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The East African : Nov 14th 2015
MONEY AND EQUITY MARKETS NOVEMBER 14-20,2015 Kenya Airways restructuring plan could propel airline out of the red Possible job cuts, cost ≥eduction and p≥icing, and plans to stop hedging By ALLAN OLINGO The EastAfrican K enya Airways is hoping that a restructuring plan, with expected savings of $346 million, will propel the national carrier back to profitability. However, the plan is dependent on lenders agreeing to restructure the company’s short term debt obligations. The airline posted a $119 million loss in its half year, due to higher finance costs that rose to $35 million and a $13 million loss on its fuel derivatives, compared with a $6.8 million gain over the same period last year. Chief executive officer Mbu- vi Ngunze said from next week the airline will embark on a one-and-a-half year 24-item McKinsey crafted restructuring plan that will see the airline save more than $300 million. The plan involves possible job cuts, cost reduction, pricing and productivity improvement. “We hope the plan will boost our bottomline through a $200 million saving, adding to the expected $146 million from the sale of the grounded aircraft and land, which is at an advanced stage,” Mr. Ngunze said. The airline is also in dis- cussions with local banks to convert its short-term debt of $250 million into long-term debt, with tenures of about seven years. “We are currently in talks with local banks so that we can renegotiate the terming of some of these short-term facilities to enable us to reduce our repayments and interest costs,” Mr. Ngunze said. KQ’s finance director Alex Mbugua said the airline has seen great improvement from an operating perspective, saving $80 million in fuel hedging contracts that helped the direct costs decline by 17.5 per cent, year on year, to $34.8 million. “We have also managed to improve our operating loss position to $218 million from the We hope the plan will boost our bottomline through a $200 million saving.” Kenya Airways CEO Mbuvi Ngunze 45 How much ma≥ket volatility is too much? By A SPECIAL CORRESPONDENT Bloomberg THE FINANCIAL consequences of wider divergence among central bank policies — a stronger dollar, great volatility in stocks and larger yield differentials among US and German benchmark government bonds — have been playing out over the past week. That was the easy part to pre- dict. It is more difficult to determine how much these markets will move from here, the impact these moves will have on what central banks do next, and how the real economies will react in both the short- and longer-term. Two developments have refo- Kenya Airways has embarked on a restructuring plan. Picture: File previous year’s $1.05 billion. This means that the business is fundamentally on the right track,” Mr Mbugua said. The airline also announced that it has drawn half of the $200 million facility it received early this year from African Export-Import Bank (Afreximbank). Its long-term loans stand at $1.14 billion, while its short term debt is $517.8 million. Since 2014, the airline has borrowed $1.04 billion from Afreximbank. However, the outlook for the second half of the year is not favourable for the airline due to fluctuating exchange rates and high interest rates. In the half year to June, the airline made foreign exchange losses of $49 million related to revaluation of loans, and a $15 million loss on long term loans. In the near term, the airline plans to stop hedging as it positions itself to benefit from the falling oil prices. Of great concern however is the increase in the company’s negative equity position to $33.9 million, from $5.9 million in March, which the firm attributed to revaluation of dollar-denominated long-term loans and cumulative losses. Mr Ngunze said that they TURNAROUND PLAN Kenya Airways CEO Mbuvi Ngunze said the turnaround plan would help the firm make an after-tax profit of 5 per cent of its revenue in two years, after it narrowed its pre-tax loss to Ksh11.9 billion ($116 million) in the first half ended September, but he gave only limited details of the plan. “My ambition is that we can deliver in the next 18-24 months,” Mr Ngunze told will be speaking with Capital Markets Authority with a view to rectifying the airline’s negative equity position soon. Analysts say the next few months will be challenging given the financial environment and the government’s ability to inject additional capital. “The airline management has been keen to emphasise the importance of Kenya Airways to the economy beyond its profitability — a discussion that is intended to elicit support for a government backed bailout plan,” Standard Investment Bank said in their investor note. In October, Kenya Airways Reuters after an investor briefing. Kenya Airways is one of Africa’s biggest carriers along with South African Airlines and Ethiopian Airlines. Analysts said they need more information to be able to assess the plan properly. “The devil is in the detail as to what those specific initiatives are going to be and the impact,” said Eric Musau, a research analyst at Standard Investment Bank. received two Dreamliners, completing the fleet ownership programme that sent the company into massive debt. “We received the fleet through a special financing arrangement,” Mr Ngunze said. “We have seen the net finance costs go higher than last year. We are also feeling the interest costs impact and expect this to continue into the second half of the year,” Mr Mbugua said. The airline’s revenue growth has remained flat, at $567 million, with Kenya contributing 11 per cent of its total revenue; the rest of the continent contributed 60 per cent. cused traders’ attention on monetary policy divergence. The first are recent policy and economic signals — including the US jobs report for October and comments from central bankers — that have materially increased the probability that the Federal Reserve will hike interest rates, in December, for the first time in almost 10 years. The second is the growing possibility that the European Central Bank may enhance its programme of large-scale purchases of securities, known as quantitative easing, including by extending its duration beyond September 2016. This month, the dollar has appreciated by more than two per cent against the euro, and the yield differential between 10-year US and German government bonds has widened by about five basis points in the context of higher interest rates overall. Both are likely to move further. Greater equity price volatility is to be expected in a market that has received such big liquidity injections in recent years, particularly from global central banks. What happens next, and how it happens, matter a great deal for portfolio positioning, the financial system and economic well-being, particularly when it comes to the notion of “volatile volatility.” Although central banks expect — and want — a greater level of market volatility overall, they don’t want to see too much turbulence. Excessive volatility threatens the central banks’ approach of generating growth through “financial repression,” and it would undermine the already tentative and struggling transition from liquidity- assisted economic gains to genuine growth.
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