How loss-making KQ paid firm Sh2.3b in six months

By Paul Wafula | Friday, Sep 30th 2016 

Kenya Airways aircraft,a member of the Skyteam flies over the dark clouds above the Jomo Kenyatta International Airport,Nairobi. Photo/Elvis Ogina

Kenya Airways paid consultancy firm McKinsey and Company a staggering Sh2.3 billion in six months at a time the airline is struggling to remain afloat.

Invoices seen by The Standard on Saturday show that the consultancy firm, which is helping the airline implement its restructuring plan, has been drawing about Sh43 million every week since March this year as weekly fees.

This has emerged as one of the most expensive consultancy bills in Kenya's corporate scene, even as management continues to defend itself against concerns that it may not be getting value for money.

The Standard on Saturday shared with the airline’s boss a copy of the document detailing the invoices by the consultancy firm in an effort to establish if the money it was being paid was in line with industry standards.

Mbuvi Ngunze, Kenya Airways Chief Executive Officer declined to comment on the specifics of the contracts because of privacy clauses, but maintained the company had been awarded the contract competitively.

“The contract was competitively done and its implementation ioverseen by the board. I cannot speak on the specifics. They bid for the tender and I cannot disclose the details,” Ngunze said.

However, insiders say the firm, which was hired early this year, bills for its services in dollars and the weekly fees are hurting KQ's cash flow given that it is currently operating largely on debt.

In addition to the weekly fees, the company also bills the airline for various services, among them performance and professional fees.

For instance, an invoice number 127CM dated September 19, 2016 of Sh43.5 million ($435,000) was received by the airline for “implementation stage weekly fees”. Similar invoices were entered in March, April, May through to September.

On August 14, the firm invoiced a Sh46.4million for professional fees. Similar fees were entered for December, January and February. There have been about 40 different invoices entered in the period.

The single-largest invoice was in July and September when it billed Sh290 million and Sh600 million as performance-based fees.

McKinsey was brought in after the airline made cumulative losses of Sh52 billion in the last two years, throwing the national carrier into its biggest financial distress in the last decade.

PAINFUL DECISIONS

McKinsey officially set up shop in Nairobi in 2014 and has become a favourite of blue chip companies and moneyed government parastatals, especially in turnaround and restructuring operations.

The New York-based firm was hired by East African Breweries Limited (EABL) to advise it on how to increase efficiency of the movement of its products from its Ruaraka factory to distributors and later on to thousands of retailers across the country.

The firm has also done some work for National Bank of Kenya (NBK), Kenya Commercial Bank (KCB) and the Kenya Revenue Authority (KRA) among other local companies.

In a bid to stem the losses, the airline has had to take painful decisions and had to sell some of its assets to free up money to meet its daily obligations.

 

So far, it has fired almost 100 employees in its restructuring plan known as “Operation Pride” and it is preparing for the second phase of sackings that will see off another batch of employees.

The company put up for sale a prime plot in Embakasi and has also sold parking slots at Heathrow. It has also sold a number of planes and leased others. Since March this year, the company sub-leased two Boeing 787 and three Boeing 773 aircraft as part of the turnaround initiatives aimed at increasing its liquidity.

“We are talking on the side even as we deal with capital optimisation, with different interested parties. It is good for the board and other shareholders to have a perspective on who is interested in terms of the future share capital of KQ,” Ngunze said.

The airline declined to name the companies that have shown interest in the company's shares. It is understood that a Middle East carrier is among those that have bid to buy the airline.

“Today, we are talking to about three or four parties and that is not an exclusive group,” he said.

The airline is also shaking up its management, with replacements both at the board and the senior management levels.

Those who have left include its long-serving finance director Alex Mbugua and former chief operating officer (COO) and fleet director Rick Sine. Others who have exited include Gerard Clarke (commercial director) and Alban Mwendar (human resources director).

The exits were given momentum by a series of pilot strikes since October last year. The airline is also facing persistent pressure from pilots who want a complete overhaul of the management team.

“We are constantly in conversation with all the unions to support optimisation of this business, productivity and operation pride. We are making progress but there are tasks that are tough on us from them and vice versa,” Ngunze said.

The airline has also been losing dozens of technical staff to competitors, especially to Middle East carriers.

“On attrition, it is true that there has been a number of engineers who have left for the Middle East carriers recently. We have been training people to deal with a back fill. But we are looking at initiatives to maintain our technical staff,” Ngunze said.

He did not however say how many technical staff had left from it’s over 600 employees in the engineering department.

The airline has also received a forensic audit by Deloitte that was expected to unearth the inefficiencies and weakness in the airline.

DISCIPLINARY ACTION

“The report is more than 1,000 pages and we cannot name the individuals before we have enough evidence. But we shall take the necessary action be it disciplinary or otherwise. Action has already began,” Mr Dennis Awori, the airline’s chairman said.

Mr Awori declined to reveal the names of the people mentioned in the report or the key findings unearthed by the forensic auditors.

The other major cost for the airline has been maintenance of its aircraft in addition to the other operational costs and employees.

But its the business turnaround plan code named Operation Pride that the airline is hoping to help it fly out of turbulence.

“The programme is based on the results of an internal business review which identified the fact that the group was carrying excess capacity relative to its commercial ability to utilise this capacity, resulting in flat revenues,” the airline says in its financial report.

“The group was also incurring high costs, and was operating in a challenging environment with significant external impacts, all leading to consistent under performance of the business,” the report explains.

The airline told shareholders that the company had received the full Sh20 billion bridge financing to support its turnaround.

“We received Sh10 billion from the government of Kenya, being the second tranche of the Sh20 billion bridge financing that has been on lend from the African Export Import Bank.”

The company has Sh142 billion in debt and it says it is now negotiating with the lenders to obtain waivers for non-compliance with certain financial covenants as at 31 March, 2016

Currently, the airline is servicing loans from at least eight different lenders, among them the Government of Kenya and international banks.

Co-operative Bank financed the acquisition of an Embraer spare engine. The loan was to be repaid over a period of five years starting June 2012. However, this was consolidated with existing Co-operative Bank short term loans during the year and repayment period extended to seven years.

The short term facilities were drawn down from Equity Bank, Jamii Bora Bank, KCB, Commercial Bank of Africa, I&M Bank, Chase Bank, National Bank of Kenya, Diamond Trust Bank, Co-operative Bank, NIC Bank and Eco Bank for the financing of pre-delivery payments for ordered aircraft.

During the year, the airline negotiated for extended repayment periods for all short term loans ranging from four to seven years except for a KCB loan which had not been concluded as at 31st March, 2016.