KENYA AIRWAYS SWOT ANALYSIS

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Kenya Airways recently announced its results for the year ended March 2011. On the back of this announcement, I will do a SWOT analysis of the national carrier.

Key highlights of the results:

Total Revenue up by 21% to Kshs. 85.8 Billion

Operating Profit soared 216% to Kshs. 5.8 Billion from Kshs. 1.8 Billion resulting in Operating Margin improving to 6.8% from 2.6% the previous year.

Cargo revenue grew by 16.7% over the previous year.

Profit Before Tax up to Kshs. 5 Billion, a rise of 87%

Profit After Tax up 74% to Kshs. 3.5 Billion

Net Profit Margin of 4.1% as opposed to last year’s 2.9%

Net Cash from operations was up 37% to 10.4 Billion

Earnings Per Share is now at 7.65. The share, at the close of trading on Friday June 3^rd, was trading at a trailing Price/Earnings ratio of 5.56

The company recommended a dividend of 1.50/= per share

STRENGTHS

Management: KLM which owns part of KQ brings in key management experience which is necessary to steer a company in the tough Airline Industry

Brand: The Pride of Africa. Faced with similar prices between KQ and a domestic airline for a domestic route, consumers will choose the ‘Pride of Africa’. Kenya Airways is routing the competition in the domestic industry by slashing fares, especially the Nairobi-Mombasa route

Fuel Hedging: The Airline is currently benefiting as the price of oil is sitting pretty above $100. Though this advantage can be erased at any time

WEAKNESSES

The cost of new planes is thought to be around US$1.8 Billion. The company is in the process of seeking approvals to raise cash for this purpose. If KQ decides to go for a rights issue to raise part of the money (part because it is likely some of the funds will be sourced from within) there is a chance it will receive a lukewarm reception from the shareholders due to them envisioning a difficult period for the airline industry. Thus, there is a likelihood of not all of the cash needed being raised.

The company could also go for the option of a bond, though interest payments will increase the expenses of the company. But there is no way around it as the money must be raised. It is up to the management to choose the option they see as best for the company as it would be a disaster if KQ fail to get the adequate amount needed for its expansion.

OPPORTUNITIES

New Planes: The company is set to acquire 9 new 787-8 Dreamliners beginning the last quarter of 2013. 6 of the new planes will be to replace its ageing fleet while 3 will be for expansion into new routes

The company has also been leasing Embraer jets which provide higher fuel efficiency for regional flights

New Destinations: The airline recently launched flights to Chad and aims to fly from every African by 2013. KQ already has the African market in a vice-like grip. This is an impressive feat considering the national carrier is not subsidised by the Government of Kenya as are continental rivals Ethiopian Airlines and South African Airways by their respective governments.

During the financial year, KQ‘s new destinations included Muscat, Juba, Luanda, Nampula and Rome

THREATS

Workers Union: The worker’s union is prone to asking for their “rightful” share of the company’s profits. The airline cannot proceed if every time the company grows its profits, the workers ask for a salary increment. Otherwise, the company risks its wage bill spiraling out of control. Employee costs increased in excess of Kshs. 1 Billion from the previous year.

Oil price volatility: Though KQ is now enjoying the benefits of hedging the oil price at $90, it could just as easily turn out to be disaster if the price of oil was to plunge as deeply as it did a few years back. Hedging really is a double-edged sword.