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:
- Close the profit gap (and get the airline to a 5% after-tax return).
- Revising their business model to focus on Africa
- 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 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 the 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
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 them 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 than the retired 767’s.
Demo of food leftover after a typical KQ flight.
- 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.
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.
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.
The Kenya Airways shareholders 2015 annual general meeting (AGM) was held at the KQ Pride Centre, Embakasi on Friday October 9. This was on the back of the year in which they lost (a corporate record) Kshs 25.7 billion ($257 million).
Board Changes (in the calendar year): In: Mbuvi Ngunze (CEO), Carol Armstrong, Wanjiku Mugane Out: Titus Naikuni (CEO), Ayisi Makatiani, Dinesh Kapila and the Chairman Evanson Mwaniki who had announced he was stepping down ahead of the AGM by not seeking re-election. He said he was not running away from the problem but it was time to give someone younger the chance.
At the end of the meeting, there was the re-election of directors to the board, and while 5 had applied, 3 of them had since dropped out leaving Jason Kapkirwok (a former KQ strategy director) and Dennis Awori (current board member) as the only two names for the two vacancies on the board.
The meeting was quite routine, ahead of the Q&A. After the auditor read his statement, which included an emphasis of matter (relating to the loss), the chairman invited KQ CEO Mbuvi Ngunze to give a brief on the state of the airline which he (Mbuvi) said was operationally sound, but had financial challenges.
- He asked Kenyans to rally behind the airline, as the staff are committed. Dubai and Ethiopia had aligned their hubs with airline and cities, but Kenya had not.
- KQ has sold older Boeing 767 and 737, aircraft, but deals to sell the 777-200 fell through twice, and they have since hired an agency to complete this.
- Seabury has been appointed to improve pricing and airline processes.
- They have appointed a financial advisor to secure $200 million and negotiated credit with local banks and patient supplies, as well as short-term loans from the government of Kenya, and KLM has also provided some finance.
- Asked about the loss, finance director, Alex Mwangi said, in short, they invested in the fleet, but revenue did not grow to match the increased fleet expenses (6 new 787’s now, and 3 new Boeing 777-300 this year). He also said the aircraft buy decisions were made back in 2005 – even before Chairman Mwaniki (longest-serving director) joined the board.
- One shareholder said the Kenya government should not give the board Kshs 60 billion, but instead jail the managers who were being investigated by the senate and get new auditors. Mbuvi said they are cooperating with the Senators who say they have a constitutional right to ask questions.
- PS Kamau Thugge said that with the visits by President Obama, the Pope, the WTO summit and the lifting of advisories, the outlook was good for KQ. He reiterated that the government was not broke as written in the media, and that they had already lent Kshs 4.2 billion to the airline, and facilitated the Afriexim funding.
- What’s the use of KLM? Mbuvi said KLM is a commercial and shareholder partner on North-South routes and this has allowed KQ to focus on Africa where 60% of their revenue now comes. They also have 20 other partnerships.
- Did Ebola really impact the results? Mbuvi said the Liberia and Sierra Leone routes generated closes to $4 million per month and the airline lost about $31 million in two weeks.
- One shareholder was concerned that management is too optimistic. Last year they talked nicely after the airline lost money, only to come back this year and find that the position was even worse. He said they had also been sweet-talked by boards at Uchumi and National (bank) as the companies went down and wondered if KQ would be around next year.
- One complained about, in the digital era, shareholders don’t get to see annual reports, till they arrive at the AGM.
- One shareholder who’s a frequent flyer and trader on the China route commended the switch to new Boeing 787’s, from the old 767’s which would break down often in China resulting in extended expensive hotel stays for passengers and crew. He also said that Kenyans were lucky to have an airline and that other African travelers depended on KQ.
- Some shareholders complaints were contradictory; one asked for the meeting to be held in Mombasa, and another asked for bus fare to be refunded. One complained about high ticket prices, then later complained about having to buy water on JamboJet (KQ’s no frills carrier). She also complained about kids been separated from parents in-flight (an international airline rule?) and also asked the airline not to use prominent people like Chris Kirubi and Charles Njonjo (who crew would salute) in their adverts, but instead have ordinary passengers talk about their airline experiences.