National carrier Kenya Airways’ record-setting Sh25.7 billion loss has wiped out shareholder wealth, taking it to a Sh5.9 billion negative capital position and adding momentum to the long-running erosion of its share price at the Nairobi Securities Exchange (NSE).
At Sh25.7 billion, the airline’s loss for the year ended March 2015 was nearly eight times the Sh3.4 billion net loss it reported a year earlier, reflecting the impact that the debt-fuelled aircraft acquisition spree has had on the company.
KQ, as the airline is popularly known, has been executing a debt-financed fleet modernisation programme that has pushed its total liabilities to Sh187.9 billion, more than its assets that are currently valued at Sh182 billion.
This means that if the airline was liquidated today, shareholders would be left with nothing and creditors would still be asking for an additional Sh5.9 billion from them.
KQ’s net assets stood at a healthy Sh28.2 billion at the close of the previous financial year, underlining the unprecedented wealth erosion that occurred in the financial year that ended in March.
The airline, however, continues to operate, relying on additional debt to meet its obligations, including paying employees’ salaries and suppliers whom it owed Sh19.9 billion by end of March.
The airline’s share took a beating at the NSE declining 7.3 per cent to Sh6.30 per share. Investors on the counter lost Sh748 million, leaving its market value at Sh9.4 billion.
The Sh25.7 billion net loss represents a Sh17.2 per share erosion or nearly triple the market value of each of the 1.4 billion shares.
At Sh6.30, the KQ share is still trading at a big premium if viewed against the company’s fundamentals.
KQ’s performance is the culmination of a credit-fuelled expansion spree that happened at a time of increased competition from Middle East carriers such as Emirates that has denied it the headroom it needs to increase fares or grow passenger numbers.
“We have had turbulent times and this loss is obviously significant,” Mbuvi Ngunze, the airline’s chief executive, told investors at a briefing in Nairobi.
“It is, however, important to know that we made significant investments at a time when the industry generally was going through hard times.”
KQ’s fleet ownership costs more than doubled to Sh25.9 billion in the period, reflecting the impact of acquiring new aircraft, including the fuel-efficient Dreamliners.
The fleet modernisation programme was largely funded by debt, a move that more than doubled the airline’s borrowings to Sh104.1 billion and contributed to the negative net worth.
Finance costs, including interest payment and foreign exchange losses, also nearly doubled to Sh4.7 billion on the enlarged debt which was largely sourced from the African Export Import (Afrexim) Bank.
KQ also booked Sh7 billion in depreciation cost for its Boeing 767s that are out of service and four Boeing 777-200 aircraft that have been put up for sale at a price lower than what was carried in the books.
The airline also provided for a Sh5.7 billion loss from fuel cost hedging. Mr Ngunze said the amount was unrealised in the review period but could become due in the near future.
The provision means fuel prices have fallen below the level at which KQ had hedged. Mr Ngunze did not disclose the hedging point, citing confidentiality clauses in the agreements.
Kenya Airways could pay its counterparties if the low fuel prices persist in the long term. Global crude prices have been adrift on account of increased output by major producers such as Saudi Arabia.
The losses on several fronts overtook KQ’s revenues which rose four per cent to Sh110.1 billion, benefiting partly from the weakening of the shilling against the dollar, which the airline uses to price its fares.
The airline said it has signed an agreement with Afrexim to lend it $200 million (Sh20 billion) in the next few weeks to fund its working capital.
Afrexim has also been mandated to review KQ’s balance sheet and advise the airline on sustainable fundraising options, signalling an end to the debt financing it relied on for most part of last year.
The Treasury, the single largest shareholder with a 29.8 per cent equity, recently lent KQ Sh4.2 billion.
Dutch airline KLM, which is second with a 26.73 per cent stake, also provided funding but the national carrier declined to disclose the amount.
The capital restructuring could include equity financing in the form of a rights issue or a private placement but Mr Ngunze did not disclose the details.
KQ had expected the new aircraft to grow its route network from its Nairobi hub and ultimately boost revenues to pay off the debt and leave it with a profit.
The strategy has, however, met stiff competition from the Middle East carriers. Matters have not been helped by Kenya’s depressed tourism industry on which KQ has relied for inbound passengers.
This has forced the airline to change strategy by scaling down its passenger capacity with the sale of aircraft that will also serve to boost its cash position.
KQ said it expects to make a net gain of $100 million (Sh10 billion) this financial year from sale of assets, including aircraft and land holdings.
The performance has called into question KQ’s viability as a going concern, with some prominent shareholders calling for the nationalisation of the airline.
“Let us be honest; this is not a business. It is an essential service for the country,” Chris Kirubi remarked at the press briefing where he proposed that the government should take over the airline.
Airlines globally have stood out as having some of the lowest returns owing to cut-throat competition, high operating costs and intense regulation.
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