AnnualAnnual Report Report and and Financial Financial Statements Statements ForFor the the Year Year ended ended 31 31March March 2014 2014 DreamsDreams into into reality reality KQ Annual Report & Financial Statements 2014 1 Contents Performance Highlights 3 Board of Directors 6 Chairman’s Statement 12 Taarifa ya Mwenyekiti 17 Management Team 24 Chief Executive’s Statement 32 Taarifa ya Afisa Mkuu Mtendaji 45 Corporate Governance 58 Shareholding 61 Corporate Information 64 Directors’ Report 65 Statement of Directors’ Responsibilities 66 Independent Auditors’ Report 67 Consolidated Income Statement 68 Consolidated Statement of Comprehensive Income 69 Consolidated Statement of Financial Position 70 Company Statement of Financial Position 71 Consolidated Statement of Changes in Equity 72 Company Statement of Changes in Equity 73 Consolidated Statement of Cash Flows 74 Notes to the Financial Statements 75 2 KQ Annual Report & Financial Statements 2014 KQ Annual Report & Financial Statements 2014 3 Performance Highlights 4 KQ Annual Report & Financial Statements 2014 Performance Highlights KQ Annual Report & Financial Statements 2014 5 Performance Highlights Three Year Summary of Financial Highlights Financial Highlights The Group 2014 2013 2012 KShs. Million US$ Million KShs. Million US$ Million KShs. Million US$ Million Turnover Passenger 90,179 1,049.6 85,099 1,000.9 95,152 1,074.2 Freight & Mail 9,942 115.7 9,714 114.3 8,811 99.5 Handling 1,948 22.7 1,705 20.1 1,869 21.1 Other 3,941 45.9 2,342 27.5 2,065 23.3 Total 106,009 1,233.8 98,860 1,162.8 107,897 1,218.1 Direct costs (75,268) (876.0) (77,225) (908.3) (77,217) (871.7) Fleet ownership costs (12,490) (145.4) (11,178) (131.5) (9,970) (112.6) Overheads (20,972) (244.1) (18,643) (219.3) (19,404) (219.1) Restructuring costs - - (826) (9.7) - - Operating (loss) / profit (2,721) (31.7) (9,012) (106.0) 1,306 14.7 Operating Margin% -2.6% -9.1% 1.2% Net finance costs (1,601) (18.6) (486) (5.7) (1,097) (12.4) Fuel Hedge Derivative 972 11.3 602 7.1 2,467 27.9 Share of results of associate - - (230) (2.7) 238 2.7 Other costs (1,511) (17.59) (1,700) (20.0) (768) (8.7) (Loss)/profit before tax (4,861) (56.6) (10,826) (107.3) 2,146 24.2 Income tax credit /(expense) 1,479 17.2 2,962 34.8 (486) (5.5) (loss)/profit for the year (3,382) (39.4) (7,864) (72.5) 1,660 18.7 (Loss)/profit after tax margin% (3.2%) (8.0%) 1.5 Dividends - - - - 374 4.2 Operating Statistics 2014 2013 2012 Passengers 3,719,590 3,664,844 3,644,492 Revenue Passenger Kilometres (RPK’s-Millions) 9,309 9,579 9,943 Available Seat Kilometres (ASK’s - Millions) 14,188 13,937 13,875 Passenger Load Factor (%) 65.6 68.7 71.7 Cargo Tonnes 71,340 69,871 62,504 Pax yield/ RPK inc Fuel Surcharge (Usc) 10.47 9.81 9.90 Employees Airline 3,449 3,470 3,563 Group 3,989 4,006 4,834 Aircraft in Service at Year End Boeing 787-800 1 - - Boeing 777-300 1 - - Boeing 777-200 4 4 4 Boeing 767-300 6 6 5 Boeing 737-800 5 5 5 Boeing 737-700 4 4 4 Boeing 737-300 4 5 6 Embraer 190 15 12 4 Embraer 170 5 5 5 B747-400 Freighter 0 1 1 B737-300 Freighter 2 1 - Total 47 43 34 6 KQ Annual Report & Financial Statements 2014 Board of Directors STANDING FROM LEFT TO RIGHT: Alex Mbugua I Joseph Veenstra I Ayisi Makatiani I Joseph Nduva Muli Dr. Titus Naikuni I Evanson Mwaniki I Pieter Elbers I Vincent Rague Dinesh Kapila I Dr. Kamau Thugge I Amb. Dennis Awori I Ron Schipper KQ Annual Report & Financial Statements 2014 7 NOT IN THE PICTURE Catherine Musakali 8 KQ Annual Report & Financial Statements 2014 Board of Directors continued Evanson Mwaniki (75 years): Non Executive Chairman Mr. Mwaniki holds a Bachelor of Arts (Hons) from the University of London. He was the General Manager of Shell and BP between June 1989 and December 1994. Over this period Mr. Mwaniki’s notable achievements included turning around the company from a loss position in 1989 to profitability. He also led the oil industry negotiations with the Government of Kenya on liberalisation of the oil industry, leading to actual decontrol in October 1994, and prepared Kenya Shell & BP Kenya (including restructuring the organisation) for effective marketing in the new (liberalised) business environment. Mr. Mwaniki has represented the oil industry in various influential forums. These include the Federation of Kenya Employers and the East Africa Association. Mr. Mwaniki currently sits on the boards of various companies, including British American Tobacco Kenya (Non-Executive Chairman), East African Breweries Ltd, East African Packaging Industries Ltd and Lion of Kenya Insurance Company Ltd. On the corporate social responsibility side, Mr. Mwaniki has rendered long voluntary service in educational institutions including the Alliance High School where he served for many years as the Chairman of the Board of Governors and the Starehe Boys’ School where he currently serves on the Board of Trustees. Dr. Titus Naikuni (60 Years): Group Managing Director & Chief Executive Officer Dr. Naikuni holds a Bachelor of Science Honours Degree in Mechanical Engineering from the University of Nairobi. He is also a graduate of the Harvard Business School’s Programme for Management Development (PMD71) and was awarded a Doctor of Science Degree in Engineering by the Jomo Kenyatta University of Agriculture and Technology in 2008, an honorary award in recognition of his contribution to development. He joined the Magadi Soda Company in 1979 as a trainee engineer and rose to the position of Managing Director in 1995 and simultaneously served as Managing Director of the Magadi Railway Company (a subsidiary of Magadi Soda Company) in 1996. Between August 1999 and March 2001, Dr. Naikuni was a member of a team of World Bank sponsored Kenyan technocrats, known as the “Dream Team” who were engaged by President Moi to turn around the Kenyan economy. In this capacity Dr. Naikuni served as permanent secretary to the Ministry of Information, Transport and Communications and was a member of the Board of Kenya Airways during that period. He returned to Magadi Soda Company in April 2001 where he continued to serve as Managing Director of Magadi Soda and Magadi Railway Companies, a position he held up to his present appointment with Kenya Airways in February 2003. Dr. Naikuni received the COYA Manager of the Year Award from the Kenya Institute of Management in 2002. In 2009, during the 15th Aviation & Allied Business Leadership Conference in Addis Ababa, Ethiopia, Dr. Naikuni was awarded the 2009 Aviation & Allied Business Individual Achievement Award. In 2013, he received the ‘Airline Business Award’ during the Airline Strategy Awards 2013, which recognizes an individual who has made a lasting strategic contribution to the air transport business. Dr. Naikuni was recently recognized for his contribution to the aviation industry in Africa. He was awarded the Lifetime Achievement Award for Outstanding Services to African Aviation Development during the recently concluded African Aviation Summit 2014 in Addis Ababa, Ethiopia. The summit coincided with the 23rd annual Air Finance for Africa’ Conference & Exhibition. Alex Wainaina Mbugua (50 years): Group Finance Director Mr. Mbugua was appointed the Group Finance Director on 14th July 2008. He is an MBA graduate with specialization in Corporate Finance and a member of the Institute of Certified Public Accountants of Kenya. He is also an alumni of Harvard Business School having completed the Advanced Management Program (AMP 183) in October 2012. In the past 28 years, during his highly successful career, Mr. Mbugua has developed significant knowledge and expertise in the fields of finance, strategy, information technology and general management. As Group Finance Director, Mr. Mbugua has been responsible for and overseen certain key milestones for KQ, including chairing of the KQ Ten Year Strategic Planning committee for the development of “Project Mawingu” and presiding over the capital raising for the project. This included the high profile 2012 rights issue offer that raised net proceeds of KES 13.8 billion. Prior to his current position, Mr. Mbugua held the position of Chief Financial Officer of Africa Open Pit Mines, AngloGold Ashanti in Johannesburg. He also held board positions at AngloGold Holdings (UK) and also in 8 mining subsidiaries spread out in 5 African Countries. Other board positions have included Bain Hogg Ltd and Norfolk Holdings (K) Ltd together with KQ subsidiaries Kenya Airfreight Handling Ltd and JamboJet Ltd. KQ Annual Report & Financial Statements 2014 9 Board of Directors continued Dinesh Kapila (68 Years): Non-Executive Director Mr. Kapila is an advocate of the High Court of Kenya, Barrister-at-law, Lincolns’ Inn, England, a partner in D.V. Kapila & Company Advocates and a practitioner in corporate, commercial and conveyancing matters. He has been actively involved in the overall privatisation strategy in Kenya as a member of the Parastatal Reform Programme Committee of the Government of Kenya. He has been a member of the Attorney General’s Task Force formed for revising and updating laws relating to companies, partnerships, investments and insolvency. He has been a member of New Issues and Economic Rejuvenation Committees of the Nairobi Securities Exchange. He has attended the Harvard Business School’s executive program in corporate governance. He has assisted in the restructuring, commercialization, strategic investment and privatisation of Kenya Airways and was duly recognised by the World Bank for his exceptional contribution.