Category Archives: Kenya Airways

Shareholders Chat with Mbuvi Ngunze

I had a tea chat with Mbuvi Ngunze former CEO of Kenya Airways (KQ), now advisor to the board on his time at the airline and views for the future. It was with a view from the perspective of retail investors and shareholders who will be affected by a restructuring process that is ongoing.

Excerpts

Assets: The airline now has a lean fleet with three aircraft groups: Embraer 190’s, Boeing 787’s and Boeing 737-800’ s (with some 700’s); while this is thin, this choice decision to stretch the fleet was much better than having idle aircraft sitting around – and they have been able to serve similar passenger numbers with the smaller fleet. He added that the global industry is in a slump with airlines like Emirates and Ethiopian parking aircraft but with KQ did not have that option, and it was perfectly okay to lease out aircraft and get them  back in a few years

Liabilities: They were servicing bank loans, but these unsecured lenders (the local banks) had to be refinanced. While some banks were upset about the deal to take equity in the airlines, and some are less comfortable in taking a hit, he emphasized that KQ had to treat all banks as an asset class equally in the transactions, and could not pick only some the banks.

Could this have been done earlier so the restructuring was not as drastic? He said it had to happen like this, in sequence, and that they had to right-size their operations before they turned to the banks and the balance sheet.

Revenue:   Routes have to make commercial sense to take them on. While there is an expectation to have direct flights to the US start soon, he’d rather get the ability to code-share, sell tickets, and earn revenue by selling tickets from Nairobi to any US city first. KQ can’t do that now, but Kenyan passengers do that with their partner KLM.

Also, there are many aspects to ticket pricing and KQ has to maximize on routes where they can to realize profits for shareholders.

Expenses:  Expensive Advisors? one complaint about the restructuring was the amount going to be paid to deal advisors  –  but he said that was traditional for arranging such deals and the costs were about 5% which as typical

Management: I conveyed a question from blogger/investor Coldtusker – on a perennial problem  at KQ of misaligned interests between board/management and shareholders, – his predecessor famously hinted that he’d rather buy livestock than airlines shares, and Mbuvi said that this was one of the things being addressed in the new equity deals that call for KQ employees to own up to 2% of the airline through an ESOP. He could not say if this is what led to pilots staging a go-slow last week, but he said that he was not involved on a day-to-day business since he had long ago handed over and oriented his successor – but added that performance-based compensation had to happen – however unpopular it was for pilots or shareholders.

Other Chats

  • Expectations: He said, it’s wrong to compare KQ and Ethiopian airlines, as they operate in a totally different airline market. Ethiopia is a closed aviation market, while Kenya is an open market – and Kenya’s open policy means that they control 40% of traffic into Nairobi, while Ethiopia has 80%. At Addis, Emirates flies’ 7 times there, compared to 21  to Nairobi and they also control cargo.
  • London Heathrow sale: a slot is not a building or a desk that was sold – it is the much-coveted right to a time to land and take off from Heathrow
  • The Senate was a circus – one that delayed and disrupted ongoing shareholder discussions, and where wild claims were made before television cameras – such as allegations of secret ownership of aircraft. He said KQ does not need to use intermediaries to talk to Boeing or Embraer.
  • He has no regrets; he came in as CEO at a time when things went wrong at the airline, but he does not feel he was handed a poisoned chalice.
  • Could things have been done differently? Yes, he would have taken Project Mawingu in slower steps.

For shareholders, he said it could have been worse and he says this restructuring is not due to the new companies act – the law was always there. Nationalization was considered, but it was discarded as it would not be good for KQ to operate as a government parastatal.

At the EGM this week, where shareholders will vote on an equity restructuring program, the same board will be there, and he will attend as a board advisor, not the CEO. The board will change after that and he says that going forward, he plans to be a shareholder of the airline.

KQ Capital Optimization: Government, banks, KLM, shareholders impact

Kenya Airways (KQ) shareholders have been asked to approve a balance sheet restructuring. They have known this day was coming for the last two years, but the KQ capital restructuring details will still be an initial shock to many of them.

The circular signed by Michael Joseph Chairman of the board cautions about the unsustainable debt levels at KQ and that the failure to restructure this, may lead to insolvency and closure. KQ’s Kshs 155 billion balance sheet has Kshs 113 billion of long-term debt and debt and 82 billion in current liabilities – resulting in negative 47 of KQ capital. The proposed deal will reduce the company debt by Kshs 51 billion and also unlock new funding. But this comes at a price and he cautions that minority shareholders will be significantly diluted, In this conversion of debt to equity, but they can still buy shares at a discount.

Excerpts from the 38-page shareholder circular (see investor documents) 

Individual shareholders:  Each ordinary share is being subdivided into 20 shares one of which is interim and 19 of which are deferred.

  • A KQ shareholder with 1,000 shares today will end up with 1,000 shares (initially they will be 250 shares) and 19,000 deferred shares. The ordinary shares will be listed on the NSE.
  • The deferred shares have no share certificate, carry no dividend or voting rights, and are not transferable (tradable). The creation of this class is to prevent an unlawful reduction of the company share capital.

Board restructuring: the Government shall have two seats on the board, while KLM will have one. The banks will have 1 director for every 5% they own (through KQ Lenders Co.). 2/3 of the board are to vote on new CEO & finance director appointments, and on partnership agreements, fleet plans, and strategy. The circular notes the changes will enable faster decision-making and less conflict at the board.

Shareholders Change:

  • Shareholding before: Kenya Government 29.8%, KLM 26.7%, IFC (9.56%), Mike Maina Kamau 4.3%, others 30%
  • Shareholding after: Kenya Government 46.5%, Kenya Banks 35.7%, KLM 13.7%, employees ESOP 1.9%, IFC 0.5%, Mike Maina Kamau 4.3% 0.2%, others 30%.
  • KLM and IFC significantly reduce their shareholding edit.
  • A new shareholders ESOP is proposed to be created and qualifying employees can buy up to 2% of the shares.

Shareholder Dilution: the existing Shareholders’ holdings of Ordinary Shares will be diluted by 95% as a result of the Restructuring and Employee Offer.

  • A shareholder with 1,000 shares will end up with 1,000 shares (initially they will be 250 shares) and 19,000 deferred shares.
  • The new shares will be consolidated after allotments are done i.e. mainly to the banks – so that meaningful trading can take place. (On completion, the company will have 7.4 billion ordinary shares and 28 billion deferred shares). KQ can’t also issue shares at discount to the nominal value, so a share split and an immediate consolidation will be done.
  • For an illustration of the dilution Mike Maina Kamau remains with 64.4 million shares but that shareholding, which was equivalent to owning over 4% of KQ, is now 0.22% assuming he does not buy new shares.
  • Shareholders can buy up to Kshs 1.5 billion of new ordinary shares, but new shares they buy are not tradable

The Government of Kenya: When he presented his budget speech earlier this year, Treasury CS Henry Rotich spoke of plans to restructure the KQ balance sheet in which the government could play a critical role and bring on board other stakeholders.

  • They had earlier provided Kshs 24 billion in loans that is being converted to equity
  • The government is will now providing in-kind contributions being the provision of government guarantees (not cash) of another 54 billion to US EXIM bank and Kshs 23 billion to Kenya banks.

KQ Capital and Kenya Banks: Kenyan banks are owed Kshs 23 billion plus interest, which they will convert to equity in a debt restructuring.,

  • Also, a group of Kenyan banks has agreed to provide Kshs 18.1 billion in new financing.
  • Eight Kenyan banks signed in on the deal on July 14.
  • Kenya banks have two options of how to participate – either to convert debt into equity or to subscribe to a new “Kenya Lenders Co” in a secured debt arrangement. If any Kenyan bank that has lent to the airlines does not indicate its preference, it is deemed to have accepted the equity route – but a majority has opted for the scheme. These novel agreements are part of the new companies act that allows companies to discuss distress debts with banks as long as 75% of creditors approve.
  • KQ Lenders Co. Ltd will be permitted to divest the Ordinary Shares it holds in KQ through the NSE and the sale proceeds will be used by MTC Trust Services to repay the Kenyan Banks loans;

KLM: will invest Kshs 7.5 billion through in-kind contributions of Kshs 2.7 billion, and will also subscribe for Kshs 5 billion (Kshs 2.5 billion of share in two phases) after settling some terms on employee number and aircraft leases.

  • Also, the recently criticized master cooperation agreement between KQ and KLM (signed in December 1995) shall be terminated.
  • KLM in-kind contributions include the slot (takeoff/landing rights) at London Heathrow currently used by KQ, and certain IT systems.

Don’t go to court: the circular warns that:

  • The key risk in relation to the Scheme is that creditors and other stakeholders dispute the process, which may result in delays or in it being unsuccessful
  • if the Restructuring is not implemented, there will be no amendments to any of the Existing Indebtedness and there will be no new money from KLM or the Government.

Way forward The circular from the Chairman notes that:

  • shareholders representing over 56% of the issued and outstanding Ordinary Shares have indicated their intention to vote in favour of the Resolution at the EGM. Such Shareholders include the Government and KLM.
  • .. Accordingly, the Board unanimously recommends all Shareholders to vote in favour of the Resolution to be proposed at the EGM as they intend to do in respect of the beneficial shareholdings of the entities they represent on the Board
  • Transactions are expected to be completed in August 2017, which includes the shareholders meeting (EGM) on August 7 in Nairobi and signatures from aircraft financiers and the banks.
  • 75% of shareholders have to vote at the EGM for the KQ capital restructuring to move forward.

KQ Capital Advisors: PJT Partners, Bowmans, White & Case (both legal), Kestrel stockbrokers, Redhouse, KPMG auditors, Deloitte (financial advisors), C&R Registrars. The exercise will cost about Kshs 25M with 9.8 million for lawyers and 14.4 million for transaction advisors

$1 = Kshs 103

KQ Restructuring extended to Banks and Shareholders

This week Kenya Airways (KQ) announced the next phase of their restructuring, with a focus on their balance sheet.

While shareholders have been aware of the erosion of their equity at the airline, the reality may still be a shock.  A Business Daily story quotes a Genghis Capital report which projects that the airlines 78,000 shareholders will be several diluted as the airline has to put some equity back on its balance sheet. In the process of conversion and providing guarantees,  the airline’s largest shareholder, the Government of Kenya, will increase its stake to 41% as that of KLM will reduce to 19%.

The support confirmed by the Cabinet included conversion of the Government of Kenya loans into equity, and provision of contingent guarantees subject to parliamentary approval in exchange for material concessions to be provided as part of the financial restructuring, which would secure future funding of the company and would more importantly NOT require Government to provide CASH as part of the restructuring.

And coming on board as new shareholders will be several commercial banks (possibly as many as 11 banks) who will own 34% of the airline after they swap some loans for equity. Kenya Airways principal bankers are Citibank, Standard Chartered, Barclays, Equity and National Bank. Some of the main facilities are aircraft loans secured from Citibank NA, Citi/JP Morgan, African Export – Import Bank/ Standard Chartered Bank as well as an engine loan from Co-operative Bank. Some banks who had advanced different short-term facilities to the airline, up through their 2015 financial year include Equity Bank, Jamii Bora, KCB, CBA, I & M, Chase, National Bank, Diamond Trust, Co-operative, NIC and Ecobank.

See also: An investor asks if it the right time to buy KQ shares? 

Drones, Helicopters and Aviation Regulations in Kenya

This morning, the Director General of the Kenya Civil Aviation Authority (KCAA) gave a press chat on the aviation sector.

  • Drones: About 5,000 drones (mostly toy ones)  have been confiscated at Nairobi’s airport (JKIA). They have drafted new policy procedures and rules for drones that awaiting approval by the attorney general, but for now, their usage is still illegal.
  • US Flights: The country has now got category one status. There will be one more inspection later this year after which Kenya Airways can apply for rights and probably start flying to the US in April 2018. He expects 75% of the tickets to be taken up by US businesses people travel to Africa with Kenyan diaspora making up 15% and the rest as leisure travel.
  • Expensive Tickets: About 43% of the cost of an air ticket in Kenya is taxes. There is a strategic plan to make six East African countries a domestic market which should lower airline taxes per ticket from the current Kshs 5,000 to 500 and this will enable more and cheaper flights in the region.
  • 80% of KCAA’s income comes from airlines over flying Kenya which is strategically placed in Africa.
  • Helicopters: There are 88 licensed helicopters in Kenya, and 60 are operating. Also, the KCAA expects about 40 more to arrive to be used in campaigns for the August 2017 election. Their biggest problem they have are with “James Bond incidents”  (people hanging on skids) and the Director urged media to report such on incidents for them to take action on against the operators.
  • Opportunities: There are 100 licensed helicopter pilots and this is not enough; there are many more jobs as helicopter pilots, aviation engineers, and safety operators. Entering these sectors is not cheap as it costs Kshs 2 million to be a private helicopter pilot and about Kshs 6 million to be a commercial helicopter pilot, with part of this high cost being due to the cost of avgas as pilots have to spend many hours in training. (While petrol is Kshs 95 per liter, Avgas is 150).
  • Training: There is a big concern about colleges claiming to offer aviation courses, but which are not in fact certified by the KCAA. Anyone seeking to operate in the sector is re-examined.

EDIT  In June 2018, Kenya’s Parliament annulled the proposed drone rules which had been drafted and presented to them for approval. The committee Chair highlighted that public participation was not done in the drafting of the rules, while some parliamentarians mentioned that the fees levied were excessive as were some of the  penalties for drone usage which were above what had been agreed to by the parent ministry.

Kenya Airways 2017 Results

Kenya Airways (KQ) announced their full-year results in which they reported an operating profit of Kshs 900 million, an improvement from an operating loss of Kshs 4.1 billion the year before.

KQ flew 4.5 million passengers, an increase of 5%, to 53 destination, but had an 8% dip in revenue to Kshs 106 billion, due to the reduced fleet capacity including a change from anchor Boeing 777’s to 787’s

But more significant was that idle capacity, such as from the large Boeing 777’s, and been jettisoned, reducing fleet ownership costs by 47%, and this combined with Operation Pride initiatives, had seen the airline achieve the gross profit after all the direct costs, fleet ownership costs and overheads. However after finance costs were factored in, the airline still had an after-tax loss of Kshs 10 billion, a great improvement from the Kshs 26 billion in 2016.

These were the final results presented by CEO Mbuvi Ngunze who had announced his resignation and who is being replaced by Sebastian Mikosz from  June 1. The airline is next expected to extend the restructuring program to the other side of  their the balance sheet and address the negative capital position and high debt on the balance sheet.

During the year they added new flights between Entebbe and Bangui and two new routes  to Cape Town, via Victoria and via Livingstone. From October 2017, KQ will add 30 new flights to existing African destinations. On the cargo side, they are now flying flowers to new markets in Australia and China.

This month, their Jambojet subsidiary acquired a second Dash 8 Q400 as the airline also got Kenya government permission for international routes, which could include Kilimanjaro, Mwanza, Hargeisa, Mogadishu, Goma, and Kisangani.