KQ 787-8 Dreamliner
KQ 787-8 Dreamliner

In Summary

  • To continue operating as a going concern the new CEO will have to restructure the balance sheet to manage the astronomical costs.
  • KQ will need to engage in costs cutting initiatives on its expense lines. On average, fuel accounts for 30% of an airliner’s operating costs.
  • A strong corporate governance framework is essential for the success of any organization.
  • Stronger controls within the organization will seal a multitude of loopholes that have been fraudulently exploited in the past resulting to losses running into millions of shillings.

On 01 June 2017, few outside the aviation industry noticed the quite entry of Mr. Sebastian Mikosz into the apex leadership position of KQ. The former CEO of the Polish flag carrier, LOT Airlines, has some outstanding credentials from the aviation industry. His two terms at LOT Airlines are credited with turning around the loss making airline. Expectations are high that he will replicate the turnaround strategy used at LOT to reverse the fortunes at KQ.

To turnaround the fortunes of KQ, the new CEO will need to focus on a minimum of four financial and strategic pillars;

Debt and Equity Management

In the year ended 31 March 2017, KQ’s net financing costs amounted to KES 7.3 billion being 7 times more than its operational profit of KES 897 Million.  To continue operating as a going concern the new CEO will have to restructure the balance sheet to manage the astronomical costs.  Progress has already been made in this regards as 11 banks have agreed, in principal, to convert their KES 22.5 billion debt into Equity. The government will also convert its 23.8 billion debt into Equity. Cash flows will now be diverted from financing to operational costs such as fuel, fleet maintenance, staff and other significant overheads.

Cost Cutting

To leverage on the positive headwinds created by the debt restructuring and further bridge the profitability gap, KQ will need to engage in costs cutting initiatives on its expense lines. On average, fuel accounts for 30% of an airliner’s operating costs. KQ will need to prudently enter into new fuel hedging contracts so as to mitigate the risks of volatile fuel prices. The last fuel hedging contracts didn’t go so well.

The other pertinent and delicate area of cost cutting is the restructuring of staff costs to align them with the vision of a lean and cost efficient organization. A task that is both unenviable and inevitable. To execute this mandate, the new CEO will act as a Negotiator in Chief in his bargains and banters with the airline unions. He need not expend his energy clashing with them but rather negotiate to obtain mutually beneficial concessions.

Retention and Growth of Market Share

A potentially insurmountable challenge to the new CEO is KQ’s steadily declining market share. Loss of market share to its regional peers and gulf carriers cannot be resolved even through a government bailout or the arm-twisting of lenders. It is the final nosedive in the commercial fortunes of any airliner.

KQ’s competitors have been aggressively eroding its market share right in its own backyard. Ethiopian Airlines and RwandAir are now flying passengers from Nairobi through their hubs at much cheaper rates to destinations in Western and Southern Africa, Europe and the Middle East. Historically, flights to these destinations were firmly in KQs grip as KQ was the go-to airline for outward destinations from East Africa.

The scramble for the domination of the African skies also includes global aviation heavyweights such as Turkish Airlines with 40 destinations in Africa, Emirates 20, Qatar 22 and Etihad 15. These premium airlines could be the final punch leading to a technical knockout that KQ has so far been dodging around the ring.

To stall the incursion of its market and subsequent erosion of its customer base to these airlines, the new CEO needs to adopt a more competitive pricing strategy. Penny conscious fliers, who form the bulk of travellers in Africa, are mainly drawn to these airlines due to cost savings rather than any other ratings of an airline. KQ flights out of Nairobi are sometimes so pricey, that fliers rather incur the inconvenience of connecting flights than paying more than KES 20,000-KES 30,000 for a direct flight by KQ. Few hours lost, loads of cash saved.

Corporate governance

A strong corporate governance framework is essential for the success of any organization. According to various audit reports, KQ has lost billions of shillings in various fraudulent schemes. The frauds encompass individuals and corporates from senior staff to ticketing agents and suppliers. In this regards, the new CEO will have to implement a strong control environment and institute a high ethical culture within the organization.

Stronger controls within the organization will seal a multitude of loopholes that have been fraudulently exploited in the past resulting to losses running into millions of shillings.

The writer is a commentator on business and economic issues

 

 

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