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1. 2014
The Kiangoi Report
Interpretation of Kenya Airways Financial
Results for the year 2013-14
Chweya Kiangoi
Dynasty Africa Ltd
12/1/2014

2. Financial Review & Analysis of Kenya Airways
This is a review of Kenya Airways financial performance going back 5 years in which we
compare the airline performance with its competitors: Ethiopian Airlines, South African
Airways, Qantas Australia & Emirates Airline. We seek to establish how the company’s
performance measures up to its competition & whether the company strategy is aligned with
the expectations of its shareholders. By interrogating the numbers we hope to empower
potential investors in their decision making process.
Key Stats, Comparatives & Trends:
Understanding the industry in which Kenya Airways operates:
The importance of an industry can be measured by the economic & social benefits it creates.
Airlines and the wider aviation industry generate substantial value for their customers & the
wider economy. However, the efficiency & sustainability of the industry requires that the
investors in the industry receive a fair return, enabling the industry to attract long term
investments.

3. Below are some of the challenges the industry has to deal with:
1. High fixed & variable costs: Planes are expensive and airlines have to continue
making large lease or loan repayments irrespective of business conditions. They also
have a large labour force with a large percentage being unionaizable staff. Other cost
factors include oil price volatility; fuel accounts for 33-37% of operation costs. Added
to these costs is the cost of security which has gone up following the sharp focus on
terrorism.
2. Non-competitive nature of the airline’s supply chain partners. Two firms; Boeing &
Airbus provide majority of the plane. Airports, air traffic controls & reservation
system providers are run as monopolies.
3. Exogenous events can suddenly affect demand: Terrorism threats, the JKIA fire
fiasco, travel advisories; the Ebola virus can quickly turn the consumer perception
tide against the company’s profitability.
4. Government regulation and heavy handed intervention on its part damages
profitability. Further liberalization & removal of barriers such as ownership
restrictions is vital.
Kenya Airways plays an important role in Kenya’s economy and in the promotion of Kenya
as a tourism destination. However, it is not immune to the challenges listed above. The airline
will need to adjust and shift its business model to one that is adaptable to the environment in
which it operates.
Kenya Airways: Interpretation of Results:
Markets & Sales Analysis
Africa’s air transport industry is dominated by three large efficient airlines; South African
Airways, Ethiopian Airlines & our very own Kenya Airways. As the graph above shows the
company relies heavily on the African market extracting 54% of its revenues from the
continent. During the financial year 2013/14 the airline carried a total of 3.7M passengers
contributing 2013/4; $1049.6M vs 2012/13; $1000.9M. According to IATA, Ethiopian
Airlines became the largest African carrier by revenue and profit in 2013 carrying a total of
5.2M passengers with revenues topping $ 2300M. SAA carried a total of 8.8 M passengers in

4. the year 2012/3 and posted revenues of $ 2000M. All this airlines rely heavily on the African
market.
It is also worth noting that Ethiopian Airlines has the largest share of the African market with
a weekly total of 120K international seats, followed by SAA with roughly 90K and KQ at
70K seats. The same trend can be seen in Asia & the Middle East which accounts for 35% of
its revenue base versus 18% for KQ. The former flies to 21 destinations versus 6 destinations
for KQ.
Kenya Airways long term strategy dubbed project Mawingu seeks to increase its fleet
capacity from the current fleet of 43 to 107 by 2021. It also seeks to expand its destinations
from 55; 45 countries to 115; 77 countries. Likewise Ethiopian Airlines has an ambitious 15
year strategic programme; the airline aims to become the largest carrier in Africa with a $ 10
billion annual turnover. It currently has a fleet of 70 & flies 101 destinations. SAA is
currently viewed as the best airline in Africa going by the WTA rankings with a current fleet
of 58 flying 42 destinations.
Sales by Segments: A Comparative Analysis between four airlines:
Most airlines depend on four streams of revenue namely; Passenger revenue, Freight & Mail,
Handling & other revenue (inflight catering, sales, hotel income). As the graphs below
shows KQ has seen an increase in revenue in each of the four segments over the last five
years.
A comparison with sampled airlines in the industry shows that KQ relies heavily on customer
revenue at 85%; Ethiopia’s 74%; SAA’s 80%; Qantas 86% & Emirates 79%. Ethiopian
Airlines & Emirates extract 14% of their revenue from freight & mail with KQ at 7%, despite
the airline being awarded the best African Airline award in air cargo. The company will need
to build capacity to capitalize on the industry recognition thus boost revenue. Another
observation is that airlines such as Emirates & SAA capitalize on non-flight revenue in order
to boost their turnover. These revenues are derived from hotels, merchandize, Maintenance
repair organisations (MRO) & catering.

5. Operating Costs
Operating costs are made up of direct cost, fleet ownership costs & overheads. As depicted
by the graphs below 69% of operating costs is direct cost with fuel at 37%, airport landing
10% & aircraft maintenance making up 8 % in this category. Fleet ownership costs constitute
11% of operating costs with aircraft leasing at7%, depreciation of aircrafts & engines at 4%.
Overheads make up 19% of operating costs with employment costs being the major
contributor at 14%.
A comparison with the sampled airlines in the industry shows that KQ seems to have cost
leadership among the African carriers when it comes to direct costs. However international
carriers perform better based on favourable factors such as purchasing power & strong
currencies. The fleet ownership cost is held at 11% which is within the sampled carriers rates
at 9%-13% with Emirates proving the only exception. Ethiopian Airlines seems to have a
better handle on its overheads at 12% of operating costs versus KQ’s 19%. The cause of the
variance can be clearly seen on employment costs with the former at 5% of operating cost
versus KQ’s 14%. This can be attributed to Kenya’s liberal labour market & the company’s
strong union that has seen the airline locked in a tussle over its bid to restructure.
Profitability:
We will first look at how airlines measure profitability before turning to the financials, below
is a list of variables that come into play when measuring operating profits.
A little primer to airline economics:
Available seat Kilometres (ASK): It is simply the number of seats multiplied by the
distance they travel. So in a sense this is the capacity of the airline. KQ’s ASK in 2013-14
was 14,188M.
Revenue Passenger Kilometres (RPK): It is the number of passengers multiplied by the
distance. KQ’s RPK in 2013-14 was 9,309M versus breakeven point of 11,223M assuming
no change in yield.
Passenger Load Factor: It is the ratio of RPM to ASM – on average tell you how “full” the
planes are. KQ’s PLF in 2013-14 was 66% versus breakeven point of 79%
Yield/RRPK: To calculate system yield, divide passenger revenue by total RPK; KQ’s
passenger revenue in 2013-14 was $1050M divided by RPK of 9,309M gives 11¢/pkm versus
breakeven point of 14¢/pkm assuming no change in RPK

6. Passenger Unit Cost: Unit costs represent how much it costs to fly one seat (empty or filled)
one-kilometre. Which is gotten by dividing total operating cost by ASK KQ’s operating cost
in 2013-14 was $ 1266 M divided by ASK of 14,188 M gives a C/ASK 9 ¢/pkm
Breakeven Load Factor: The load factor necessary for an airline to break even on its
operating cost. It is a function of the percent of seats filled at a particular yield versus the
airlines operating costs. Assuming the current yield of 11¢/pkm holds the KQ’s BLF for
2013-14 is 79%. Alternatively KQ will need to raise the yield to 14¢/pkm.
The graphs below will try and help visualize & put things into context.

7. As far as the industry goes KQ is extracting a higher yield factor than its continental rivals;
yield of 11¢/pkm versus Ethiopian Airlines 8 ¢/pkm versus SAA’s 6 ¢/pkm. Ironically this
does not translate to profits at the bottom line for KQ. What the graph above shows is that
other airlines have kept their yields low to attract price sensitive customers and as a result
used non-passenger & non-flight revenue to boost their revenue numbers. Ethiopian airline
for example derives 15% of its revenue from Freight & mail as opposed to KQ’s 9%. As
discussed under the sales & cost sections above Ethiopian airlines have a cost advantage &
can easily eat into KQ’s market share. However KQ can also target SAA markets who as the
graph above shows are the weakest link with yields below their passenger unit cost a situation
that may not be sustainable in the long run.
To conclude this section, it is worth noting that the use of any individual variable as a
measure of airline success can be misleading.
 A high yield is not desirable if passenger load is low
 Low unit cost is of little value if yield levels are low
 A high passenger load is also not desirable if it is as a result of selling a large
proportion of seats at low fares (see SAA on graph)
Airlines thus need to balance these variables when coming up with their profit maximizing
strategies.
Net Profit:
We turn our focus on net profit where we undertake a variance analysis comparing a
profitable year 2011 versus a loss making year ending 2014.
250000
200000
150000
100000
50000
0
-50000
-100000
-150000
-200000
-250000
KQ Comparing 2011 Profit to Loss 2014
Profit 2011
Revenue
DOC
FOC
OH
Net finance costs
Other costs
Income tax cerdit
Loss year 2014
Amt in $ 000
P&L Items
Positive
Negative
In the last three years since declaring a profit revenue has only gone up by 13% at $ 157M
versus direct operating costs up by 23% at $ (205M); FOC up by 17% at $(25M); Overheads
up by 13% at $ (31M). Finance costs are up by 19% but the net off with a fuel hedge

8. derivative helps post a positive variance of $ 6.1M. Other costs contribute a negative variance
$ (20M) & lastly there is a positive contribution from income tax credit of $ 35 M.
The variance analysis clearly shows that revenues have not grown as fast to cover the rise in
costs despite an increase of 16% in passenger traffic (2011;3.1M versus 2014;3.7M).
Financial Strength, Management Effectiveness & Shareholder Value:
We now turn our attention to the balance sheet as we try to establish the financial strength of
the company and how well management put to good use the assets of the company with the
underlying objective of increasing shareholders value. To do this we look at five ratios as
listed on the financial highlights summary:
Current Ratio: This ratio is also known as the liquidity ratio it measures a company’s ability
to pay its short term commitments over the next business cycle (12 Months). A current ratio
of 2:1 is considered acceptable meaning the company has the ability to pay its short-term
commitments. A current ratio below 1(current liabilities exceed current assets) means that the
company may have problems paying its bills on time. KQ has a ratio of 0.46 in 2013-14
versus 1.06 when compared to the profitable period 2010-11.
Debt to Equity: This is a long term solvency ratio that indicates the soundness of long-term
financial policies of the company. It shows the relation between the portion of assets
provided by the stockholders and the portion of assets provided by creditors. It is
calculated by dividing total liabilities by stockholder’s equity. KQ has a ratio of 4.27. It
means the creditors provide $ 4.27 of assets for each $ 1 provided by shareholders. This
means shareholders will have to wait out on dividends as interest payments take
precedence.
Net Free Cash Flow: This ratio takes focus away from earnings/profits & looks at the cash
the business generates from its operations. It is gotten by subtracting capital expenditure
(cash from investing activities) from cash from operating activities. Free cash flow is
important as it allows the company the opportunity to seek out & enhance shareholder value.
KQ has a –ve free cash flow of $(339M).
Return on Assets: This is an indicator of how profitable a company is relative to its total
assets. It is a measure of management effectiveness in the use of company assets to generate
earnings. KQ’s ROA is –ve (2.27%) in 2013-14 versus 4.49% in 2010-11.
Return on Equity: This is also another measure of the company’s profitability it is gotten by
dividing net income over shareholder’s equity. KQ’s ROE is –ve (11.96%) in 2013-14 versus
15.29% in 2010-11.
Going Forward: The Year 2014-15 & Beyond
The airline suffered a loss of $(140M) during the period ending September 2014. The H1 loss
is attributed to travel advisories over security concerns that saw passenger numbers from
Europe drop by 40%, coupled with the Ebola crisis which forced the airline stop flights to
some of its cash rich routes. On the upside lower aviation fuel prices and the 20% reduction
in fuel burn from the new Dreamliner fleet is expected to bring a positive trend in the second
half of the financial year.

9. Management has identified four key areas of focus; Customer experience, capital restructure,
revenue generation & cost containment. Below are some of the strategies in the KQ
management cards:
1. Fleet modernization; The airline received two Boeing 777 & five Boeing 787
Dreamliner’s this is expected to lower fuel costs by $ 100M each year.
2. Establishment of fuel buying company to bring the middle man’s margin into the
books
3. Non-flight revenue through building of a hotel within the airport
4. Second freighter plane brought into service
5. Establishment of low cost airline in bid to boost airline revenue & traffic
Airlines may defy the laws of gravity but they can’t ignore maths. The business is asset
heavy, capital intensive and very competitive making it hard for investors to see a good return
on investment. This coupled with the exogenous factors that airlines face means that
companies like KQ will have to adapt to their geopolitical environment and find ways of
making up lost revenue caused by yearly events.
I believe the success of the airline will come down to its ability to swim upstream &
downstream along its supply chain as it battles to curtail spend, generate profits & keep the
cash within the group. I would look out for positive net free cash flow, significant debt
reduction & prudent capital management as pointers to a return to sustainable profitability.