alternatives, KQ has reviewed the options in relation to its capital structure in order to ensure the financial flexibility, stability, and sustainability that is commensurate with the turnaround strategy.

The aim is to place Kenya Airways on a stronger footing and provide a stable base for long- term growth. The company will also continue its focus on improving service quality.

Stakeholder Support and Interim Financing

 “The Government of Kenya and KLM, in their capacity as major investors in Kenya Airways, have indicated their continued strong support of the company’s operational turnaround and the capital structure optimisation process; are closely involved throughout the process and intend to remain major stakeholders in the company over the long term,” said Mr Ngunze.

Further, as announced in the last financial year, the company secured bridge financing to the tune of USD 200 million. The first tranche of USD 100 million was received in September 2015 and the second tranche was received in July 2016. This borrowing is supported through an on- lending agreement from the Government of Kenya as a key stakeholder.

SUMMARY CONSOLIDATED INCOME STATEMENT