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Friday, October 27, 2006

Am I looking at KQ thru rose-coloured glasses?

I have been an effusive supporter of KQ... Now let us be clear on one issue...

Share Price and Company Performance are DIFFERENT... therefore I will discuss what is important... not the share price but
the Company's and Management's Performance.

"Past performance is no predictor of future performance."
True... So true...

KQ is in the same league as Barclays, EABL, SCBK, etc... I did a review of what I think are TRUSTWORTHY MANAGEMENTS...

Business is about risk and vision. Credit goes to KQ's SMART & TRUSTWORTHY MANAGEMENT TEAM... They have not let me down, yet...

KQ has a measured expansion plan that allows them to be either #1 or 2 (remember GE's credo) on most routes they fly... Bilateral agreements make this the only choice (monopolistic or duopolistic) in some cases but let's look deeper....
  • Kenya-Europe -> KLM & KQ dominate the Nairobi-Europe routes. KQ essentially runs the AMS-NBO route for KLM. Intense competition from BA & charter flights. Expect steady growth especially after the new Paris flights open up new tourist markets as well as another European gateway to N.America. Note that KQ uses its regional heft to ferry South & Central African passengers to Europe via JKIA.
  • Kenya-MidEast -> In spite of strong competition from Qatar & Etihad... KQ & Emirates dominate the Kenya-Middle East routes. That said, the competition on these routes is intense. Definitely a challenging market but necessary since lots of traders like visiting Dubai.
  • Kenya-S.Africa -> KQ dominates the business sector. KQ has 2 daily flights vs 1 for SAA. There is no other airline that comes close to SAA or KQ. The growth is limited but KQ can attract (wealthier) S.African passengers to use JKIA as hub to China, Dubai and India.
  • Kenya-Southern Africa -> KQ is dominant in most countries it flies to from Kenya. KQ crushed Air Tanzania while Air Zimbabwe is almost dead. The other airlines are small and inconsequential, as yet, to KQ.
  • Kenya-Central & West Africa -> Slow but surely... expanding. The goal is to connect to China and India using Nairobi was a hub thus the push to enlarge and modernise JKIA. This market is huge esp considering China's push into Africa e.g. Sudan and Zambia.
  • Kenya-China -> KQ will face competition in due course but for now they are the only airline that serves China direct from Nairobi. Plus 3 destinations... Hong Kong, Guangzhou & Shanghai. This is the new market for KQ. There is potential for BUSINESS and TOURISM. Chinese tourists are among the highest spenders. Hong Kong's per capita is at OECD levels.
There are challenges for KQ. I will try and be KQ specific where possible.

Oil Prices
The bane of airlines for many years. KQ will do OK as long as it doesn't rise beyond $80. KQ is in a much HEALTHIER position than most African competitors including SAA and Ethiopian. A privatised SAA could become a formidable competitor but most African countries can't afford to start their own airlines thus there is a larger untapped market as African economies grow.

Terrorism
There is little one can do when idiots want to kill others. Definitely a threat but you have to learn to live with it. After 9/11, New Yorkers (more than ever) live in high-rises. Did the hijackings of 1970s & 1980s kill off air travel? No, coz the easiest way to travel long distances remains air travel.

Tourism
Important to KQ but less profitable than Business tourism. I think most African travellers are business travellers thus less sensitive on price. The expansion to the Far East to reduce reliance on UK market for tourists while Paris will open new markets.
Kenya can maintain the tourism momentum by improving security & roads. Improved roads and security will boost the market for tourism thus creating a further need for KQ's expansion.

Competition
It is good. It is needed and it has forced KQ to be leaner & meaner. All African airlines have a deadline to be E-ticket compliant by 31 Dec 2007. Fewer than 10 airlines have done so by 31 June 2006 & among these are KQ, ET and SA. More airlines will become compliant b 2007 but many will not especially the struggling airlines. This will allow KQ, SA & ET to expand into these markets for international passengers.

KQ's "real" growth can only come from international routes since the local market is "small" in comparison. There are a limited number of Kenyans who can afford the Nbi to Msa/Ksm flights. As the roads and railway get rehabilitated, the local market for KQ will reduce or stagnate on these internal routes. Kenya is a small country and Tanzania has a larger number of towns served by Precision Air than KQ does!

KQ's biggest threat is Emirates, especially in the West African & Dubai markets. Unless KQ is restricted from further African expansion, I do not see SAA & Ethiopian as significant threats yet.

Pandemics
There is little any one airline can do but ALL international airlines will be affected.
For Kenya's part, it needs to ensure that humane rearing methods are used.
I recommend becoming vegetarians... less hassles with Avian Flu, Mad Cow or a host of other emerging diseases!

It seems the pandemics start in Asian countries which means more European tourists will perfer Kenya/Africa as a destination.

Labour
Yes, that is a problem.
Sometimes, it is NOT the employees but the vision that drives firms. When things are tough, employees cry about "working conditions" and "low wages" but when things are good they want to share in the pie... QUIT, if you think you are underpaid!

Anyway, whatever the merits of my views, I think KQ should sacrifice short-term gains to crush the unions. Unions generally want to reward "seniority" not productivity. KQ has started traning new staff who will probably supplement the current staff.

Brain drain IS a problem for KQ esp from the Middle Eastern airlines. Nevertheless, I hope Kenya produces more airline staff who can be "exported" since that brings in more forex!

KQ has embarked on recruiting staff fluent in Mandarin, Thai, French and Hindi as those markets become more important.

Mandarin - China (3 cities and counting).
Thai - Thailand is becoming a "hub" for KQ for the Far East e.g. Korea
French - The new Paris route with associated expansion to destinations like Mayotte, Brazzaville & Comoros.
Hindi - Daily flights to Mumbai with Delhi, as a destination, in 2007.

So without worrying about the "share price"... KQ is slowly becoming an engine for some of Kenya's economic gains. I expect the growth to continue with stumbles along the way. One important thing is I TRUST the Management.

Please comment... I do want to know if I am on the wrong track... or have missed an important part of the puzzle.

11 comments:

Ssembonge said...

Very good analysis.

However, KQ lacks behind in technology. Having flown KQ domestic flights I can tell you that they have a lot of wastage and inefficiencies.

While they have lots of room for improvement/growth, once they mature they will become a secular business.

You need to dig deeper into their financials. look at their Cashflow, dividend distribution/retained earnings, debt levels, share price multiple, book value, etc etc.

coldtusker said...

What wastage?
Do you have any specifics?
Suggestions on how to reduce the wastage?

KQ has a programme they call PIP... that is supposed to help cut down on costs while keeping the service levels as they are.

The Alpha Quadrant said...

I think KQ have excellent prospects especially if they continue to improve and grow.

I haven't looked much at their financials. P/E is moderately low at 12.08. I'm still digging though

http://www.stockskenya.com/stkprofiler.aspx?stkId=8

bankelele said...

KQ has good management but the airline industry is cyclical and very risky. If Naikuni or Terry Davidson did not renew their contracts, would we still buy KQ or KCB shares?

Africa: KQ has gained from being one of the few working airlines in Africa, connecting Central Africa, West to East Africa – and beyond to Europe and Asia.

But, sooner or later protectionism will kick in as other countries will try and revive their national airlines, maybe following KQ/KLM model.

KQ should also not ignore local routes where there’s money to be made. It costs more to fly to Lokichoggio than to Dubai and many airlines are expanding business to Juba and Somalia, and if KQ can gets some regional jets e.g. embrarer it shoudl also try and lock up the region

I don’t see oil prices as a threat to KQ, they are as lean as possible with modern aircraft and they will pass on fuel costs to customers. Many of their international customers are business people, who are not price sensitive anyway. They have used hedging in the past and will use it in the future - and fuel costs affect all airlines.

JKIA airport expansion is very important. However there are no plans for a second runway, which is a shortcoming (or do they not have enough land?). The Artur saga was a mess, and arriving/ departing international passengers need to be separated by more then two guards stretching their arms across an aisle

With our proximity to Somalia, FAA wil insist that we beef up our security to even thing of having flights to America.

International:
Charters are mostly Europe to Mombasa judging by the applications to KCAA -and these are seasonal routes of packaged tourists.

As for America I don't think Miami is the based US destination for KQ - maybe DC, ATL or NYC

coldtusker said...

I can't figure out WHY they don't build a 2nd runway at JKIA. There was some reason by JKIA about "unneeded capacity"...

Unless they convert Embakasi to domestic (unlikely for the moment), I think they need a 2nd runway...

Embraer Jets are sold out through 2010 coz of regional demand from American countries as well as business/corporate demand.

Charters are not very profitable for KQ but they could set up a subsidiary OR buy into a charter airline.

Anonymous said...

its good you looked at very many angles. What am wondering is will the expansion be sustained. do you think its too rapid? will we see another uchumi.

is KQ servicing those new destinations adequately before moving on to another or are they spreading themselves too thin.

i also thought you should have mentioned pilot shortage and high cost of training them as a another threat.

how about the revival of the railway,how will it affect their local market? what of the econmic 'boom'. more kenyans are opting to fly rather than drive not only because of roads but also because of class, comfort and speed. the expansion and rise of upper middle class etc.

actually i have been told by travel agents that KQ is more expensive than most airlines yet it is doing better in some cases than BA on the london route. What is their cutting edge? etc how can they massage those strengths and so on.

coldtusker said...

Ohlanga Lover - Airline pricing is super-convoluted!

Only BA & KQ fly direct to UK thus limited seats/competition. For $100, many prefer a 7-hour direct flight that gets into London in the early AM vs a 14-hour flight using Qatar or Emirates that gets you into London at odd hours!

coldtusker said...

Destinations - I don't know if KQ is spread too thin BUT they plan to acquire new planes (within next 12 months) to reduce flight times while increasing capacity.

The 3 new 737-800s to replace the aging 737-200s. The new (unknown) jets to replace the Saabs. One additional 777.

coldtusker said...

As I mentioned in the blog entry... I think the Nbi-Msa & Ksm routes will stagnate i.e. only for tourists and businessfolk AFTER the raods and railways are improved.

I think KQ is NOT flying to Juba coz these are airstrips not airports thus only "small" planes can safely land & takeoff.

I am sure there are some political issues as well i.e. flight slots.

Anonymous said...

hey i think oil prices are not a big factor - i think theycut both ways oil prices serve as a means of weakth transfer which means that when prices are high oild prodcuers prosper and trade is tilted in their favor so KA is benefiting from this phenomenon with increased business in the mniddle east and west africa from economies benefiting from oil prices

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