Acknowledgement This work is dedicated to my family, for their continued support, guidance and unending concern. I acknowledge and thank my project mentor for taking time off his busy schedule to mentor this project. I am most grateful to GOD, through whom I am able to do all things Contents: Part 1 Project objectives and overall research approach 1. 1 Topic chosen and reasons for choosing topic4 1. 2 Reasons for choosing organization4 1. 2. 1 Historical background of KQ5 1. 2. 2 Awards and achievements:5 1. 2. 3 Vision and Mission6 1. 2. 4 Authorized Capital6 1. 2. 5 Group structure7 1. 3 Project objectives7 . 4 Overall research approach8 Part 2 Information gathering and Accounting/Business techniques 2. 1 Sources of Information:9 2. 1. 1 Primary source:9 2. 1. 2 Secondary sources:9 2. 2 Description of the methods used to collect information10 2. 2. 1 Interviews10 2. 2. 2 Annual reports and ACCA manuals11 2. 2. 3 Online access11 2. 3 The limitations of information gathering11 2. 3. 1 Primary source11 2. 3. 2 Secondary sources12 12. 4 Ethical issues that arose during information gathering:13 2. 5 The accounting / business techniques used13 2. 5. 1 The Balanced Scorecard (BSC)13 2. 5. 2 Accounting techniques15

Part 3 Results, analysis, conclusions and recommendations 3. 1 Description of the results16 3. 1. 1 Limitations of the results16 3. 2 Presentation of results17 3. 3 Analysis of Data by use of Balanced Scorecard………………………………………………. 19 3. 3. 1 Customer perspective……………….. ………………………………………………19 3. 3. 2 Internal perspective……………………………………………………………………….. ……. 20 3. 3. 3 Innovation and learning…………………………………………………………………………. 21 3. 3. 4 Financial22 Profitability ratios:22

Liquidity ratios:25 Capitalization/financial leverage ratios28 Investor ratios33 3. 4 KQ’s operational performance analysis. 36 3. 5 Challenges facing KQ37 3. 6 How it overcomes the challenges38 3. 7 Conclusion39 Business performance39 Profitability39 Liquidity39 Capitalization/ Leverage40 Investment40 3. 8 Recommendations40 List of references42 Bibliography46 Appendix A Ratio Analysis and Computation………………. …………. ………………….. 47 Appendix B: Sample Financial Statements(KQ)…. ……………. ……………………………… 48 Appendix C: Sample Financial Statements(SAA)……………….. ……….. ……………. …49 Appendix D: Formulae Audit Trail for KQ…………. ……………………………………… 50 Appendix E: List of Acronyms………………………. ………………………………………. 51 Part 1 Project objectives and overall research approach 1. 1 Topic chosen and reasons for choosing topic The topic chosen is “The business and financial performance of an organization over a three year period” The reason for choosing the topic was that, during the author’s ACCA studies; especially in Paper P5 (Advanced Performance Management), he came to realize that collecting management data and going on to merely calculate accounting ratios without explaining the trend over time was meaningless to management.

Consequently; an interest arose in the author to embark on an exercise that involved collecting and critically analyzing data to make conclusions regarding the performance of the selected organization; in a quest to add substance to the lessons he had learnt in his ACCA studies. 1. 2 Reasons for choosing organization The author chose to research on Kenya Airways (here in after known as KQ) due to its outstanding reputation in passenger and cargo carriage in the country (Kenya), the East Africa region and the African continent at large.

Besides, KQ faces stiff competition both locally and internationally from South African Airways (here in after known as SAA) among many other airlines which include Fly Emirates, Virgin Atlantic and Fly 540, thus the author embarked on an exercise to find out how the airline’s financial and non financial strategies sustain it in its rather competitive market. 1. 2. 1 Historical background of KQ • February 1977: The airline was established following the break up of the East Africa Community (E. A. C) and subsequent disbanding of the jointly owned East African Airways. April 1991: A new board appointed with the mandate to commercialize and prepare the airline for privatization, and a policy paper issued later (in July 1992) gave a high priority to the privatization of KQ. • Following its outstanding performance and state of the art services, its first initial public offer (IPO) was issued in March 1996. • Year 2004: Scooped award for the Best Domestic Airline • October 2005: A major milestone in its history when it achieved IOSA (IATA Operational Safety Audit) becoming the 1st carrier in the sub-Saharan to get this rigorous safety certification.

It was also voted as the East Africa’s most respected company in the same year. The above was paraphrased from the company’s website: www. kenya-airways. com 1. 2. 2 Awards and achievements: 2001: o Voted best user of IT in Kenya by the computer society of Kenya. 2002: o Voted the best regional airline. 2006: o Voted as East Africa’s most respected company for the second year running. o KQ won the prestigious Africa Aviation Award awarded by the African Aviation Magazine in March. [pic] 2008: o Awarded the COYA (Company of the Year Award) for strategic planning and emergency preparedness. (Pictured above). 1. 2. 3 Vision and Mission

The vision of KQ is “To consistently be a safe and profitable airline that guarantees world class service. ” Their mission is; To maximize stakeholder value by consistently:- o Providing the highest level of customer satisfaction o Upholding the highest level of safety and security o Maximizing employee satisfaction The above was paraphrased from the company’s website: www. kenya-airways. com 1. 2. 4 Authorized Capital The authorized capital of a company (sometimes referred to as the nominal capital) is the maximum amount of share capital that the company is authorized by its constitutional documents to issue to shareholders.

Part of the authorized capital can (and frequently does) remain unissued. The part of the authorized share capital which has been issued to shareholders is referred to as the issued share capital of the company. The above was paraphrased from www. wikipedia. org (a website for general information) KQ had an authorized share capital of 1,000,000,000 shares of Kshs. 5 each. The issued and fully paid shares as at 31. 03. 2007 were for a value of Kshs. 2,308M in 461,615,484 ordinary shares of Kshs 5 each. This was the same for the years 2008 and 2009. Source: Annual Reports of KQ 2007, 2008 and 2009 1. 2. 5 Group structure

The airline has control over four subsidiaries. According to (BPP, 2006) control is achieved when the holding company has the power to govern the financial and operating policies of the subsidiary so as to obtain economic benefits. The subsidiaries were domiciled in Kenya and they are: ? Kenya Airfreight Handling Limited ? Flamingo Airlines Limited ? Kencargo Airlines International Limited ? Africa Cargo Handling Limited Its only associate company is Precision Air Services Ltd in which it has 49% shareholding. Precision Air is domiciled in the Republic of Tanzania. 1. 3 Project objectives The objectives were: i.

To examine the airline’s initiatives within a three year period with regard to service and operational improvements to evaluate whether they are in line with its mission and vision. ii. To analyze the airline’s financial performance for the same period, to determine how satisfactory its progress has been within the increasingly competitive market as earlier noted. 1. 4 Overall research approach The author’s approach to the research was: collection of both primary and secondary data that may answer the above research objectives comprehensively, then to subject the data collected to analysis under a business model.

The major source of primary data was interviews of key officials allied to the airline; secondary data will be largely derived from the company’s website, annual financial reports and ACCA text books. The evaluation of the business performance of KQ will be based on: the airline’s customers’ satisfaction, internal processes and its innovative and learning processes. To tackle the financial evaluation bit, the author selected, calculated, and interpreted key profitability, liquidity, gearing, and investor ratios over the period.

The following authoritative business model will be used to check on the effectiveness of KQ: The Balance Scorecard. Part 2 Information gathering and Accounting/Business techniques 2. 1 Sources of Information: The author made use of primary and secondary sources of data. 2. 1. 1 Primary source: This is data observed or collected directly from first-hand experience (definition obtained from the business dictionary website: www. businessdictionary. com). Usually the researcher obtains data as per his/her requirements. The author opted to use interviews as the main source of primary data. 2. 1. 2 Secondary sources:

Published data, data collected in the past; or data collected (and/or compiled) by other parties is called secondary data (definition obtained from the business dictionary site www. businessdictionary. com). It is already recorded data which is neither collected by the user nor specifically for the user often under conditions unknown to the user (BPP, 2004). The main sources were: i. Company annual reports The annual report is one of the most important means of communication between a company and its stakeholders especially on matters pertaining financial information (Philip, 2006). Michael (2006) discusses that an annual report s a document produced to fulfill the duty of directors to report to shareholders; it is produced annually and is a mixture of financial and non-financial information. It is for these reasons that the author made full use of the contents of the reports. ii. Reading manuals They comprised of the ACCA approved publications, from where a number of definitions were obtained. iii. Internet A lot of information pertaining to the organization was obtained from its own official website, i. e. www. kenya-airways. com. The site contained extensive information about the airline’s financial and business performance.

The research was made easier by the use of search engines, like www. google. com from where relevant industry information and competitor websites were found. www. wikipedia. com was very beneficial for various definitions. 2. 2 Description of the methods used to collect information 2. 2. 1 Interviews Due to the busy schedule of the various employees working with the airline, the author managed to interview only 15 of them. He also interviewed a separate group of 25 people who have flown with the airline for either business, educational or touring purposes.

To start with, the author asked the interviewees general questions followed by specific-well-tailored questions. Vital first hand information was obtained as a result of the exercise. 2. 2. 2 Annual reports and ACCA manuals This is the use of books, journals and periodicals rich in information relevant to the case study. The annual reports contained useful information regarding the airline. Also of importance to the research were some of the approved ACCA reading manuals that provided technical assistance on some issues.. 2. 2. 3 Online access It involves the use of Information Technology to search for pages and articles from the Internet.

Various documents can be accessed to provide a load of information within a short period of time and with little or no cost. With the help of search engines and due to the fact that most organizations had their websites on the World Wide Web, this method of data collection was of great significance to the research work. 2. 3 The limitations of information gathering 2. 3. 1 Primary source Preparation for the interviews required careful planning about what to ask and despite this; some of the interviewees were unwilling to provide details on some issues fearing a breach of confidentiality.

This led to the author having to book an appointment with the CEO (which was not an easy affair); who clarified all the issues. In addition, the various interviews took a substantial period of time. 2. 3. 2 Secondary sources i. Reading manuals o It was difficulty to trace books with certain information which the author wanted. o It called for a lot of reading and data analysis to get the information needed. ii. Internet The Internet at the author’s office was restricted during official hours; it as only available early in the morning, during the one hour lunch break and later after office hours; and occasionally the Internet server was down thereby inhibiting the online research even further. iii. Costs There were monetary costs for instance Internet costs, telephone call charges, transport costs, etc. In addition, the author had to sacrifice the time he uses to socialize and spend with his family members to undertake the research. 12. 4 Ethical issues that arose during information gathering: i. KQ’s management feared that the research might expose their core competencies and other confidential information to its competitors.

This was resolved by the author when he let them read the confidentiality and anonymity section of the project guidelines. ii. Some interviewees gave different and at times conflicting information and opinions on an issue. The author resolved this by booking and holding an interview with the same members to highlight the various inconsistencies. iii. The author was in casual wear on his first visit to KQ’s offices; the security guards were not convinced that he was conducting an interview owing to his casual attire. The author resolved this by showing them his ACCA registration card and adequately explaining his intentions. . 5 The accounting / business techniques used 2. 5. 1 The Balanced Scorecard (BSC) According to BPP (2007) the BSC approach to measuring effectiveness focuses on four perspectives that are based on both financial and non-financial indicators. It emphasizes the need to provide management with information which covers all relevant areas of performance in an objective and unbiased manner. Effectively the model is both a management and a performance appraisal tool. The four perspectives according to (BPP, 2007) are: • Customer This is concerned with what the customer values from an organization.

It gives rise to targets that matter to customers like: – cost, quality, delivery, inspection, handling, etc. • Internal Concerned with what processes the organization must excel at so as to achieve its objectives. Aims to see improved internal processes and decision-making. • Innovation and learning Can the organization continue to improve and create future value? It considers the business’ capacity to maintain its competitive position. • Financial This perspective concerns with whether the organization has created value for its shareholder/owners. It covers traditional financial measures like growth, profitability and shareholder value.

Limitations of BSC: According to (BPP, 2007) they are: o Conflicting measures Some measures in the BSC such as research funding to aide innovation and cost reduction may clash. It may become difficult in deciding which criteria to follow; to prioritize a measure at the expense of the other(s). It may therefore be difficult to determine the best balance which will ensure expected results. o Selecting measures In applying the technique, appropriate measures have to be devised of analyzing success; one might get confused and over-consider some issues over thers (for instance considering the financial aspect over Internal) and lose take on the question of overall effectiveness. o Expertise The non-financial managers/stakeholders may have difficulty in interpreting the financial data involved. Equally the financial managers may neither appreciate the need nor the significance of non-financial measures. o Interpretation Summarizing results to advise accordingly and forming an overall conclusion on basis of both the financial and non-financial information may be challenging. 2. 5. 2 Accounting techniques

The research employed quantitative analysis of data which involves ratio analysis and trend analysis. Two options were available; 1. Cross-sectional analysis compares an organization’s specific ratios with those of other organizations. 2. Trend analysis also called time series compares an organization’s ratios over a specific historical period. Limitations of quantitative analysis a) It did not consider qualitative (non-financial) data, only financial data was analyzed which did not solely depict the true picture of the airline’s performance. ) It was based on historical information, which did not take into account the current or prospective market situations like inflation. c) Although it was important for a management accountant and the company’s management, it may have been technical jargon to some key stakeholders. d) There was need for absolute accuracy in data collection; otherwise the analysis would have resulted to false and misleading conclusions. e) Inter-company comparisons were somehow inhibited due to the fact that different airlines had different capital structures and risk profiles that called for different accounting policies to prepare their ratios.

Part 3 Results, analysis, conclusions and recommendations 3. 1 Description of the results The following results are both qualitative and quantitative in nature. Most of the qualitative results were obtained from the airline’s annual reports and its official website. Quantitative results were numerically represented and cover a broad range of ratios to determine the airline’s financial performance over the period under review and how they compared to one of its competitors, SAA. . 1. 1 Limitations of the results At the time of preparation of this research work, the author could not find vital data pertaining to KQ’s latest trading period: the year to 31st March 2010, as it was neither available on its website nor in a comprehensive print media. As such, even though the research work covered a justifiable time, it is somewhat incomprehensive as it does not illustrate the airline’s current financial performance. 3. 2 Presentation of results Table 1 Operating statistics |2009 |  |2008 |  |2007 | |Airline  |KQ |SAA |  | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |passenger numbers (thousands)| 2,820| | 2,760| | 2,601| | | | |6,898 | |7,444 | |7,727 | Graphical Representation of Passenger Carriage from 2007 – 2009 pic] Table 3: Cargo carriage (in tonnes) |Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |cargo carriage | | | | | | | |(tonnes) |55. 6 |138. 0 |62. 6 |186. 0 |60. 9 |202. 0 | Graphical Representation of Cargo Carriage in tonnes from 2007-2009 [pic] [pic] Source: KQ Annual Report, 2009. 3. 3 Analysis of Data by use of Balanced Scorecard

BPP (2007) offers an example of how a balanced scorecard might appear; the author has used the example in his research as follows. |3. 3. 1 Customer Perspective | |Goals |Measured Results | |New Products |New products in form of new destinations were introduced during the period under review.

The new | | |destinations increased its customer base. For the 2007/08 period; two new routes – Accra/Monrovia and | | |Cotonou/Abijan were successfully launched (Annual Report, 2008). Following the above strategy, the | | |airline’s passenger carriage increased from 2. 7 million in 2007/08 to 2. 8 million in 2008/09. |Responsive Supply |To improve the level of service to its customers, a new “State of the Art” Flying Blue Customer Service| | |Center located in Barclays Plaza Nairobi, commenced operations in June 2007 (Company Annual Report, | | |2007). | |Preferred Supplier |There was no indication from data, of any special arrangements with suppliers.

However, according the | | |airline’s Annual Report (2009), codeshare agreements were signed with new partners, China Southern and | | |Air Mozambique during the year. These served to extend KQ’s reach into its partners’ domestic and | | |international points and vice versa. | |Customer Partnership |According to the airline’s Annual Report (2007), based on feedback from its customers, the airline | | |upgraded its air show program on board its flights to enhance their satisfaction.

Air show 4200 now | | |offers motion and moving maps that keep the passenger informed and entertained from departure to touch | | |down. | |3. 3. 2 Internal Business Perspective | |Goals |Measured Results | |Technology capability |The deployment of Flight Information Display Screens (FIDS) at JKIA.

These screens at check-in, | | |boarding gates and transfer desk assist customers in quickly finding out which gates their | | |flights are departing from and their flight departure status without having to look for KQ staff| | |or queue in long lines to get this information (Annual Report, 2008). This was a unique | | |discovery that was particularly un available in the other local airlines. |Manufacturing Excellence |The author could not find any data on manufacturing. However, In the year 2008, KQ took home the| | |Company Of the Year Award (COYA) for its strategic planning emergency preparedness, (trophy | | |pictured on page 6) | |Design Productivity |To improve both capacity and connectivity in line with market demand, the airline increased | | |frequencies to several destinations.

In the year 2009, night flights were introduced to Addis | | |Ababa, Lusaka, Lilongwe, Harare and Kigali. Notably flights to Lusaka and Kigali increased in | | |frequency to double daily from daily flights. These night flights not only improved connectivity| | |but also increased capacity by offering new connections to the morning flights out of Nairobi | | |(Annual Report, 2009). |New Product Introduction |For the first time in October 2008, direct services were offered by the airline to Guangzhou | | |from an African point. The direct Nairobi-Guangzhou connection offered a competitive product by | | |drastically cutting down on customers’ travel times (Company Annual Report, 2009). | |3. 3. Innovation and Learning Perspective | |Goals |Measured Results | |Technology Leadership |Customers can now visit the airline’s website and through the online channel, purchase a ticket to| | |travel.

They can do it at their own convenience from the comfort of their homes or offices, or | | |anywhere they can get Internet access. The customers can also pay for their ticket online as the | | |booking system facilitates secure credit card payments online (Company Annual Report, 2008). | |Manufacturing Learning |The airline acquired a learning and development acility (pictured below) in 2005 at a cost Kshs | | |360million. The facility named ‘the Pride Centre’ was formerly launched in July 2007. Customized | | |training and development programs for customer service, personnel effectiveness and leadership are| | |developed and delivered at Pride Centre to staff at all levels. (Annual report, 2007). | |[pic] | | |KQ Pride Centre | | |Source: Company Annual Report, 2007 | |Product Focus |From table 4 (on page 18), The airline had an overwhelming focus on passenger carriage that | | |contributed to 86%, 87% and 88% of total revenue in the years 2007, 2008 and 2009 respectively. | |Time to Market |There is no indication from data, of any specific product that was scheduled to storm in the | | |market at a given specific time. | 3. 3. 4 Financial Profitability ratios: Net profit margin (NPM): |Year |2009 |2009 |2008 |2008 |2007 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |Net Profit (%) |-5. 7 |1. 5 |7. 6 |-4. 9 |7. 0 |-4. 3 | Graph 1 Net Profit (%) Return on capital employed (ROCE): Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |ROCE (%) |7. 7 |12. 7 |7. 6 |-10. 7 |12. 6 |-7. 3 | Graph 2 ROCE (%) Profitability analysis: Graph 1 above shows that KQ’s NPM reduced from 7%% to -5. 7% it was however significantly greater than that of its rival carrier in the first two years of trading. SAA’s margin increased from -4. 3% to 1. 5% over the same period which was due to large restructuring costs in its earlier years of trading that ended during the final year under review (SAA Annual Report, 2009). KQ’s decline in NPM may be attributed to the cost of aircraft fuel and oil expenditure that increased by about 55% over the period.

Notably this expenditure comprised of about 38%, 46% and 51% of total direct expenditure in the years 2007, 2008 and 2009 respectively. Besides, in 2007, the world market was volatile which led to increase in crude oil prices. This had a negative impact in the aviation industry. Nevertheless, overheads that mostly comprised of administration expenses and mainly employee costs rose from kshs 8,069 million to Kshs 9,938 million and further to Kshs 12,001 million an increase of about 48% compared to that of SAA of about 6% over the same period. KQ’s direct costs which formed about 66. 6% of the airline’s costs in the year ended 2009 increased to Kshs 47,792M an increase of about 23. 1% compared to the previous trading period.

Of important to note is that the effect of unrealized losses in the latest trading period increased from Kshs 1,403M to Kshs 7,532M representing an increase of 436. 85%, these two costs justifies the sharp decline in profits reported in the year to 31st March 2009. The airline also reported reduced revenue to March 2008 in the Kenyan and Europe destinations which can be explained by the effects of post election skirmishes in the country. At that time business was not good for anyone, and KQ was not an exception in this matter. The trend of operating profits shows that KQ may not have been keen in controlling operating costs that triggered huge loss during 2009. SAA’s margin went up from loss to profit over the same period. KQ’s trend is not favourable as (Gerald et al. 2003) observes that equity investors are concerned with the firm’s ability to generate, sustain, and increase profits, as such risk averse shareholders looking in to the profitability of KQ may opt to dispose of their shares to invest in SAA in fear of further decline in its performance. ROCE equates the profits earned before interest and taxes as a percentage of the capital employed to generate that return (BPP, 2007). KQ’s ROCE reduced from 12. 6%, to 7. 7% in both 2008 and 2009. This can be explained by the 37. 8% decrease in PBIT and given that both total assets and current liabilities was relatively constant over the period. On the other hand SAA’s ROCE increased from -7. % in 2007 to 12. 7% in 2009, this was mainly due to culmination of restructuring towards profitability projects that reduced costs and fostering sales greatly during that trading period (SAA Annual Report, 2008). Liquidity ratios: Current ratio: |Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |Current Ratio |1. 4 |0. 9 |1. 6 |0. 9 |1. 4 |0. 8 | Graph 3 Current Ratio (number of times) [pic] Quick ratio: Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |Quick Ratio |1. 3 |0. 8 |1. 6 |0. 9 |1. 3 |0. 7 | Graph 4 Quick Ratio (times) [pic] Total assets turnover: |Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |Total assets turnover |0. 9 |0. 6 |0. 8 |0. 8 |0. 8 |0. 7 | Graph 5 Total Assets turnover (number of times) [pic] Liquidity analysis:

Current ratio measures the ability of a firm to meet short-term obligations out of current assets (Frank wood, 1999). KQ’s liquidity position as per the current ratio as indicated on graph 3 was 1. 4 times in 2007, improved slightly to 1. 6 due to a 4. 2% increase in trade and other receivables (a component of net current assets) compounded by a 3. 81% decrease in net current liabilities in 2008 then decreased to 1. 4 in 2009. On the same graph, its competitor had a rather lower current ratio at 0. 8 times in 2007 and 0. 9 in both 2008 and 2009, effectively KQ’s ability to meet short term obligations out of its liquid assets was thus better than that of SAA whose ratios were even below 1 over the entire period under eview as such KQ’s short-term creditors were assured of their payments as and when they became due. KQ’s quick ratio (graph 4) was 1. 3, 1. 6 and 1. 3 during 2007, 2008 and 2009 respectively. The ratio was comfortably retained above 1. 1 unlike that of SAA which was 0. 7, 0. 9 and 0. 8 over the same period. This is a further indication that the airline could as well settle its short term obligations out of its most liquid current assets and even in a better capacity that of its competitor. Total assets turnover is a measure of how well assets are being used to generate sales revenue (BPP, 2003) in which case KQ’s assets constantly supported revenue at about 0. limes in both 2007 and 2008 and further by 0. 9 in 2009 unlike SAA which had a turbulent and lower trend, that is; 0. 7, 0. 8 and 0. 6 during the same period. KQ’s total revenue increased by about 22. 17% over the period mainly due to customer online check in compared to that of SAA that rose by almost 30% over the same period. Total assets on the other hand increased by only 0. 4% while that of SAA increased by about 7%. Both revenue and total assets of both airlines had an increasing trend but SAA’s assets increased at a much higher rate which implies it may greatly support sales in the future trading periods. Capitalization/financial leverage ratios Debt ratio: Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |Debt ratio |0. 66 |0. 84 |0. 65 |0. 85 |0. 72 |0. 90 | Graph 6 Debt Ratio (number of times) [pic] Gearing ratio |Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |Gearing Ratio |0. 7 |0. 6 |0. 6 |0. 6 |0. 7 |0. 8 | Graph 7 Gearing Ratio (number of times) [pic] Interest cover Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |Interest Cover |3. 0 |2. 2 |2. 9 |-1. 9 |4. 8 |-1. 2 | Graph 8 Interest Cover (number of times) [pic] Funds from operations to total debt (Cash flow ratio) |Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |Cash Flow Ratio |7. 3 |-2. 8 |13. 0 |9. 2 |13. 2 |1. 7 | Graph 9 Cash Flow Ratio (%) [pic] Capitalization/financial leverage analysis:

The debt ratio of KQ was less than 1 in the three years and it actually had a reducing trend year to the next to mean that its assets were mainly financed by owner’s equity. It is equally important to note that the airline’s debt ratio was lower than that of SAA which had a ratio of 0. 9, 0. 85 and 0. 84. This could be interpreted to mean that KQ was more keen not to finance its assets through debt to avoid rather high interest and other debt related costs. Graph 7 shows that the gearing of the airline was 0. 7 in 2007, reduced to 0. 6 in 2008 but increased to 0. 7 again during 2009. As per appendix B, long term borrowing increased from Kshs 28,545M to Kshs 31,287M an equivalent increase of 9. 1% but decreased to Kshs 25,190 during 2008, a decrease of 19. 49%. However, it increased by Kshs 3,067 (12. 18%) to Kshs 28,257 during 2009. The 19. 49% decrease in borrowing compounded by 13. 68% increase in revenue reserve to Kshs 19,542M during 2008 clearly explains the rather turbulent trend of the ratio during 2008. The low level of gearing implied low level of financial risk and as such KQ had a greater potential and flexibility to borrow in later trading periods. Its rival carrier appeared to have had a marginal revert from external financing to internal financing as evidenced by its ratio that decreased from 0. 8 during 2007 to 0. 6 in both 2008 and 2009.

This meant SAA’s financial risk was even much lower and it was also in a better position to avoid finance costs and hence report increased profits over the period under review. KQ’s interest cover reduced from 4. 8 to 2. 9 but increased marginally to 3 times over the period under review. According to appendix B, in 2007 the airline’s PBIT was Kshs 7,895M while its interest obligation then was only Kshs 1,636M hence strong interest cover potential of almost 5 times. Increased operating costs and mainly fleet ownership costs increased from Kshs 7,388M to Kshs 7,994M an increase of 8. 2% between 2008 and 2009 resulting to reduced PBIT to Kshs 4,908M and Kshs 4,837M respectively.

Effectively this reduced interest cover potential to about 3 times in the latter trading periods. An interesting point to note is that its rival carrier (SAA) had a similar interest cover ratio trend only that its ratio rose sharply from -1. 9 times during 2008 to 2. 2 times in the year 2009. SAA’s restructuring costs in its early years of trading resulted in to massive losses but it later regained profitability when it completed the project in 2009 which meant lower costs and increased revenue. Its increased interest cover in 2009 was compounded by the corresponding 21. 44% decrease in Long Term Debt resulting to a 5. 4% decrease in Interest obligation. n average therefore, it can be concluded that although KQ’s interest cover was by far better than that of SAA, SAA’s rate of growth could have attracted money lenders more than KQ due to assurance of interests on borrowings in the long term. The cash flow position as shown in graph 9 had a reducing trend for both airlines but KQ’s ability to generate cash from operations was better of when compared to that of its rival carrier that was not only smaller but also reduced at rather alarming over the period, that is, from 1. 7% to -2. 8%. KQ’s trend can be explained by reduced cash from operation in the latter years of trading occasioned by the chaotic electioneering period in 2007 and early 2008 that created insecurity in the country; and the subsequent reduction in travel-business. Investor ratios

Earnings per share (EPS): |Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |EPS (Cents) |-884. 53 |0. 04 |991. 77 |-0. 10 |887. 78 |-0. 08 | Graph 10 [pic] Dividend per share (DPS): |Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |DPS |1. 00 |0. 03 |1. 75 |0. 01 |1. 75 |0. 00 | Graph 10 [pic] Dividend cover: Year |2009 |2008 |2007 | |Airline |KQ |SAA |KQ |SAA |KQ |SAA | |Dividend Cover |-8. 8 |1. 1 |5. 7 |-7. 9 |5. 1 |0. 0 | Graph 11 [pic] Investment analysis: KQ’s EPS was the best at 887. 7 cents in 2007, SAA was -0. 078 cents during the same year. However, although KQ’s EPS increased by 11. 23% to 991. 76 cents in 2008 it reduced drastically by 188. 8% to -884. 53 cents during 2009 which was due to 636. 85% increase in unrealized fuel derivatives (as per appendix B), a trend that is inverse to that of its rival carrier in that although its ratio decreased by only 23% to -0. 096 cents it increased greatly by 136. 5% to 0. 4 cents during 2009. KQ’s ability to create shareholder wealth was therefore in question considering its poor performance in 2009 as per this ratio. There was no change in shareholding in both airlines (KQ had 461. 6M while SAA had 11,343M fully paid shares at year end) as such only the dividends proposed or paid could only determine how the DPS variable faired during the period under review. KQ adopted a stable dividend policy during 2007 and 2008 where the same amount (Kshs 808M) of dividends was proposed in both years, the trend changed slightly in 2009 where only half of the previous years’ total dividends was proposed (Kshs 461. 6M), hence the net DPS eclined by 75cents to Kshs 1 in 2009. The author believes that this proposal by management was inevitable due to the Kshs 4,083M loss reported during 2009. On the other hand SAA actually recovered from huge losses arising as a result of various restructuring projects that involved huge outflows in form of financing. No wonder it reported a loss of Rand 883M in 2007 that worsened and increased further to Rand 1,085M in 2008 but turned to profits upon completion of the above projects to Rand 398M, that explains its increased DPS over the period. Dividend cover analysis shows that KQ’s ability to pay ordinary dividend was stable, above 2 and actually increased from 5. 1 to 5. times during 2007 and 2008, it however decreased to below 1, in fact to -8. 8 times, representing 256. 1% decrease, in the latest trading period under review. This implied that it used retained profits from 2007 and 2008 to pay the 2009 dividends. This measure of performance, just like the DPS had an increasing trend, it actually increased from -7. 9 to 1. 1 times as far as its rival carrier was concerned. Although SAA’s dividend cover is slightly below 1. 5 times, the 113. 9% increase during 2009 is by far promising to its shareholders as compared to the declining trend of KQ’s ratio. 3. 4 KQ’s operational performance analysis. According to money terms website (www. moneyterms. co. uk)

RPK is a measure of the volume of passengers carried by an airline. That is, a measure of sales volume of passenger traffic. ASK measures an airline’s passenger carrying capacity. PLF (also referred to as the load factor) is a measure of how much an airline’s passenger carrying capacity is being used. That is a measure of capacity utilization. According to table 1, it can be concluded that KQ is not only a smaller carrier than its competitor, (SAA) but it also faced stiff competition as far as passenger carriage was concerned. Its volume of passengers carried was the least compared to that of SAA in all the three years under review, although KQ’s RPK increased by 7. 78% it was considerably lower than that of

SAA; in fact it was over 3 times lower in all the three years under review. It can also be noted that the airline’s passenger carrying capacity (ASK) increased from about 10millin to about 11million an increase of about 11. 3% compared to that of SAA that remained 3 times greater in the three years. This was mainly due to SAA’s many planes that were in operation compounded by its better carrying capacity utilization as discussed here under. KQ’s PLF dropped to from 73. 6% in 2007 to 70. 8% in 2009, although that of SAA dropped from 75% to 73% over the same period it was undoubtedly better and greater than that of KQ. KQ’s three measures discussed above had the worst performance.

As per table 2 (page 17) KQ carried 2. 820 million passengers during 2008/2009 financial year compared to 2. 76million in the previous year and 2. 601 million in the year 2006/2007. According to KQ’s Annual Report 2009, the growth in passenger numbers in 2009 over the prior year was primarily due to the airline’s increased capacity, the effect of which was partially offset by the negative impact on tourism from the post-election crisis. In addition, the softened global economy also impacted the demand negatively towards the end of the financial year. On the other hand, although its competitor statistics indicated that its passenger carriage dropped by over 10% to only 6. 98 million passengers in 2009, its carriage capacity was almost 3 times greater than that of KQ in all the three years under watch. The cargo carriage per Table 2 shows that KQ had a lower carriage potential over the period compared to its competitor over the same period under review. SAA had almost thrice the capacity obtained by KQ in all the years. According to KQ’s Annual Report (2009) cargo revenue decreased primarily due to rationalization of capacity and decreased demand for air cargo services in a weaker global economy. In addition, the impact of drought on agricultural exports resulted in a further decrease of demand for cargo. 3. 5 Challenges facing KQ

From the above analysis KQ is yet to reach the carriage capacity of SAA (which is almost three times that of KQ). There are industry challenges to improve profitability by achieving further cost efficiencies. There is competition from other airlines like Virgin Atlantic Aviation in the London, America and (parts of) Africa routes. In addition, there is also competition from low cost carriers both locally and internationally, fore instance Fly Emirates has even low cost partner airlines around the globe. Others issues are: Escalating fuel prices, on time performance improvement and the political stability in Kenya Grand Coalition Government. 3. 6 How it overcomes the challenges 3. 6. 1 Network Expansion

According to KQ’s Annual Report 2009, network changes in the year were mainly geared towards optimizing the network through capacity rationalization, introduction of new destinations, improving connectivity and enhancing both crew and aircraft utilization. Learning centre on cost reduction and general employee awareness, this was mainly to increase carriage capacity. The Antananarivo and Brazzaville routes were successfully opened in November 2008 and March 2009 respectively. For the first time in October 2008, direct services were offered to Guangzhou from an African point. 3. 6. 2 Time Management The airline achieved a significant improvement in its on-time performance with more than 70% of its flights leaving on time.

This was achieved by setting a new target at zero minutes delay tolerance as opposed to the international IATA standard of 15 minutes delay tolerance prior to departure (Company Annual Report, 2009). 3. 6. 3 People Development The Pride Centre, (pictured on page 23), a state of the art training and development centre was officially launched in 2007. This facility houses the Company’s training and development activities (Company Annual Report, 2009). This was an effort to enlighten staff on efficiency hence cost reduction. 3. 6. 4 Acquisition KQ acquired and has control over four subsidiaries and an associate company; this helped to reduce the intense competition in the local scene. 3. 7 Conclusion Business performance The airline had various initiatives that were not only strategic but also long-term in scope.

In fact all of the discussed initiatives were either geared towards profitability or customer satisfaction. Besides they were all in line with the airline’s vision – ‘to consistently be a safe and profitable airline that guarantees world class service. ’ Profitability KQ’s profits reduced considerably over the period compared to that of its competitor that actually recovered from losses (as a result of completion of restructuring projects in 2008/2009). Effectively, its potential to control operating costs reduced over the period and as such ROCE also decreased greatly over the period despite marginal change in capital employed. The airline therefore, appeared not to have been keen on how owner resources were managed.

SAA had a better profitability potential and equally better ability to generate returns to its shareholders and the rate at which it picked up should be a waking up call to the KQ management. Liquidity The airline’s potential to settle short term debts (and with ease) was above 1 over the entire period under review as indicated by the trend of both current ratio and the quick ratio. This implied that the airline may not be in liquidity problems in the foreseeable future. Total assets increased too to imply that the airline had either few or no non performing assets. SAA’s similar ratios remained below 1 and as such KQ had a better liquidity position over the three year period under watch. Capitalization/ Leverage

The debt ratio reduced over the period to mean that the airline reduced long-term liabilities at each balance sheet date over the period; this means lower financial risk. However, even though this might be viewed as a good trend, care should be taken not to reduce long-term borrowing to a very low level, since good management means taking the maximum possible advantage of both sources of capital; i. e. debt and equity. Michael (2006) discuses that capital investment is essential for the long-term survival of a business. SAA’s ratio was marginally higher to suggest that although it financed its assets mainly through equity it was higher leveraged than KQ and hence higher financial risk.

Investment KQ’s EPS, DPS and dividend cover reduced greatly due to reduced profits reported in the financial 2008/2009 as a result of increased operating costs. Its competitor airline had an increasing EPS, DPS and dividend cover that actually rose from negative in 2007/2008 to positive during 2008/2009 to mean that SAA had better investor performance indications and as such investors could have opted to invest in it other than in KQ. 3. 8 Recommendations The airline may focus on the business segments with the greatest returns to ensure increased revenue hence profits, in which case it may opt to focus on passenger carriage in Africa and Europe.

KQ may also borrow operating strategies from SAA which fore instance did a lot of restructuring that begun during 2007, as a result (although it performed dismally in 2007 and 2008) new routes and more passengers where carried in 2009. This was a long term strategy rather than a short term one as SAA enjoyed increased profits during 2009. In order to boost the cash flow generated from operating activities, the company’s management may consider the use of discounts to entice the customers to book and fly with them. Generally, the airline may also review its air ticket pricing especially for its subsidiaries mainly to help curb competition from the local (domestic) market especially from Fly 540 which even has ‘Africa’s low cost airline’ as its brand name.

KQ may also opt to further venture into other new routes in other parts of the world as it is a member of the sky team, this strategy will help increase revenue. List of references BPP Learning Media Ltd. (2003) Strategic Financial Performance Study Text. 3rd Edition, London: BPP Learning Media Ltd. BPP Learning Media Ltd. (2004) Success in your Research & Analysis Project. 4th Edition, London: BPP Learning Media Ltd. BPP Learning Media Ltd. (2006) Financial Reporting Study Text. London: BPP Learning Media Ltd. BPP Learning Media Ltd. (2007) ACCA Paper P5 Advanced Performance Management Study Text. London: BPP Learning Media Ltd. Business Dictionary (2009) Primary Data [Online].

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