Kenya Airways has turned to McKinsey & Company to draw up a restructuring plan in the face of considerable losses. The national carrier has seen passenger numbers decrease against a backdrop of added capacity, while legacy fuel hedges too have cut into operating margins. In a bid to improve its position McKinsey has developed a 24 point plan, with debt restructuring and the sale of underutilised assets key to the companies long term sustainability.
Kenya Airways, Kenya’s flagship carrier, was founded in 1977. The carrier was wholly owned by the Government of Kenyan until privation in 1996, today the carrier is a public-private enterprise between large stakeholders including the Government (29.8.%), and KLM, which owns 26.73%. The carrier currently operates 45 planes.
The national carrier has in recent years been met with considerable headwinds to its operation from structural economic conditions as well as geopolitical challenges. The airline purchased several new planes in recent years, however, due to a slump in passenger numbers, in part due to the fear brought on by the outbreak of Ebola in West Africa, regional terrorism and increased competition from Gulf carriers, the increased capacity has not translated into increased revenues. The company also invested in a number of hedges against fluctuations in the price of crude oil, which have seen the carrier lose $56 million due to paying high fuel costs even after the recent substantial drop in fuel prices.
As a result, Kenya Airways posted losses of $107.2 million on flat revenues in the six months to September last year, with a similar result booked in the same period the year previous. As the company continued to face high finance costs, depreciation of the shilling and loan re-evaluation losses, it turned to McKinsey & Company for a restructuring plan that would help it return to profitability. The consultants analysed the firm’s strategy and operations, and drew up a plan which aims to save the company $346 million over two years, largely through restructuring of the airline’s short and medium term debt for which the company is in talks with its major stakeholders. Selling excess capacity, as well as being more careful about fuel hedging too make up part of the long term strategy to help the company return to profitability.
The project was led by McKinsey’s office in Nairobi, Kenya’s capital city, which opened its doors in September 2014. Since the local consultancy team has served a range of large clients in the country, including the Co-operative Bank of Kenya (for which McKinsey developed a growth strategy) and the Government (which engaged the consultancy to design a 20 year horizon strategy for its ailing mining sector).