Reading the Kenya Airways Tea Leaves

Today is the last day of the Kenya Airways  rights issue in which they are seeking to raise Kshs 20 billion ($240 million) from shareholders.  The 35-year-old company is  one of the most-talked about companies in Kenya mainly as as a model of privatization gone right.

The airline which dubs itself The Pride of Africa has set out to branch out across Africa and cover every African capital, but has also had to fight a rearguard action from a handful of local airlines and gulf carriers.

The information memorandum is about 236 pages, but with most of the data in it one year old, relating for the financial year that ended in March 2011. Also, there have been no stockbroker reports about this rights issue.


  • The company has 73,612 shareholders (old data)
  • The authorized share capital of the airline  is Kshs 10 billion (102) comprising 2  billion shares with a  par value of Kshs 5. 461 million have been issued and in 2011 shareholders had a return on equity of 15%.
  • Approval has been obtained from the stock exchanges in Tanzania (page 130) and Uganda  (page 127) where KQ” share are cross-listed.
  • The directors’ shareholding is listed (98) and they don’t own much in the airline while the CEO does not own any shares in the airline (odd as the marketing camping exhorts Kenyans to invest in the pride of Africa) and this does not bind the CEO to improve the share performance of the airline.
  • For any KQ shareholder who does not participate in their shareholding will mean a substantial dilution in their shareholding (93) and this has been enumerated in a court case where a shareholder sued the airline to stop the rights issue.

Rights issue:

  • Proceeds of the rights issue will be used to make pre-delivery payments (28) for aircraft  between June 2012 and March 2013  and pay down some unsecured loans.
  • The success level of the rights issue is to raise Kshs 14.4 billion ($173 million) (26)  and KQ will lower its risk profile (and maybe borrowing costs) by having a higher equity level (23).
  • Kenyans have to own at least 50% of the shares and the transaction advisors may refuse transfer of shares to foreigners that will violate that (p37)
  • Shareholders are being offered 16 new shares for every 5 held. They were priced at a discount when the offer was announced, but the market price is now the same as the rights price was at a discount, but now trades (Kshs 14.9) at  about the offer price.
  • The  rights issue will cost Kshs 620 million ($7.4 million) (p38) -comprising commissions of Kshs 310 million, advertising 66M, CMA Kenya fees 51M, underwriting (up to 47M), and lead transaction advisor 15M  ($180,000)
  • The issue is underwritten for only up to Kshs 420 million (93) and they are aiming to raise Kshs 20 billion.
  • Rump allotment: Qualified institutional investors (33) will be invited to buy shares at the discounted price concurrent with the rights issue , and these social security funds of Rwanda, Uganda, Tanzania, Burundi, pension & insurance companies in East Africa, financial forms in South Africa and other foreign institutional investors(230). Yesterday’s paper had a story that the IFC will own 7.4% of KQ after the rights issue. 


  • Despite revenue increasing from Kshs 41 billion to Kshs 55 billion  ($662 million) in the first six months of their 2012 year, operating profit for the 6 months was Kshs as 1 billion ($12 million), down from 2.4 billion  the year before. This was attributed to increased employee costs and new routes and the airline issued a profit warning in January 2012 profit wanting in January 2012 (68) citing the rising fuel costs which will impact full year profits for 2012.
  • For the full-year to March 2011 revenue of Kshs 85 billion (comprising passenger 75, freight 6.5, handing 1.4)  and had direct costs of Kshs 54 billion (comprising fuel of 25b billion, landing 8 billion, maintenance 7b, sales commission 2.7b), fleet ownership of 9 billion, 13 billion on administration (11 billion on staff).
  • Of the revenue, 54% is from African routes, 27% Europe, and 19% Mid-East & Asia (68) .
  • Their hedging policy is to hedge 80% of their fuel requirements for the next one year hedged and 50% for following months  (70).
  • Their debt-equity ratio in 2010 was 111% (borrowings of Kshs 20 billion against equity of Kshs 17 billion) and this improved to 88% in 2011.
  • Deferred income – includes compensation from a manufacturer (204 -likely Boeing)  of Kshs 2.5 billion and they also have deferred tax liabilities of Kshs 8 billion (203)

Banking: KQ has borrowing of Kshs 25 billion ($301 million) (201)  from Private Export Funding (PEFCO), Barclays and ABN Amro at rates of 4-6%  over 12 years and lien of credit for Kshs 20 billion (202). The loans are routed through Simba Finance, Swara Aircraft Finance, Chui Aircraft Finance and Kifaru Aircraft who are registered as owners of the aircraft  (81) (these are not subsidiaries) and will transfer their titles once the loans (secured through Eximbank) are repaid (201). KQ also drew new loan facilities in 2011 from Standard Bank, KCB and Barclays to pay for pre-delivery payments (87) . KQ also earns rates of 4 -6% on their deposits (198).


  • KQ has 4,355 staff who earned Kshs 11 billion ($132 million) in 2011 (numbers in December are 4,672 (61).
  • KLM appoints the CEO, finance director and one director for each 10% they own (106).
  • Directors and key management were paid 223 million in 2011, with directors earning 78 million of that (175).
  • KQ is recruiting expatriate pilots to meet a shortage (65).
  • Have an Ab Initio pilot training program (pilots who had no previous flight experience)  that now has 87 pilots getting training in South Africa (61). KQ has an arrangement with Co-Op bank in which these students can borrow and pay for their expensive training of pilots and they have drawn Kshs 500 million ($6 million) (112).
  • KQ will hire a director for a new fleet delivery department and separate that from the technical department (61)


  • KQ operates 33 aircraft, 20 under lease (108) and has 7 spare engines.
  • Have Kshs 20 billion worth of leases (213)  and commitments to buy about Kshs 100 billion ($1.2 billion) worth of aircraft (212)
  • Paid deposits of Kshs 2.1 billion to Boeing (192) and Kshs 631 million for leases of Boeing and Embraer planes & engines.
  • Have signed purchase agreements for 10 Embraer 190, three 777-300ER,  and 9 Boeing 787 Dreamliner’s with options for 4 more (111)
  • Future fleet will comprise Embraers (for domestic/short routes), Boeing 737 (NG) next generation (for medium/Africa routs), and Boeing 787/777 for intercontinental routes). They also have board approval to acquire 12 freighters (53).
  • Sold 2 Saab 340 aircraft to Alandia as well as land in Nairobi and Lusaka, (108)

Customers & Passengers:

  • Flew 3.1 million passengers in 2011 and 1.8 million in the first half of 2012.
  • All KQ ground staff participated in customer service training at the end of 2011 (65)
  • The airline seeks to maintain & improve on on-time performance but this has been hampered by airport congestion, traffic jams unavailability of equipment and a lack of captains (65)
  • KQ plans to re-design their network to decongest JKIA by having more mid-day flight blocks, in addition to the current morning  & evening ones (58)
  • Passenger meals are by KLM catering and NAS (111)

Risks: Risks to the company include adverse publicity from terror alerts or attacks,  aircraft crashes (91) fuel prices (90) and the slow pace of Jomo Kenyatta Airport (JKIA) expansion (90) which impacts on time performance. They need the airport authorities to complete terminal 4 which will be exclusive for KQ with 7 parking bays nose-in, and also construct multi-level terminals, have a separate domestic terminal, and (later) construct a new (greenfield) airport and a second runway.

On-going construction at Jomo Kenyatta International Airport, Nairobi

But they also note in risk mitigation that:  Support from the Government of Kenya for the airline is another important positive factor, which allows the airline to compete successfully. Lenders’ and investors’ experiences with flag carriers and airlines in general across the world create an expectation that carriers tend to find some way to keep operating in difficult circumstances, and this usually involves the state in some form or another (63)

Litigation: KQ has suffered two fatal crashes and there are still cases and investigations that stem from those two in Cameroon (2007)  and Ivory Coast (2000) . There are minor passenger and staff cases, but also a long-running claim by Kenya Revenue Authority for indirect taxes (page 107)


  • KQ is largest in Africa with 42 African destinations compared to Ethiopian 40, South Africa (22) (p47)
  • Comparing airline traffic (62) between Africa to the world, the top is South Africa, Egypt Air, Air France, and KQ is 8th , just behind Ethiopian and Emirates while for traffic between Africa and Asia, KQ  is 6th behind Emirates, Ethiopian, Qatar, Egypt Air.
  • KQ enjoys some advantages by having a young aircraft fleet, while other countries don’t have working airlines. It competes in the region with Ethiopian & South Africa, but these airlines have distant hubs in Johannesburg and Addis, while Gulf carriers pull traffic away from the region with their long haul aircraft and cheap tickets (64).
  • KLM owns 26% of KQ and KQ owns 41.23% of Precision Air in Tanzania (72) after their own rights issue which reduced KQ’s shareholding from 49%.