 Graphic Illustration by: Conrad Karume
Indeed, over the last one year, the value of his shares have fallen by half—reflecting the fall of Kenya Airways share price from a peak of Sh146 on September 20 last year to a new low of Sh60 that it hit yesterday. This was a 15 per cent decline in two weeks.
Though the general market as measured by NSE 20 Index and AIG 27 Index—both of which have fallen by five per cent in the last year, Kenya Airways has been sliding at a far worse momentum, which has seen the share under perform the returns that shareholders would have gained by putting their money in other stocks by between 42 and 47 per cent.
Over the last five years since Mr Naikuni took over as CEO, Kenya Airways has outperformed the NSE 20 Index by 206 per cent and the AIG 27 Index by 150 per cent.
After Kenya Airway’s poor profit showing, which saw net profits falling by Sh457 million to Sh1.9 billion in the first half of its fiscal year, in spite of revenues growing by Sh1.8 billion to Sh30 billion, investors started fleeing the share all week forcing it to a new historical low.
Granted, Kenya Airways is a hugely successful and profitable company compared to its peers around the world, but the message that now seem to be coming out of the market is that investors are starting to doubt the ability of the management to digest the problems that have come with the fast expansion strategy.
So far the company has more than doubled its revenues from Sh27 billion when Mr Naikuni joined in 2003 and this is expected to hit Sh60 billion in the current financial year. Profits too have grown tenfold from Sh417 billion to Sh4 billion in the same period.
However, unless fortunes turn rapidly to Kenya Airways’ side, Mr Naikuni is unlikely to beat the earnings that the company delivered last year and this is expected to spook investors and the big question will remain whether he will manage to execute the operation strategy of the expansion. This will leave Mr Naikuni with three unhappy constituents: shareholders, customers and employees.
The worries over the ability to digest the expansion, say analysts, goes to the heart of the valuation of the company because the first signs that a company cannot sustain its growth momentum starts with service, before it starts affecting liquidity and the capital structure.
So far, with the business generating nearly Sh3 billion in free cashflows in the first half of the year, the airline is still very strong, but the real test will come with the additional fleet and route expansion that is planned.
Last week Friday, Mr Shah was among a gaggle of investors and analysts who questioned Mr Naikuni over the mounting operations problem that have started eating into KQ’s earnings.
Mr Shah who claims that his family had recently lost money as KQ’s share price fell expressed his disappointment at an investors briefing held at an upscale Nairobi hotel. He pointed at two issue that are affecting the airline’s performance: poor customer service that has come from rapid and massive expansion.
“New aircrafts do not mean much, right now they are a waste of resources and they need to look at their current operations,” he added.
Shareholders who have been faithful to the airline are now turning to other airlines for better services.
 Mr. Titus Naikuni
Mr Shah is one of the many Kenya Airways shareholders who are disheartened with the performance of the airline. Speaking during the release of the half year results Mr Shah expressed his disappointment in the airlines stating his family, who own millions of shares, has lost millions of shillings on the airline’s share.
According to Mr Shah there are many issues that have led to the poor performance including poor customer service and the rapid expansion.
These issues had been brought to light early in the year through media coverage of an controversial internal memo that Mr Naikuni had written to his staff (see separate story page 5). These pressures have seen Kenya Airways facing a high staff turnover ratio and low morale.
However, in retrospect, Mr Naikuni’s memo, as much as it was interpreted to be a strategy of enforcing stretch limits, attained the unintended consequence of acting as a warning sign to investors. It also gave the first real glimpse of the internal pressures that the company has been struggling with to cope with its expansion strategy and come to terms with the Cameroon plane crash in May and growing competition in both the cargo and passenger markets.
In a press statement Kenya Airways chairman Evanson Mwaniki, noted that “the continued weakness of the US dollar and the relative strengthening of the shilling is having an adverse effect on foreign currency dominated revenues when reported in Kenya shillings.”
Though the company managed to hedge the risks that come with fuel price fluctuations, it only managed to cut on the fuel cost down from 30.6 percent in the previous year to 27.8 percent in the half year ended September. As oil heads to $90 per barrel, the energy outlook does not augur well for the company. Fuel costs remain to be the highest of all its expenses.
“While the company will continue to grow during the reminder of the financial year it has concerns about the cost of jet fuel that currently continues to escalate,” said Mr Mwaniki. What seems to have paid off for the company has been its strategic addition of routes in Africa and an additional trip to Paris.
West Africa despite the crash in Douala, recorded an increase of about three out of every 10 new passengers carried to any destination by the airline.
Reeling from the loss a plane in May this year, KQ has had to deal with tight airline schedules as capacity constraints continue to bite, despite an increase in passenger numbers. The airline also faces stiff competition from new market entrants who have stepped up their presence in KQ’s key routes.
While stock pickers paint a gloomy picture for KQ in the short term, strategic alliances and increased revenues from higher passenger flights, depict a stable future for the airline.
Though the share has received a beating in the last few weeks, analysts continue to be upbeat about the company’s strategy for penetrating the West African route network.
The firms revenues in Africa in 2007 was Sh24 billion compared Sh21 billion in 2006, this outshines Europe where it reported a turnover Sh18 billion in 2007 compared to Sh16 billion in 2006/ Africa remain Kenya Airways’ gem.
However, analysts point to the problem in the Middle/Far East routes where Kenya Airways is losing quite a substantial amount of business to the likes of Emirates and Gulf Air, and this may pose a threat in future to their African routes as Emirates expands rapidly into the continent.
Additional reporting by Emmanuel Were
Related Story:
KQ chief saw it coming with memo in MarchBy Wangui Maina
 In November last year, Mr Titus Naikuni, the Kenya Airways managing director, seemed to have received some revelations that some bad quarters were on the way.
In March this year, the Business Daily reported that Mr Naikuni had sent a scorching memo to the airline’s staff, warning of a need to shape up or risk grave financial under performance for the company.
True to the predictions, KQ last week reported that its next profits had fallen by Sh457 million to Sh1.9 billion in the first half of its fiscal year, despite revenues having grown by Sh1.8 billion to Sh30 billion. The real culprit was Sh2.5 billion increase in operating profits, a part of which came from inefficiencies that came with the rapid expansion.
In the memo issued in January and based on the airline’s internal performance figures at the end of November 2006, Mr Naikuni unveiled a catalogue of deteriorating performance and missed targets: “The net result is that we are below budgeted after-tax profit by a whopping 22.9 per cent”.
Announcing a set of drastic initiatives to correct the slide, KQ has assigned the company’s directors to weekend duties at JKIA airport, put technical managers on 24-hour call, accelerated recruitment, and triggered new communication and training programmes.
KQ had in March issued its third quarter trading statement, reporting a nine per cent increase in passengers compared with the same quarter the previous year.
The statement showed that with large capacity increases, ranging from 10 per cent to 40 per cent over a 12-month period across all regions, except Europe, cabins on all flights remained more than 70 per cent full, only a few percentage points lower than prior to the expansion.
Nonetheless, the deterioration in operational performance, said Mr Naikuni, had been “horrifying.”
In dramatic terms, Mr Naikuni said the airline was behind target on passenger numbers, cargo tonnage, and all operational performance targets – with just 29 per cent of flights from Dubai now arriving on time — as well as missed targets across all revenues, through passengers, cargo, handling, excess baggage, and Galileo.
“This is our company,” he concluded, “if we destroy it then we are destroying ourselves.” His call to arms came at a time when KQ had started an ambitious expansion programme alongside announcements from some of the world’s leading airlines of entry into its market. Few months later, the airline would lose a new plane in Cameroon in a horrific crash that had no survivors.
The expansion has caused major lapses in customer service, leading to an unusual increase in the number of passenger complaints. Regular travellers report that the problems worsened markedly in December — a high season month.
All these problems were popping up as rivals such as Singapore Airlines and Virgin Atlantic were gearing up to enter the Kenyan market. This triggered a loss of KQ staff, as poaching became rife.
In addition, the market was beginning to attract attention from the so-called low-cost airlines.
These competitors, now reaching out fast into international routes, have learned how to keep their $100m planes in the air for more hours in every 24, getting better returns on the dollars tied up in the machines.
Seizing upon the Internet, they have revolutionised booking, getting passengers to buy their tickets on-line and pay up months in advance, squeezing out travel agents’ commissions.
Passing on some of the benefits to travellers, in the form of cheaper tickets, low-cost carriers can undercut network airlines, with their high overheads, cumbersome mix of long and short-haul routes, and expensive sales programmes.
To cut costs and win travellers by offering more destinations, network carriers have begun to merge and form alliances, such as KQ’s own codeshare with KLM, helping to draw passengers onto their long-haul routes, which are usually the most profitable arm of any network airline.
But even those long-haul routes are facing intensifying competition. It is against this backdrop that Mr Naikuni was warning of diminishing service levels and below-target take-up of its expanded capacity.
“December was a horrifying month to most of our customers,” he says.
The proportion of on-time arrivals for the airline fell from near 80 per cent to just over 50 per cent between October and December last year. In examining the causes, he assigned the blame far and wide, from passenger handling, to technical hitches, cargo loading problems and even crew-related hold-ups.
At airports, he cited VIPs left and forgotten only to meet rudeness when seeking assistance. And reports of poor customer service from the airline’s outlying stations in Dubai and Khartoum.
At the financial level, the memo revealed the greatest revenue under performance for Galileo, the ticket reservation system, where sales were set to be 20 per cent below target for the nine months to end-December. Cargo revenue was 10 per cent below target, and passenger revenue some 7.5 per cent. Source: Business Daily Africa |
