Mbuvi Ngunze: Can new captain fly Kenya Airways

 

NAIROBI, KENYA: Mbuvi Ngunze is nothing like his predecessor.

When the soft-spoken accountant took over as chief executive of the national carrier earlier this month, some of the airline’s employees popped glasses of champagne.

Save for the fact that both are Harvard graduates, Mr Ngunze looks nothing like Titus Naikuni, the no-nonsense, six-foot-tall man who did not suffer fools gladly and ran the airline with an iron fist.

Ngunze, who earned most of his corporate experience in the cement industry, smiles more easily, and several KQ employees described him as “more likeable” and “a lot more approachable”.

Profit warning

But the new CEO is going to have to make some changes that may test his popularity after the airline flew into a Sh10.4 billion net loss in the six months to September 30. This was a dip from Sh384 million in net profit made over a similar period last year.

And the airline, East Africa’s biggest carrier, expects to make another loss this year, which would make it the third in a row.

Kenya Airways, which says it bleeds every time the Kenyan brand is battered, issued a profit warning for its full-year earnings last week.

Board Chairman, Evanson Mwaniki, told shareholders the airline expects to make a bigger loss than last year’s after it suffered the effects of insecurity in Kenya and the Ebola outbreak at a time when it was aggressively expanding its capacity.

“Kenya Airways’ second-half year results are unlikely to reverse the full impact of the first-half loss and attain results close to or at last year’s levels. It is reasonable at this time to anticipate earnings for the financial year 2014/15 to be lower than the previous year’s by at least 25 per cent,” Mr Mwaniki said in a statement.

Last year, the airline posted a Sh3.3 billion net loss. This, however, was an improvement from the Sh7.8 billion it lost in the 2012/13 financial year.

Ngunze’s first major assignment was to announce the loss, the worst half-year performance the airline has recorded, to shareholders who are increasingly becoming impatient with the carrier’s dwindling fortunes.

The airline lost Sh610 million from its operations. In 2013, it generated Sh5.1 billion.

The new management attributed the negative performance to the fire at its hub airport, the Jomo Kenyatta International Airport (JKIA), in August last year, and aftermath of the Westgate terror attacks last September. The travel advisories issued after the terror attacks suppressed demand for its services.

Ngunze said that the airline received Sh156 million in compensation for property destroyed in the fire, but insurance did not pay for lost business following cancellations.

It also took a beating from the outbreak of the Ebola virus in West Africa after it was forced to suspend flights to Sierra Leone and Liberia this August.

Ngunze described the Monrovia (Liberia) and Freetown (Sierra Leone) routes as some of its cash cows on the continent, adding that the suspension of flights into West Africa resulted in a capacity reduction of 20 per cent in the six months to September compared to a similar period the previous year.

But the airline is counting on its new fleet to cut costs and fly it out of loss-making territory.

This year, it took delivery of two Boeing 777 aircraft and five Boeing 787 Dreamliners, while grounding for return its Boeing 767 fleet of six.

It hopes to make savings of Sh9 billion every year in fuel costs alone with the current fleet.

Staff headache

Ngunze will also inherit the staff headache that defined the last three years of Mr Naikuni’s term. He will be implementing the last phase of a painful retrenchment programme that saw the carrier send home 599 employees.

However, even as it continues with its aggressive cost-cutting plan, the airline’s annual report shows it raised compensation for its directors and key management — the second year in a row — by 10 per cent.

In 2013, it paid out Sh250 million, and in the year ending March 2014, its directors took home Sh277 million.

As part of initiatives to cut costs further, the airline told its shareholders last Friday that it plans to start its own fuel company and a hotel. The airline spends an average Sh1 billion annually on hotel bills alone.

But this is still just a plan and implementation will depend on the results of an ongoing assessment.

“We are doing feasibility studies and we will proceed from there. But we don’t have any specific dates set for establishing the same,” the airlines finance chief, Alex Mbugua, told Business Beat.

Counting on Jambojet

It is also counting on its six-month-old, low-cost airline Jambojet to stimulate domestic travel among Kenya’s growing middle class. Though the airline has started breaking even on some routes, it is far away from flying into the profit zone.

“The domestic market registered a 42 per cent growth in capacity from the commencement of Jambojet operations,” shareholders were told.

“The group introduced three additional daily frequencies to Mombasa and two extra flights into Kisumu.”

Another headache Ngunze is inheriting is the growing number of lawsuits facing the airline, which saw it set aside Sh591 million for litigation contingencies.

To turn the airline around and help it cruise back to fortune, Ngunze has outlined four major areas of focus.

Customer experience

He appreciates he has inherited an airline that is suffering from poor customer experiences, which has been blamed on low employee morale and poor training.

“I am looking at a redesign of our hub at JKIA for better connectivity. I will also focus on customer experience, which is a significant impetus for growth,” he told Business Beat.

Secondly, the new CEO is looking at better ways of managing the current turbulent business environment. Ngunze says the board has recruited a financial advisor to help it deal with its capital structure.

The airline has been borrowing heavily to fund its ambitious expansion programme, which has also been a subject of criticism from aviation analysts.

The airline is servicing at least six different loans from local and international banks. Its annual loans and borrowings rose by 45 per cent to Sh89 billion in the year to March 2014.

The lowest interest it pays is an aircraft loan from Citi/JPMorgan bank, at 3.4 per cent, while the highest interest rates are on short-term facilities that accrued annual repayments of Sh13 billion last year. It also has other aircraft loans from Barclays Bank PLC, Citibank, Afrexim and an engine loan from Co-operative Bank.

“The board has retained a financial advisor to review and propose appropriate refinancing options,” the airline said.

Revenue generation

Thirdly, the company will renew its focus on the commercial department to generate necessary sales to match expanding capacity.

“Revenue generation will be my renewed focus area to deliver sales, despite the environment we are operating in. I will be asking our commercial department to do more,” Ngunze said.

However, the management does not state directly that its expansion programme has added to the airline’s cash flow strain, despite the new planes taking longer to fill.

The airline, which had a total of 47 aircraft last year, is still planning more changes to its fleet size by the end of this year.

It hopes to retire 14 aircraft and acquire another 11 to replace them.

Over the next 10 years, it plans to eliminate all aircraft older than eight years, with its flagship Dreamliners expected to lower the average age of its fleet from 6.7 years to 4.9 years by April 2016. KQ also plans to have only four major aircraft types, down from the current seven.

The fourth focus for the new CEO will be to contain the airline’s expanding costs, which are wiping out revenues coin by coin and driving the company into negative territory.

Direct operating costs surged 13 per cent to Sh42 billion in the first half of the year on the back of a 15 per cent capacity growth.

Fuel costs remain the single-largest item on the bill, accounting for 35 per cent of total operating costs.

The fuel cost for the half year period grew 11 per cent, which the airline attributed to its expansion in operations.

KQ’s overheads stand at Sh11.9 billion, which it attributed to “increased manpower and marketing costs aimed at supporting the renewed fleet and expanded network”.

“Going forward, the prospects for our business are positive, driven by the following factors ... deployment of a new fuel-efficient fleet, opening of Terminal 1A at JKIA dedicated to Kenya Airways, new lounges at the hub offering superior customer experience, and hub redesign with improved infrastructure at the airport,” Mwaniki told shareholders.

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