KQ Operation Pride

What is Operation Pride? Kenya Airways (KQ) has just released its financial results for 2016. It’s been another loss making year, and it’s clear that major changes will have to be made. Internally at KQ, they have Operation Pride, launched in October last year but, which started in March this year, and which KQ CEO,  Mbuvi Ngunze,  said aims to:

  1. Close the profit gap (and get the airline to a 5% after tax return).
  2. Revising their business model to focus on Africa
  3. Achieving Financial stability.

Item 3 is really about the shareholders (which includes the Government of Kenya – as a shareholder and regulator, and KLM) making balance sheet, debt and equity decisions. KQ has already secured $200 million from through an on lending agreement with the Kenya government, and got the first $100 million in September 2015, and the rest of it this month – in July 2016.

And while the move to layoff some pilots and other staff (once other discussions with court and the unions are resolved) , Operation Pride is not about jobs. It also more than cutting on costs without compromising quality and waste without reducing service.

Operation Pride started out as 460 initiatives that mainly came from suggestions from staff, consultants and stakeholders to improve the business.  KQ staff will champion these as they are implemented over the next 18 months, and expected to generate about $200 million. About 40% of the impact will be from cutting costs and about 60% will be from growing revenue at the airline.

KQ CEO deck

KQ CEO deck

After the 2016 results announcement this week, the Kenya Airways team showed their guests some examples of the 134 ongoing processes that they have started on. Most are intended to generate recurring savings, but some of the are one-time initiatives have already borne fruit, according to management, including:

  • Removal of 7 large aircraft  will this will reduce KQ fleet costs by about $8 million per month. They were largely idle, and some have been sold, and others leased (3 777-300’s to Turkish) and (2 787′s to Oman). KQ is still able to serve all their existing routes (with about 60 weekly flights outside Africa) with the smaller fleet of 36 active aircraft.
  • The Heathrow deal in which they combined and sold two different time slots in conjunction with Air France raised a record amount. They had previously served London with night flights, but which meant a plane sat idle the whole day in London. Now they only need one aircraft and lease a slot from KLM , which  means an (almost) immediate turnaround.

On the Revenue side:

  • Improved incentives to agents,  who still generate 70-80% of the ticket sales.
  • Targeting corporate customers.
  • Adjusting flight times: E.g between Lusaka and Dubai, they can fly passengers at an attractive price and the total journey is just now over one hour longer, even with a stop-over in Nairobi, than the direct Emirates flight.
  • New routes in Africa, the Middle East, and China  through new code-sharing partnerships (category one status for JKIA will also mean that they will be able book tickets to the US for flights on partner airlines). This is essentially a redesign of Project Mawingu a decade ago  in which KQ set out to fly many new routes by themselves.
  • (A system that can?) React to try to match different over 1,000 ticket prices combinations every day.

On the Expense side:

  • The 787’s bring  lower operating costs, than the released 777′s and lower maintenance costs
    Demo of food leftover after a typical KQ flight

    Demo of food leftover after a typical KQ flight

    than the retired 767′s

  • Use new hotels in Nairobi that offer good services and buying packaged deals from overseas hotels.
  • Re-negotiating handling contracts as a result of smaller aircraft.
  • Revising inflight meal service – serving lighter meals to reduce waste, and removing beverages that were not popular.
  • Controlling and reducing staff travel.

 

Kenya Airways 2016 Results

Kenya Airways announced their results this morning at their Pride Centre in Nairobi. The CEO – Mbuvi Ngunze , Finance director and management all  referred to the airline being stable after a turbulent stall.

  • They flew 4.2 million passengers (up from 4.1M the year before) and  -  with about 11,500 passengers daily and 158 tons of cargo per day, they had a 68% cabin factor, which is decent for African routes.
  • With fewer aircraft – 36 (compared to 43 before) they operated more frequencies to the same 54 destinations.
  • Turnover went up 5% to Kshs 116 billion and management says they broke even on operations in 2016 compared to an 11 billion loss last year.
  • They reported a gross profit of Kshs 48 billion and operating loss as at March 2016 of Kshs 4.1 billion that’s 75% less than the Kshs 16.3 billion of the year before.

KQ wing JKIA

  • Fleet ownership costs were Kshs 29 billion -  up from the year before as the full cost of the arrival of the 787′s were felt. They also had to make provision for the aircraft that they are leasing out to other airlines.  
  • Net finance cost was Kshs - 7 billion, up from Kshs  from 4.5 billion. They had to pay more interest on their borrowing some of which were short-term, and in 98% of which are in dollars (taken when the US dollar was Kshs 75, but which now exchanges at Kshs 101).
  • Foreign exchange losses were Kshs 10.8 billion up from 1 billion, and Mbuvi said that, if the Kenya shilling did not depreciate, the loss would have been Kshs 10 billion smaller. They also had to book losses from countries like South Sudan which devalued its pound from  3 to 31 to the dollar.
  • Fuel hedges resulted in a loss of Kshs 5 billion.
  • Overall loss before tax of 26 billion, and the valance sheet went down from Kshs 141 to 128 billion. For shareholders, the reserves are now Kshs -51 billion.

Q&A

Ethiopia: What is Ethiopian doing right that KQ isn’t? KQ had some advantages, ET has some advantages. They operate a different network – we focus on Africa, they focus outside, and the frequencies into Addis and the frequency into Nairobi are different.

US flights: While the government is excited about category one upgrade of JKIA, Mbuvi said that their priority is code sharing with a US partner, more than doing direct flights themselves.

Currency reparation: Globally, airlines have $4 billion in non-repatriated currencies (with $400 million in Nigeria) and KQ faces challenges in Sudan, Nigeria, and Angola

Other: The last good year for tourism in Kenya was 2011, when there were 1.8 million tourist arrivals (it was 1.3 million last year) and 2017 will be an election year for Kenya. They are yet to assess Brexit impact but commodity slowdown and currency crunch has seen a slow down in the African routes they operate in.

They said the Government of Kenya and KLM, remain supportive of the company’s turnaround efforts which are embodied in Operation Pride, and this comes in a year in which they were voted the leading airline in Africa and leading airline for business class.

Insurance vs Betting

Last week I got an email from an insurance company titled insurance vs. gambling. I deleted it immediately, but later thought about what it meant. Why is it that it is hard for vital sectors like insurance and pensions to get traction in this country? Their levels remain low, yet people flock to what are likely losers like sports betting, gambling and pyramid scheme.

Every time my cousins visit from the village,  I marvel at how many of them are into sports betting. They know teams in many obscure  soccer  leagues in many countries and make bets to fill out their winning brackets. They all remember their big wins, “Kshs 8,000″ or “Kshs 22,000″ that was sent directly to their mobile phone as they slept, but they can’t or won’t tell you about how much spend every week to get those winnings.

Pic by MediaclubSA of street in Molimode (from AfricaKnows.com)

Pic by MediaclubSA of street in Molimode (from AfricaKnows.com)

As I started to write this I was at a doctor’s office. I ate some food and ended up with  a bad stomach. A mentor had warned me that bad food and the flu were “putting down” a lot of people in Nairobi now, and so I went to get some help.

Earlier, I had been at Coop Bank to speak to them about their various medical insurance products. They have high-end packages and low-end ones that costs Kshs 15,000 to cover a family for one year, and with just Kshs 9,000 to start, a family is covered with both in-patient & out-patient care.

For small companies they waive all waiting requirements and pre-conditions and for individual joining from another medical cover plan, the same requirements are also waived. There is no co-pay (no money paid for treatment) and they are accessible at centres all over the country. It covers people goes up to 74 years and includes operations and treatment in India and South Africa, if a doctor recommends treatment that’s not available locally.

A typical doctors visit in Nairobi ranges from Kshs 3,000 to 10,000 for doctors visits, medication and lab work (if required). Every young person should have insurance, for themselves and their families such as the plans at Co-op branches and agents.

But back to the inspiration for the post. I also got an email from a popular sports betting company. It came just a few days before the final of the Euro 2016 soccer tournament, and listed some of the odds that could have won me some money. Besides the outcome of the game, which few could have predicted, here are other bets that one could have placed:

  • Portugal vs. France: 1 (4.13) X (3.10) 2 (2.02 [whatever that means!]
  • Cristiano Ronaldo not to score. 1.24 
  • Cristiano Ronaldo to score first and Antoinne Greizmann not to score. 8.82
  • Both Cristiano Ronaldo and Antoine Greizmann to score anytime. 8.70
  • Renato Sanches to score anytime. 8.50
  • Paul Pogba to score anytime. 4.50
  • Over 2.5 goals: 2.60
  • Both teams to score: 2.20 

Kenya Airways 2016 Outlook

It’s time for Kenya Airways (KQ) to release their (March) 2016 results, later this week. They are coming off what was, arguably, the toughest year (2015) in their 39 year history, when they lost almost Kshs 25 billion. This was largely a result of their decade-old ambitious Project Mawingu that they the airline invested in coming up short.

inaugural Dreamliner

The plan was for a massive fleet and route expansion program to support the growth of passenger numbers in and through Nairobi and Africa. They bought new aircraft (mainly Boeing 787 ‘Dreamliners’), but the aircraft arrived a few years late, and when they did, the passenger numbers had not grown to match their expectations, and they were left with new and expensive equipment that operated below the expected capacity or remained idle. While the European routes are at 80% capacity, African routes are at about 60% and they get about 60% of their business flying around Africa, which has also become a very competitive region with  KLM, Ethiopian airlines and (now) 3 large Gulf-carriers competing for passengers out of Nairobi.

For the half-year, they reported a cabin factor of 68%, flew about 2.1 million passengers with revenue of Kshs 56 billion, but the half-year loss was Kshs 11 billion as the slowdown of commodity economies, terror alerts, route shut downs due to Ebola  and Nairobi (JKIA) runway repairs continued to affected the passenger numbers. The weakening Kenya shilling also contribute to their reported losses as they had to revalue their aircraft loans that are denominated in dollars.

In the year, the board also faced shareholders who wondered if they would be around in a year as they embarked on a  turnaround plan to stem the losses, secure funding for the future and fix the company  balance sheet.

Domestic Resources Mobilization in Africa

African case studies on tax reform and domestic resource mobilization from Togo, Uganda and Ethiopia.

Togo 

  • IMF was not very happy when they merged the two offices of customs and revenue. But Togo accepted performance monitoring mechanism that was funded by the WB and when they saw that it was working, then the IMF came back on board.
  • Introduced reform in a country where the richest people are civil servants
  • Invested in computers, capacity building, software to have a system that tackles all aspects from declaration to dispute resolution.
  • Got 15,000 new taxpayers last year, while in past years they used to get 7,000.
  • Also improve speed and security. Previously, petroleum revenue used to be manually recorded. They now use PIN’s in different department, and the software is connected to the banking system so no more direct payments (all are done at at banks).
  • While they initally retired a number of officers who did not want to learn or comply, those who remained had improved terms with performance targets for which they earn bonuses
  • 2015 target was 480 billion CFA and they managed to college 516 billion.
  • They have not fully used the system yet. It’s only two years old, but they rely on their neighbours for internet connectivity.

Afcop AfriK4RUganda: 

  • Is in second phase of a 2019-20  plan which targets to  fully financing budget from domestic sources. The revenue authority started in 1991 but reforms started in 2005.
  • Even as the economy has grown, surprisingly the informal sector has also grown to take a larger share of the economy (49% of GDP, up from 43% in 2002. They have had to target the informal sector to keep up e.g via presumptive tax thresholds.
  • The revenue authorities treat the government as ‘private sector’and removed their exemptions like VAT and income tax.
  • Have business bands, and a taxpayer identification number (TIN) is requires for most transactions and permits, whether livestock movement, boda boda purchase, agriculture payments etc. All professionals – doctor engineers lawyers also have TIN’s, and they hope the introduction of national ID cards will enhance tax collection efforts.
  • They have a separate section for international taxation and have built capacity in oil & gas taxation. But as they train staff, other companies hire away their top performer, so they have to be retained.
  • They have simplified tax system so people can pay at their convenience e.g. via mobile money even when banks are closed.

Ethiopia:

  • Set out to mobilization domestic resources for the largest hydroelectric dam in Africa after foreign donors and partners who had supported previous smaller dams, balked at participation.
  • The GERD (Great Ethiopian Renaissance Dam) will generate 6,500 MW. It is 1,680 Sq.KM, and 120 kilometres by 14 kilometers and 146 metres high – and it took off  in April 2011, is 70% done, to be completed in July 2017.
  • Because of political impact river to other countries (shared Nile), external funding was blocked by international community and they turned to own people to meet the $4.8 billion cost (11% of their GDP or about 60% of the country’s 2012 budget).
  • Got contributions from individuals and companies –  local and diaspora –  though direct contributions, lotteries, music events.
  • They also had a diaspora bond which has raised $500 million. People bought the 1.5% bond that matured in 5,7, 10 years. The dam will generate income from electricity sales to pay back the bond – and is expected to generate $1 billion per year.
  • They also got support from banks, who expanded branches to reach more of the rural population (one bank now has 1,000 outlets) and mobilized deposits. The banks were required to allocate 27% of every loan they make to buy the bond.