FOR KQ’S NEW BOSS, A STORMY TASK AHEAD

It is good to be Mbuvi Ngunze. But it is even better to be the CEO of Kenya Airways, one of the most admired companies on the continent. Mr Mbuvi, who is currently chief operations officer at KQ, was picked to lead the national carrier from December 1, beating his colleague Alex Mbugua, who is finance director, and an array of industry captains.

 BY LUKE MULUNDA

Mr Ngunze boards a plane that is experiencing turbulence, with earnings still in the red territory. Kenya Airways surprised the market by announcing pretax loss of Sh10.8 billion for the year ending March 2013. For an airline that has branded itself as the Pride of Africa, sinking deeper into losses is a dubious distinction that it has been forced to fly around the world with and which the new CEO-cum-managing director is expected to live with for some time and, hopefully, shake it off sooner than expected.

Analysts say steering Kenya Airways back to profitability will be one of Ngunze’s key performance indicators. The Sh10.8 billion loss, the biggest in Kenya’s corporate history, turned focus on the national carrier as low-travel environment conspired with competition to devour revenues. The management, led by outgoing chief executive and managing director Titus Naikuni and board chairman Evanson Mwaniki, blamed the drop from Sh1.6 billion profit the previous year to the Eurozone crisis and travel advisories due to terror fears and election jitters that led to a decline in passengers coming to Kenya. Political instability in North Africa was also a source of turbulence.

Quest for continuity

After searching for nearly one year, it appears the board was not ready to gamble with an outside to replace Naikuni, who has served his 10-year contract plus one, preferring an insider with institutional memory of its operations to ensure continuity. Mr Naikuni is expected to retire end of November, having extended his term by a year to give the board time to search for his replacement.

If it’s any consolation for the incoming chief executive, the airline’s revenues rose 7% and reported a pre-tax loss of Sh4.86 for the year ended March 2014, a major rebound from the Sh10.8 billion pre-tax loss for the previous year. This loss may have become small enough to calm the nerves of investors, but it is still big enough to cost the company a lot in terms of restructuring and revenue growth to bridge the gap.

The announcement of the results came strategically a day after unveiling the new CEO, effectively throwing Mr Ngunze at the deep end of the KQ red ink. Despite the hard times, the airline’s share price has gained about 17% in the past year to trade at around Sh11.5 in June. Kenya Airways continues to report growth in turnover and has held operational costs to last year’s levels.

Three key challenges

Mr Ngunze, who joined Kenya Airways in September 2011 from cement maker Lafarge’s operations in Tanzania, faces three key challenges.

First and more urgent is getting the airline back to profitability, which is an uphill task given the strong headwinds, including the highly competitive and fluid aviation market in Africa. Second, he has to see through the airline’s ambitious expansion plan, which involves buying new fleet of bigger and fuel efficient planes and charting new profitable routes. This, too, is tricky given that this expansion has been burning piles of cash while returns are long-term and actually not guaranteed.

Last but not least, Mr Ngunze must strategically navigate a spooky market being shaken by insecurity fears ever so in Kenya where terrorism has become a bigger threat to airlines than fierce completion.

Looking at his profile, Mr Ngunze has the chops for the job. He was worked for blue-chip companies, including PricewaterhouseCoopers and Larfarge. He holds a Bachelor of Commerce degree, accounting option, from the University of Nairobi and is a Chartered Accountant (England and Wales). With three years at KQ, he has an idea of what it will take to turn it around.

It is now clear the board had a succession strategy for Kenya Airways, but kept a tight lid on it. They brought in Mr Ngunze in September 2011, two years to the expiry of Mr Naikuni’s contract, perhaps to understudy him. But tightening cash-flows meant that Naikuni had to stay longer and help refocus the business.

Mr Ngunze is expected to take Kenya Airways to a new level in terms of consolidating its market position and expanding its fleet without gnawing too much at its bottomline. The company is in the third year of its ambitious 10-year expansion strategy code-named  ‘Project Mawingu’, which targets to grow its network of destinations and double its fleet. This year Kenya Airways expects delivery of six new aircraft.

Up and down the skies

Formed 37 years ago, KQ has built one of the strongest aviation brands in Africa. The airline currently covers a network of over 60 cities in Asia, Africa and Europe, and is aggressively expanding in Africa. In 2012, it raised Sh20.68 billion through a rights issue to fund the expansion of its routes and boost its fleet with Dreamliner aircraft, billed to be the epitome of luxurious flying and efficient fuel consumption.

Kenya Airways is spending $3.6 billion (Sh306 billion) on buying new planes and route expansion, even as it suspends and downscales flights on not-so-profitable routes. This expansion is expected to win back customer confidence and attract new fliers and in the process grow revenues. It will also work to intimidate its rivals with a psychological warfare in an industry where size is a measure of success.

Analysts say Kenya Airways problems could be largely self-inflicted. It expanded too fast into low-passenger traffic markets, increased spending on new aircraft and engaged in an expensive retrenchment, all of which strained its cash-flow. In addition, Kenya has been a uniquely complicated market for airlines. In 2012, Bahrain based Gulf Air, UK’s Virgin Atlantic and South Africa’s 1Time pulled out of the Kenyan market citing increased fuel costs, rising taxes and falling passenger numbers.

This was in line with IATA warning that many passenger airlines were grappling with razor-thin profit margins, and therefore struggling to generate adequate returns for investors. “Improved performance is what’s keeping airlines in the black,” Mr Tony Tyler, IATA director-general, said. “Airlines are putting more people in seats.”

Even then, Kenya Airways has had to contend with escalating fuel prices, increased competition, the Eurozone crisis that led to a drop in passenger numbers in key markets and the continuous security risk at home that has adversely affected the tourism sector.  Those challenges saw the airline’s revenues drop by Sh9 billion to Sh98.8 billion in the year ending March 2013. Net loss was Sh7.86 compared to Sh1.66 billion the previous year.

Kenya Airways has appeared to concentrate on the local market to bolster revenues and recently launched Jambo Jet, which has caused a stir and send its rivals scampering to the boardrooms.  So far, it is always fully booked and Mr Ngunze hopes this trend will hold with a growing middle class in Kenya trying out air travel. The low-cost carrier is designed to fend off growing competition on domestic routes from local carriers like Fly540 and Jetlink.  Competition on local routes has been furious from budget fliers and regional routes have turned into a bloody contest with newer entrants like Rwanda Air.

To protect its vaults, Kenya Airways has re-negotiated maintenance contracts with aircraft suppliers from which it hopes to save up to Sh5 billion (US$60 million) over five years. In addition, Project Mawingu, which aims to grow its network of destinations, besides expanding the fleet to 107 new modern aircrafts, is expected to lead to a significant cut in costs, according to Mr Naikuni.

Analysts also see outsourcing some functions as key to cutting costs. The airline plans to outsource cabin crew and if this goes well, it can be extended to ground services. This, though won’t be an easy ride with increasingly vocal unions.

IATA says a trend is emerging across the world’s regions in which large airlines are enjoying stronger profitability than smaller rivals because they enjoy economies of scale, which provides hope for Kenya Airways as it goes big on aircraft and routes.

Low passenger numbers

KQ’s passenger numbers have remained almost stagnant. In the first half of the year to March 2014, it grew by 5% to 1.9 million, but revenues increased significantly, buoyed by higher yields and a favourable exchange rate.

Mr Ngunze has to find ways of having the new Boeing 777-300 ERs full of passengers to get return on the investment. It is the biggest plane in the airline’s fleet, with a capacity of 400 passengers, and is likely to have higher profits. A second Boeing 777-300 ER is expected next year along with the much-awaited Boeing 787, Dreamliners.

KQ in June received its second Dreamliner and targets to have six of the modern and fuel-efficient aircraft by year end. They are expected to help it manage its fuel costs, which account for 38% of total expenses.

Growing competition

Competition is also growing. Middle Eastern carriers like Emirates Airline, Qatar Airways are making inroads in the African markets, as well as big carriers like British Airways. Ethiopian Airlines remains its biggest enemy on African routes. It received its Boeing 777-300 ER in June.

Mr Ngunze’s job is clearly cut, and he will need  to summon all his experience and skills to pilot the airline. “On behalf of the board of directors of Kenya Airways, I also wish to take this opportunity to call for your full support for Mbuvi Ngunze as he takes over the leadership of the company’s day to day affairs…,” Mr Evanson Mwaniki, the KQ Board chairman said in the press statement to announce the appoint.

This is something that Mr Ngunze will need in plenty as he takes over the corner office on December 1.