TOPIC 8:

AN ANALYSIS AND EVALUATION OF BUSINESS AND FINANCIAL

PERFORMANCE OF KENYA AIRWAYS (KQ) FOR THE PERIOD OF THREE YEARS
FROM 1st APRIL 2013 to 31st MARCH 2016

ACCA NUMBER:

2307859

WORD COUNT: 7043

MAY, 2017

Research and Analysis Project in partial fulfilment of the Bachelors Science Honours Degree
in Applied Accounting from Oxford Brookes
1.0 INTRODUCTION Commented [t1]: Start with the table of content, the list of
tables used in the report, list of figures,
This particular research report examined the financial and business performance of Kenya Airways in
relation to its peers and the industry at large. Kenya Airways (KQ) is in the business of passenger and
cargo air travel having been established in 1977 after the collapse of the parent regional airline East
African Airlines (Kenya Airways, 2016).

The global airline industry saw a precedent growth of passengers from 2,989 million in 2012 to 3,545
million in 2015 (IATA, 2016), but Kenya Airways and most of its African peers were not able to generate
positive net profits for the period under study (2013 -2015 (IATA,2016)). The Airline industry is complex
characterised by stiff competition and a myriad of unpredictable external events makings its analysis and
forecasting particularly difficult.

The research project was based on an inductive research approach using Kenya Airways as the subject of
the study. The major sources of data were secondary and were applied pragmatically to the research
framework. The evaluation was performed by looking at the external and internal factors that affect the
operating environment of Kenya Airways for the period of study.

The research paper focused on the financial and business metrics that contributed to the performance of
Kenya Airways between 2013 and 2015 financial years. The analysis was evaluated using an outside to
inside approach. It began with an external environmental analysis using PESTEL model, and then it
looked at the internal factors using a SWOT analysis. The PESTEL and SWOT analyses helped to
elucidate the key factors and drivers that affect players in the airline industry. A further analysis was done
by looking at the financial statement ratios to further evaluate the performance of the company over the
period of study. Emphasis was placed on the financial ratios such as operating margin, net profit margin,
current ratio, quick ratios, and debt to equity ratios.

1.1 Reason for Choosing the Research Topic

The author chose topic 8 because of his interest in entrepreneurship and management. He hopes to further
his career as an entrepreneur and an in-depth understanding of how large corporations operate and how
various strategies impact performance would be very beneficial to him. The research topic chosen would
be a great way to put into practise the theoretical knowledge gained from previous studies to an actual
organisation.

1.2 Kenya Airways Background

Kenya Airways was established in 1977 after the collapse of the East African airways that was jointly
owned by three east African countries – Kenya, Uganda and Tanzania. At its establishment it was wholly
owned by the government but was later privatized in 1996 through a very successful Initial public offer.
The government retained a 30% ownership and KLM took 26% the rest was taken by other investors
(Kenya-airway, 2016). The company stocks are publicly traded at the Nairobi Securities Exchange (NSE).

As the company grew, it got into strategic partnerships with other airlines to share their routes. This aided
in their expansion and increase in the number of passengers from year to year. The company has
experienced mixed performance over the years but it’s been generally profitable after commercialization.
The company began to experience difficulties after taking up an aggressive expansion program that
involved increasing their destinations and number of aircrafts. This led to draining of cash reserves and
massive losses over three years before the financial year ending 31 March 2016 (Kenya Airways, 2016).

The company’s major cost centres are its payroll and the high costs of operations notably high cost of
fuel. So critics have said the hedging decision made the company was not effective and reduced the profit
margins in the long term (Kenya Airways, 2016).

In an effort to lower operational costs, the company attempted to lay off staff, a move that was fought in
court and the employees won due to tough labour laws in Kenya (Mmaks.co.ug, 2017). In the year 2015
the company received a government bailout package to resuscitate the company that was almost
collapsing (Cidi, 2016). The period being researched from April 2014 to 31 March 2016, the company
recorded massive losses (Kenya Airways, 2016).

1.3 Research Objectives and Questions

An Initial look into the industry shows improvement in financial performance both globally and
regionally (Africa). However this was not reflected across the board in the African region. The region has
many growing airlines that are fiercely competing for the market share. Some of the firms have been very
profitable while most have generally struggled. Kenya airways is a major player in the African region and
this particular research sought to answer one question

a) What is the financial and business performance of Kenya Airways in relation to the industry for
the period of 2013 – 2015?

1.3.1 Research Questions

The overall objective is further subdivided into the following research questions to help further
disseminate the information:-
 a) What is the overall financial and business performance of the Kenya Airways?
b) What is the impact of operation pride strategy on the financial performance of the company?
c) What is the comparative business and financial performance between Kenya Airways and
Emirates Airlines?

1.4 Research Approach

This particular research paper adapted an inductive research approach where the main concern was the
context in which KQ’s business and financial processes developed as they did. The entire research paper
attempted to draw clear logic and patterns that affect the overall business model and how they relate to the
industry peers in the airline industry.

The research design basically looks at a single case study - Kenya airways. The company under study was
then thoroughly analysed looking at both internal and external factors, key drivers of the operating
environment.

The study looked at financial results for three years of Kenya airways in comparison with a peer company
and with industry averages. The research also looked at the various trends in the company performance by
comparing year on year performance. Using publicly available information, the research also performed a
strategic positioning analysis using both PESTEL and SWOT analyses. These were instrumental in
evaluating the operating environment of the company and form a foundation for internal analysis.

2.0 INFORMATION GATHERING

2.1 Sources of Information

This empirical study was done using quantitative and qualitative data obtained from secondary data. The
secondary data is mainly obtained from public sources such as annual reports, academic research articles,
books, journals and online sources. The secondary data has both its advantages and disadvantages

2.2 Data Collection

As stated above, the data collected was mainly secondary in nature. The data included financial
statements from annual reports of Kenya Airways, South African Airways and industry figures from
IATA website. Additionally, to further understand the process of financial analysis and the different Commented [t2]: Have you given the full name before…

methodologies several articles and academic journals had to be sought for literature review. These sources
were mainly obtained from online sources of the publishers for a fee.

Further information was obtained from books such as the ACCA text materials, recommended reading
lists on the topics of finance, accounting and corporate analysis. The quantitative data obtained from
online sources was then tabulated in spread sheets for easy manipulation and analysis. The author of the
research paper used Microsoft Excel to tabulate the quantitative data.

2.3 Advantages of Secondary Data

One of the advantages of using secondary data is that since it’s publicly available, it’s easy to sort out
which data is relevant to the research question being pursued. It’s also quite easy to validate the reliability
of such information. For instance financial statement of listed companies can be compared from different
sources to ensure that they are valid, reliable and accurate.

Another advantage of secondary data is that since it’s publicly available it’s more likely to have been
scrutinized, critiqued and corrected if there are errors. Commented [t3]: Consider whether to give advs in bullet form

2.4 Disadvantages of Secondary Data

Among the shortcomings of secondary data is that it is usually initially collected by others for their own
purpose and thus may not be reliable and effective for answering the research question being pursued by
the researcher.

With data obtained from company websites, airline industry organisations such as (IATA) International
Air Transportation Association cannot be independently verified. The research assumed that the data
obtained from the annual reports and IATA website to be of high quality. Also management books,
academic journals and articles are assumed to have accurate information when quoted.
Commented [t4]: Do not start the sentence with also… include
other disadvas such as the data may outdated, irrelevant to the
present study, voluminous for verification and analysis, biased,
skewed by the preparer.. consider use of bullets

2.5 Limitation of Information Gathering
In this particular research the secondary data was mainly in form of quantitative financial information
published by various entities. This information gives little information with regards to the rest of the
business environment or key driving factors in the industry or sector being studied.
Commented [t5]: Include other factors which were limiting you
on the same i.e. huge loads of work, ltd time, restriction of word
count, cost of accessing internent, elec outages, downtime internet
etc….

2.6 Ethical Issues

2.6.1 Ethical Dilemmas Faced
The research sought to form an opinion and recommendation on the financial and business performance
of Kenya Airways which is a publicly traded company. This may potentially bring an ethical dilemma as
Commented [t6]: Check the info pack you need to put
something on plagiarism and how you avoided that in your research
work. I have understood this in reference to you as the reasercher
i.e. not using other people work without referencing, falsification of
work, collusion, etc….

it may influence the perception of the company by various stakeholders especially if the performance is
not positive.
2.6.2 Resolution of Ethical Dilemma
To resolve the ethical dilemma, the author referenced all the financial data obtained from publicly
published sources. The samples of the financial statements used were also added in the appendix for
clarification on how opinions and recommendations were arrived at by the author.

Secondly, the author only used data that is allowable in the public domain i.e. results that were published
by the companies or available journals and hence no privacy conflicts were expected.

Finally, the author would like to state that the opinion expressed in this research paper is based on his
independent evaluation based on the methodology used. Therefore, it is should not be taken as a final
state of affairs of the company but an opinion of the performance of the company by the readers of the
report.

2.7 Accounting and Business Techniques Used

2.7.1 PESTEL Analysis

A PESTEL model basically looks at the environment in which Kenya Airways Operates. The company
has a headquarters in Nairobi, Kenya but operates in different countries and Jurisdictions and therefore
political issues could affect its performance. Air travel like all other services is affected by the economic
trends and thus the company needs to understand these trends and how to operate in them for instance
during recession or times of high fuel prices. The social trends show how people are basically interacting.
Technology is constantly defining the way people interact and concerns about the environment are
constantly defining how business is done in the current age. Legal issues cannot be ignored for operations
of the magnitude of Kenya Airways.

The PESTEL Model provides a rather large over view of the macro environment of the industry that
Kenya airways are part of. This is important as it helps to understand how the company has been able to
interact effectively with its environment and how competitive it is (Team FME, 2013) (Kim-Kueng Ho,
2014).

This model has its weaknesses as it’s subjective to the analyst’s point of view (Rastogi & Trivedi, 2016).
As an macro environmental model, it might not be very accurate to all in a particular industry as there are
other factors that could play key roles in the activities of a company in an industry that cannot be easily
defined. Another limitation is that analysis can only be done in situ which is unrealistic (Rastogi & Commented [t7]: ?

Trivedi, 2016). This basically means that the analysis does take into consideration the ever changing
factors that affect an industry from time to time.
2.7.2 SWOT Analysis
A SWOT analysis is also employed in this particular research to look at the strengths, weakness,
opportunities and threats that the company is faced with. A SWOT analysis outlook helps the researcher
to forecast probable strategies that the company is most likely to adapt to take advantage of their
competencies so as to achieve their economic goals (Riston, 2008). This particular analysis looks at the
company at the period of the study and looks to understand the internal competencies and areas it lacks
behind. This is critical in understanding how the company can become competitive in that particular
industry (Wang, no dates).

A SWOT analysis is limiting as it’s a more backward looking analysis using current and past trends to
forecast future trends. The analysis does not take into consideration strategic more taken in anticipation of
different changes or long term positions taken by the company (Riston, 2008). Another limitation of
SWOT analysis is that it’s dependent of the researcher’s perception. For instance an analyst can see lack
of shoes in a population as a weakness while another analyst may see it as an opportunity.

SWOT framework also does not recognize trade-offs. A good example would be having jambojet -KQ’s
low cost domestic arm doesn’t serve meals on their flights. This could be either termed as a weakness in
customer experience but also strength in ensuring profitability of the company (Valentine, 2011).

SWOT analysis also seems to overemphasis on accomplishments and strengths some of which might not
have theoretical underpinning factors. This may eventually lead to shallow analysis of facts based on
mere assumptions. A scenario could be when large market share could be termed as strength with the
assumption of large market share would produce better efficiency and profitability (Valentine, 2011).

2.7.3 Financial Statements Analysis

Financial statements give an insight into the financial performance of a company. An analysis of the
financial statement would require a comparison of the results over a period of time. This is called
horizontal analysis where year on year performance is traced. Using such analysis trends can be
established and highlighted in the process of study.
Financial analysis would look at the income statement to see the trends in profitability, operating
expenses and revenues. A growth in revenues shows a company is progressively growing while a relative
increase in operating expenses might imply that a company is becoming less efficient.

The balance sheet shows the relative growth of the company in terms of total assets and how they are
funded. The balance sheet figures enable the author to look at how they relate with each other. These
relationships give an insight of financial performance of the company and the stability of the company.

The cash flow statement gives an insight on how the company is able to generate cash during the period
under operation. Businesses need cash and cash equivalents to be sustainable. It’s possible for an entity to
be profitable but not have sufficient cash to run its short term operations and this may affect its overall
liquidity. Therefore, the cash generation status of the company is a key indicator of financial health of a
company.

2.7.4 Ratio Analysis

Kenya airways exist as a profit making venture and therefore the stakeholders are keen on economic value
added by its operation. Financial accounting information helps to understand the economic value addition
operation of the entity. Financial ratio analysis helps to further disseminate the financial accounting
information and also to do comparative analysis. These helps to check the financial strategy of the
company and also its effectiveness in utilizing the resources it has to add economic value to the
shareholders (Bajkowski, 1999) (Adedeji, 2014).

This method of evaluating the performance of Kenya Airways has its limitations. One of the limitations is
that it relies heavily on financial accounting which is prone to various biases. A good example of such
biases is the method of valuation of assets, liabilities and revenues could be subjective. These methods are
also preferred differently in different jurisdiction and therefore comparing a company operating from one
country to another company based in a different country could inappropriate. Comparative analysis is not
accurate since other company’s accounts could be prepared using different accounting standards. Another
problem that arises from using financial accounts is differences in estimates, methodologies and
classifications of items in financial statements. When performing trend analysis the time value of money
may be ignored as there is inflation of money and hence leads to inaccuracy. This however can be
rectified by a lengthy process of adjusting for inflation.
3.0 RESULTS AND ANALYSIS

Overview
Kenya Airways as a business entity can be classified as an open system. An open system is one that
interacts with elements both within its boundaries and those outside its boundaries to achieve its
objective. The external environment in which it exists therefore contributes to the performance of the
business as a whole. In the paragraphs below, this research report shall evaluate the environment in
which Kenya airways operates in and how it affects the overall performance of the company as a whole.
A PESTEL analysis will give us insight to the global airline industry as a whole while the SWOT analysis
would bring it closer by looking at the capabilities of Kenya Airways and how it is affected by its
environment. Finally, the analysis shall also look at the business and financial performance data to
evaluate and come up with appropriate conclusions and recommendations.

3.1 PESTEL analysis

PESTEL analysis is important to evaluate the strategic position of a company in the macro environment.
This analysis looks at the political, economic, sSocial, technological, environmental and legal issues that
affect Kenya Airways operating environment.

3.1.1 Political factors

Kenya Airways has its headquarters in Nairobi and is partially owned by the government of Kenya. This
ownership has its advantages and disadvantages. One of the main advantages is that it has access to funds
from the public treasury as evidenced in the previous bailouts in the recent past (Cidi Naomi,2016).
Another advantage would be that it can easily influence public policy in its favour. A disadvantage would
be political interference in management which might lead to bad policies and decisions that could affect
the company in the long term.

The government is also keen on developing air transport as a way of improving the economy through
trade and tourism. This is a favourable condition for air transporters as there are efforts to reduce tariffs
and increase efficiency across the country. Strategically Kenya Airways as an early entrant is well
position to take advantage of good government goodwill to ensure that it capitalizes to keep its
competitive edge.

The Kenya government also has a development plan called vision 2030 in which it hopes to achieve
middle income economy status by the year 2030. In this particular plan there are plans to build more
airports and make air transport more efficient to improve numbers. It’s also expected that the country’s
main airport would also be refurbished and expanded to international status to make it a hub in the region
(Kenya Vision 2030, 2011).

3.1.2 Social Economical Factors

The global economy and that of Eeast African economy by extension have been growing steadily for the
past years and the trend is expected to persist for a few more years (Focus-Economics, 2017). This
presents a favourable trend for air travel as more people have better income which means they can travel
more. Also more people are becoming more aware of air travel and its becoming culturally acceptable so Commented [t8]: ?

traffic numbers have increased and its forecast to further increase.

Growth of the economy has also seen a corresponding growth in trade especially in agricultural products
that are routinely exported to the rest of the world by air transport.

3.1.3 Technological factors

With regards to technology, the company is keen embracing technology as it’s the new competitive field
in the modern world. The booking and reservation system has been made available online and thus reduce
the number of staff and related costs that the company could have incurred. Technology has seen newer
more modern and efficient airplanes produced. Kenya airways’ fleet expansion program was aimed at
ensuring the company had the newest and most technically advanced planes in their fleet. These
technological factors all go to improve customer experiences and effectively improve the company’s
competitive advantage.

3.1.4 Legal and environmental factors

The Kenyan legal system is fairly advanced and thus can be both advantageous and disadvantageous.
Some of the key things to be noted that have adversely affected Kenya airways is the strong labour laws
that make it difficult to cut on staff. The previous attempt was fought in court and the employee won the
case in which Kenya airways had to employ them back (MMAKS, 2017). This adversely affecteds the
cost cutting measures and plans they might have had. The corporate governance laws are also not as well
developed as they should and thus there are some loopholes for unethical behaviour among the executives
who profit at the expense of the shareholders.
3.1.5 Remarks of the PESTEL analysis
The environmental analysis of the airline industry show that the major factors to profitability of a
company would be the economic factors such as prices of fuel, GDP growth. These have been favourable Commented [t9]: Have you indicated the same in full??

as GDP is generally on the upward trend while fuel prices are reducing this ideally should reflect on
increased turnover, reduction in costs and higher profit margins for airline. Another key element that Formatted: Highlight

was picked up from the PESTEL analysis was the political component. Kenya airways being part owned
by the government means it enjoys political goodwill and sometimes access to funds and favourable
policies. Another political threat that has recently emerged is global terrorism; such incidences cause Formatted: Highlight

reduction in air travel as fear creeps into people. Thirdly, technology is a key player in the industry as
ecommerce picks up and the production of better planes that are more fuel efficient. Lastly, the
environment is also a factor that immensely influences air travel for instance adverse weather is not
favourable for the industry.

3.2 SWOT analysis

Overview
SWOT analysis provides a strategic positioning of Kenya airways both internally and externally. The
analysis provides the internal strengths that the company has and its internal weaknesses. It also looks at
the external opportunities and threats affecting the company. These factors aid in providing a detailed
outlook of the entire company in regards to competitiveness in its market for the near future.

3.2.1 Strengths
- Partnership with KLM provides support for the organization in terms of management expertise
and access to global networks needed for a growing airline.
- KQ has a head office in Nairobi, which is commercial and financial hub in the eastern Africa Formatted: Highlight

region that provides easy access to all corners of the African continent.
- KQ has a well-developed network in Africa – it currently flies to 46 African cities
- It has an excellent presence in the region it operates
- The government of Kenya is a major shareholders and therefore provide easy access to capital in
case of need or to bailout against unfavourable performance

3.2.2 Weaknesses
- KQ is usually faced with frequent labour disputes
 - Poor business model that have resulted in numerous losses over the recent past

3.2.3 Opportunities
- There is increased trade between African countries which provides opportunities for increased air
travel
- With growth in African economies there is a relative increase in disposable income in the region
which can be tapped by the airline industry to grow its revenues
- KQ has increased its fleet size and started new routes which provide opportunities for increased
business.

3.2.4 Threats
- There is competition from a trend to modernize other forms of transports like more efficient road
and rail network that would reduce the demand for air transport
- The cost of aviation fuel has been on the increase and generally fluctuates which might make the
industry unstable
- the African aviation market is attracting global players who had kept away and thus challenging
the strong position that Kenya airways had in the region
- there is also a growth of low cost airlines that provide similar services but at lower rates as
compared to Kenya airways

3.2.5 Remarks on Kenya Airways SWOT analysis

The company has a great opportunity to tap into the African market which is growing rapidly and its
location in the East Africa business centre makes its quite strategic. Some of its main threats to its own
success are poor strategy by its management, political interference and competition especially by low cost
airline.

Generally the company needs to leverage its strengths so as to capture the opportunities and also work on
its weakness and try to eliminate or reduce the threat exposure.
4. Financials and business performance of Kenya Airways

4.1. Revenue generation

Revenue in Kes (Million)

140,000
120,000
100,000 Total Revenue
80,000 Passenger

60,000 Freight & Mail

40,000 Handling
Other
20,000
-
2014 2015 2016

Kenya airways managed to consistently grow its turnover year after year. In the year ending
March 31st 2016 the company generated 116 billion Kenya shillings which was a 5% growth
from the previous year. In comparison the global airline industry has seen major fluctuation in
revenues there was a 2.1% and 4.3% growth in years 2013 and 2014 respectively and a decrease
of 4.4% in the year 2015.

2013 2014 2015

Revenue (Kes Mil) 106,009 110,161 116,158
% Change 4% 5%
Table: Revenue growth for Kenya airways

2014 2015 2016

Revenue AED mil 80,717 86,728 83,500
%Change 7% -4%
Table: Revenue growth for Emirates Group

2013 2014 2015

Revenues $ Billion 720 751 718
% Change 2.1 4.3 -4.4
 Table: Global change in revenue in the airline industry

From the turnover growth it can be noted that Kenya Airways revenue generation capacity has
significantly outperformed the industry and its peers. It shows improved efficiency in the process of
converting its assets to generate revenue. The industry has constantly seen an increase in passenger air
travel and this could be the explanation why Kenya Airways has managed to grow its turnovers.

Traffic Volumes

2011 2012 2013 2014 2015

Passenger growth, rpk, %

6.3 5.3 5.2 5.7 7.4

Scheduled passenger numbers, millions

2,864.0 2,999.0 3,152.0 3,328.0 3,568.0

From the pie chart below it can be noted that passenger travel accounts for over 81% of the total revenue
for all the years. This particular specialization has enabled the company to stay ahead of other companies
in regards to turnover growth especially in the year 2015. In comparison most airlines had passenger
travel constitute an average of 72% of their total turnover from IATA data.

Revenue distribution '14 Revenue distribution '15

2%
4% 2% 7%
9% Passenger
9%
Passenger
Freight&
Freight& Mail
Mail
Handling
Handling
85% Other 82%

Other
 Revenue distribution '16
2% 9%
8% Passenger
Freight& Mail
Handling
81%
Other

2013 2014 2015

Total Revenue $ Billion 720 751 718
Passenger Revenue $ Billion 539.0 539.0 518.0
% of total revenue 75% 72% 72%
Table: Global Airline Revenue Distribution

4.2. Profitability Analysis

4.2.1 Operating Profit Margin

The operating profit margin is a ratio that is used to evaluate the operational efficiency of a company to
generate a profit from its turnover. Over the three year the company has consistently had a negative
operating margin. This is an indication that the business model and the operations are not able to generate
a profit. In the year 2014 the company embarked on a restructuring program named operation pride in
which it saw an improvement in operating margin from -15% to -3.5% which is an indicator that the
company is headed for better performance in subsequent years.
Operating Profit Margin (%)
2013 2014 2015
Kenya Airways -3 -15 -3.5
Emirates 5.3 6.8 10
Industry 3.5 4.7 8.3

From the table above it can be noted that operating margins grew similarly across the industry and even
for the Emirates our chosen comparator for this particular project.
 2015 2014 2013

Revenue 100.0% 100% 100%

Direct costs -58.4% -69% -71%
Fleet Ownership costs -25.5% -24% -12%
Restructuring costs -19.6% -22% 0%
Overheads 0.0% 0% -20%
Operating expenses 0.0% 0% 0%
Operating (loss)/profit -3.5% -15% -3%
The table above shows the distribution of operating expenses as a percentage of revenue. It can be noted
that direct costs have significantly reduced while fleet ownership costs increased over the three years. The
reduction in relative direct cost could be attributed to restructuring process that might have made the
operations more efficient. Also direct cost reduction could be as a result in progressive low jet kerosene
prices, fuel accounts for about 30% of the overall expenses in the airline industry.

2011 2012 2013 2014 2015

Fuel, $ Billion 191.0 228.0 231.0 224.0 180.0
% of expenses 30.7 33.2 33.2 31.3 27.3
Crude oil price, Brent, $/b 111.2 111.8 108.8 99.9 53.9
Jet kerosene price, $/b 127.5 129.6 124.5 114.8 66.7

300.0

250.0

200.0
Jet kerosine price, $/b
150.0
Crude oil price, Brent,
100.0 $/b

50.0

-
2011 2012 2013 2014 2015

The fleet ownership costs were due to increase in the number of planes purchased in the year 2015 and
2016. Also notable the restructuring costs are quite high accounting for 22% and 19.6% of total revenue
generated but the results can be seen on the year 2015 where there is an improvement in the operating loss
margin.

4.2.2 Net Profit Margin

The net profit margin for Kenya airways was worse of as compared to its peers in the industry. The
industry average was 2.7% net profit margin while it had an average net loss margin of -16% over the
three year period.

Net Profit Margin (%)

2013 2014 2015
Kenya Airways -3 -23 -22.6
Emirates 4.2 5.5 8.8
Industry 1.5 1.8 4.9

Vertical analysis of other expenses further elucidated the trends in profitability of the company. It brought
out the fact that finance costs have been on the increase from 2% of revenue in 2013 to over 6% in 2015.
Also quite significant in fair value losses on fuel derivatives for the years 2014 and 2015 which could be
attributed to poor fuel hedging strategies employed by the company.

2015 2014 2013

Finance costs -6.1% -4% -2%
Fair value losses on fuel derivatives -3.6% -7% 0%
other gains and losses -9.3% -1% 0%
(Loss)/profit before income tax -22.5% -27% -5%
income tax credit/(expense) -0.1% 4% 1%
(loss)/profit for the year -22.6% -23% -3%

From the table above other gains and losses are also significant costs to the company especially in the
year 2014 and 2015. These losses were mainly due to poor foreign exchange hedging positions taken by
the company over the period.
 4.3 Liquidity and Solvency

4.3.1 Current and Quick Ratio

The current ratio gives the short term liquidity of the company as is an indicator of how well a company is
able to manage its day to day operation. It basically looks at the ability of a company to meet its short
term obligations using its current assets. A current ratio of above one (1) means that an entity is able to
comfortably meet its obligation using its current assets. The closer to one the better the short term
liquidity status and an indicator of lower liquidity risk.
Current Ratio
2013 2014 2015
Kenya Airways 0.46 0.51 0.40
Emirates 0.84 0.80 0.82
Industry

Kenya Airways current ratio for the three years has been 0.46, 0.51 and 0.40 respectively for the three
years while it has been 0.84, 0.8 and 0.82 for the same years for Emirates. The lower current ratio is an
indication of a lower ability to generate cash from its operating and financing activities as compared to
emirates. The low current ratio has been due to negative cash flows for the years of 2013 and 2014 and a
net cash flow of 1.56 billion in 2015. From the cash flow statement it can be noted that repayments of
borrowings significantly grow over the three years due to heavy borrowing to finance the restructuring of
the company’s operations.

2015 2014 2013

Repayments of borrowings (34,730) (33,071) (13,096)
 Repayments of borrowings
0
2015 2014 2013
-5,000

-10,000

-15,000
Kes Millions

Repayments of
-20,000
borrowings
-25,000

-30,000

-35,000

-40,000

2015 2014 2013

Net cash generated from operating activities 6,362 1,214 2,738
Net cash generated from/(used in ) investing activities 5,715 (76,766) (31,878)
Net cash (used in)/ generated from financing activities (10,517) 67,601 25,965
Increase/ (decrease) in cash and cash equivalents 1,560 (7,951) (3,175)

The quick ratio is obtained by dividing the current assets less inventory with the current liabilities. This
ratio also gives a measure of short term liquidity of a company; it is more particular to actual current
assets that can be easily converted to pay for short term obligation. The higher the ratios indicate a good
cash or liquidity position while a low number indicate the poor cash position. Kenya Airways had quick
ratios that were almost 0.3 points below Emirates which makes the company more risky financially and
potentially unstable.

Quick or Acid Ratio

2013 2014 2015
Kenya Airways 0.43 0.49 0.38
Emirates 0.79 0.75 0.76
 quick ratio
Kenya Airways Emirates

0.79 0.76
0.75

0.49
0.43
0.38

2013 2014 2015

4.2.1. Debt to equity ratio

The debt to equity ratio provides the state of solvency of the company over the long term. It basically
shows how much of the company’s capital base is based on debt as opposed to owners’ equity. From
the analysis indicated in the table below it can be noted that debt to equity ratio for the company was
negative for the three years. It can be noted that there was a significant improvement in the debt to
equity ratio in the year 2015 from the previous year. A negative debt to equity ratio indicate that the
company’s has a high solvency risk as its equity cannot be used to offset the debt burden that it has. In
comparison Emirates its peer has positive debt to equity ratio having maintained at an average of 1.63
for the three year period.

Debt to Equity Ratio

2013 2014 2015
Kenya Airways (2.84) (24.24) (3.86)
Emirates 1.67 1.69 1.55
The overall long term solvency position of the company remains to be very poor despite increase in
turnover. It has not managed to create positive returns for the three years and as a result the capital and
reserves have been depleted. This coupled with heavy lending has made the company’s debt to equity
ratio to be in the negative.
 4.2.2. Interest Cover
Interest cover mainly looks at the ability of a company to pay its financing costs using the profits
generated. It can be noted that the company has a negative interest cover; this implies that the
company has a poor solvency state as compared to its peer company. This is an indication of over
borrowing by Kenya Airways and makes it a risky company over the long term and highly unfavourable
for investors

Interest Cover
2013 2014 2015
Kenya Airways -1.1 -5.28 -2.7
Emirates - - 12.45

An ideal interest cover should be positive at least so the company must first generate a net profit.

4.3. Remarks on financial and business performance

The financial and business performance analysis using the financial statements has looked at three
critical areas which are profitability, short term solvency and long term solvency. It was noted that the
company did not manage to generate an operating profit and net profit for the years under review. This
was with the backdrop of increasing turnover over the years. The direct costs also increased mainly due
to restructuring and increase in fleet ownership costs. Also, the loss making trend led to massive
borrowing and consequently high finance cost over the three years. The hedging positions taken by the
company with regards to fuel derivatives and foreign exchange were also poor as occasioned by losses
on the income statement. The overall net loss position improved from 2014 to 2015 giving an indication
that the company is headed to profitability and that the restructuring program was becoming successful.

With regards to short term solvency the company’s position is also poorer than industry standards and
needs to put in strategies to ensure sufficient short term resources are available to reduce solvency
risks. Majority of the cash generated from the company was from financing activities as opposed to
either operating or investment activities. This shortage had to be filled through financing but it’s still
below industry level standards and better strategies need to be put in place. The overall solvency trend
is on the negative as the current ratio move from 0.56 in 2014 to 0.40 in 2015. This is an indicator that
Kenya Airways continued to struggle with regards to short term solvency.

The long term solvency levels as highlighted by the debt to equity ratio show a very poor position for the
company. This is as a result of poor profit levels that make it necessary to borrow heavily and also obtain
a bailout package from the government of Kenya in order to stay afloat. The interest cover levels also
showed the ability of the company to generate enough profits to cover its loans and borrowings was
below its peers. The interest cover was negative which means that the company is not realistically able
to cover its obligations without further borrowing. The trend in interest cover ratio improved in the
2015 as restructuring efforts take root.

5. Conclusions
This particular research was aimed at answering the question what was the financial and business
performance of Kenya airways for the period of three years to 31 March 2016. An evaluation of the
industry was the first logical step in order to bring out the external factors that influence the
performance of the Airline using the PESTEL model. A SWOT analysis was also performed to further
understand the strategic capabilities of the company and how it is positioned in its market niche.
Further on the research went on to do a financial statements analysis where the aspects of profitability,
short term solvency and long term solvency were used to evaluate whether the company was
performing good or poorly and deduct logical reasons for the level of performance.

PESTEL analysis gave the external macro environmental factors affecting the performance of Kenya
Airways. The PESTEL analysis showed that air travel enjoyed improved uptake due to social economic
trends especially with the growth of the industry in Africa. The statistics indicate that economic growth
is tied to growth in air travel and Kenya Airways has Africa as one of its main revenue centres. The
analysis showed that Kenya airways’ ownership by the government was beneficial especially in regards
to policy and financial support. The government support also gives the company some credibility and a
level of security even in years of poor financial performance. The industry is also affected by ever
changing international political environmental and legal regulations. In general, the industry is affected
by many complex issues but in the recent times the major issues are terrorisms, climatic conditions,
political issues and economic issues especially fuel prices. Not considered in the analysis would the
period shocks and events that affect the airline industry from time to time. These events cannot be
easily predicted but can affect the business and managers need to have sufficient strategies to be able
to operate smoothly.

The research concluded that the financial and business performance of the company was poorer that its
peers for the period under study. The research has shown that despite increase in turnover and
reduction in fuel costs the company has not been able to generate profits. The loss making trend
showed that the operations of the company’s business model were not optimal. Among the notable
strategic flaws of the company was its hedging strategy that led to significant losses. The massive losses
by the company necessitated an expensive restructuring process that had not yielded profits for the
three years under study. The company struggled to stay afloat as indicated by both the long term and
short term solvency ratios analysed. However, the general trend is that the company is headed towards
profitability as its changes its business model. It also needs to carefully look at its hedging practises as it
is a key source of its costs that chip away the revenue generated.

In conclusion, the business and financial performance was influenced by a myriad of external and
internal factors. The external factors were common to all players in the industry such as terrorism, low
cost of fuel and growth in GDP. The company did not take advantage of the favourable external factors
to grow wealth for its shareholders. Internally, the management did not run a profitable business model
and as a result ended up with massive losses for the three year period. From 2014 the company
undertook a restructuring process that began to bear fruits though the company did not achieve overall
net profitability. The status of the company remains at risk due to high debt to equity ratio and poor
liquidity status.

6. Recommendations
From the conclusion above, it can be noted that the business performance has been below industry
standards and the company is at a high solvency risk due to its debt burden. The research recommends
a change in the management of the organisation to implement a strategic restructuring to ensure that
the company becomes profitable.

The research further recommends a further research on the specific strategies implemented by the
management that resulted in the losses. This would be helpful for scholars, business managers and
policy makers in understanding the airline industry and factors that influence its performance.

This particular report further recommends to investors and other stakeholders to be cautious with the
company though it shows some positive trends in profitability. The long term solvency and liquidity
positions indicate a high level of financial risk and must be adequately raised to reach industry standards
for the company to be competitive. The company also needs to grow its turnover levels and a much
higher levels to reflect the growth in region for it to generate profits.
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