Should You Buy African Airline Stocks?

African airlines have been making news of late.

FastJet (RUBI:LN), a new airline backed by the head of EasyJet, will launch in Ghana in a matter of months. And, in June, Kenya Airways (KNAL:KN) concluded a capital-raise for the purpose of doubling its fleet of planes by 2016.

Both news items would seem to be bullish indicators for airline stocks.

Should investors be hopping on board or cooling their jets?

African airlines have been making news of late.

FastJet (RUBI:LN), a new airline backed by the head of EasyJet, will launch in Ghana in a matter of months. And, in June, Kenya Airways (KNAL:KN) concluded a capital-raise for the purpose of doubling its fleet of planes by 2016.

Both news items would seem to be bullish indicators for airline stocks.

Should investors be hopping on board or cooling their jets?

Let’s take a look at the numbers.

Please Fasten Your Seatbelts

We’ll start with Kenya Airways (KQ), the most venerable of African airline stocks.

Photo by Plane Spotter NL

Travel back with me to 1995. In that year, KQ generated over KES2.1 billion worth of profit. That’s an impressive performance considering that the African renaissance was still in gestation at the time.

Since then, Kenya’s GDP has nearly quintupled. So it would be reasonable to expect KQ’s profits to have soared along with it, right?

It would, but if you had invested on that assumption, you’d be sorely disappointed.

I don’t have KQ’s share price info all the way back to 1995, but I do have its earnings figures. They’re plotted in the below chart.

[easychart type=”line” height=”150″ width=”350″ title=”Net Income for Kenya Airways (Local Currency)” groupnames=”Net Income (KES Million)” valuenames=”1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012″ group1values=”2137, 1419, 851, 1314, 993, 2922, 1357, 868, 400, 1302, 3882, 4829, 4098, 4578, -4083, 2035, 3538, 1660″ minaxis=”-5000″ groupcolors=”0070C0, 5E7B3B”]

If you look closely, you’ll see that KQ actually earned less in 2012 than it did in 1995! And this wasn’t a fluke. It outperformed its 1995 earnings in only six of the past 17 years.

KQ’s earnings history is even more lackluster when converted to US dollars.

Let’s assume a very patient investor bought $1000 worth of Kenya Airways’ stock in 1995. Our investor is so patient that she commits to holding her shares for 17 years and will consider 6% annualized earnings growth a satisfactory performance. The chart below superimposes our investor’s expectations on KQ’s actual earnings.

[easychart type=”line” height=”150″ width=”350″ title=”Net Income for Kenya Airways (US$)” groupnames=”Net Income (USD Million), Patient Investor’s Earnings Expectation” valuenames=”1995, 1996, 1997, 1998, 1999, 2000, 2001, 2002, 2003, 2004, 2005, 2006, 2007, 2008, 2009, 2010, 2011, 2012″ group1values=”48.3, 24.3, 15.5, 21.8, 15.5, 39.2, 17.4, 11.0, 5.2, 16.8, 52, 66.6, 59, 68.2, -49.4, 25.4, 41.4, 19.8″ group2values=”48.3, 51.2, 54.3, 57.5, 61, 64.6, 68.5, 72.6, 77, 81.6, 86.5, 91.7, 97.2, 103, 109.2, 115.7, 122.7, 130.1″ minaxis=”-50″ groupcolors=”0070C0, 5E7B3B”]

KQ never even come close to meeting our investor’s undemanding earnings growth expectation.

Unfortunately, I don’t have share price data for 1995, but, because stock values are a function of earnings, I’m pretty sure KQ has produced little value for its long-term holders. The stock price has dropped 81% in US dollar terms over the past five years.

Prepare for Turbulence

But I don’t mean to single KQ out. Africa’s other two airline stocks, Air Mauritius (AML:MP) and South Africa’s 1Time Holdings (1TM:SJ), have performed just as miserably.

My data for Air Mauritius (AML:MP) stretches back to 2002. Since then, its profits have dropped from $16.8 million to a $40.8 million loss. Its share price has dropped 35% in US$ terms over the past five years.

South Africa’s low-cost carrier, 1Time Holdings, reported its first earnings as a public company in 2006. In recent years, it doesn’t seem capable of reporting anything but losses. 1Time lost $19.1 million in 2011, and its shares have lost 88% of their value since August 2007.

Why is it so hard to make money in airline stocks?

In short, it’s because their profit margins get squeezed tighter than an oversized duffel bag in an overhead bin.

Check out the net margins for each of the African airlines over the past five years below.

[table id=112 /]

KQ is actually the most successful of the three, yet it’s only keeping two cents of profit out of every shilling’s worth of revenue.

With margins that thin, it’s no wonder that airline profits are fleeting. Variable fuel bills, high airplane replacement costs, encroaching competitors, and air disasters all have the potential to wreak havoc on the bottom line.

Stay Grounded

Airlines are sexy businesses. They’ve got a readily understandable business model based on flying hugely powerful, flashy jet planes.

And they often appear to be much cheaper than other stocks. But there’s a good reason for this. Airlines simply don’t generate much income over time.

So what’s my take on African airlines?

Fly them. Don’t buy them.

What Do You Think?

Am I being narrow-minded by refusing to invest in airlines? Let us know your thoughts in the comments!

28 thoughts on “Should You Buy African Airline Stocks?”

  1. Hmm interesting post. Also could Explain why the directors of Kenya Airways including the CEO himself do not own a single share of the company.

    1. Very true, Mark. Insider ownership is a key indication of future profitability. If someone like Mr. Naikuni, with his intimate knowledge of Kenya Airways, decides not to invest in the firm he commands, it speaks volumes about where he thinks the company is headed.

  2. If narrow-mindedness = Profits whats the problem?

    Why hold many shares with some aggregate growth rather than hold a few shares that go to the moon?

  3. I remember to have bought KQ during 2003 at a price of 7 bob and sold it and made really good profit. And when you knew how to trade this stock you will make money, very good money. To me I will buy it but I am very greedy at 7-8 bob mark although its hard to reach there…. so I am timing it and it is closely going to my number of 10. The company has issues on reducing staff, I will see where this goes and get in.

  4. OK, OK, so now we know NOT to invest in African Airlines – The question is where are the best places to invest in Africa???

      1. I will mention a few reasons why:

        1) Being owned by the government, it is often subject to its intervention and which according to me destroys free running of these businesses… As an example, the company changed CEO something like 9 times (for several reasons) in the last 10 years…
        2) Gets revenue in EURO and pay most expenses in USD… The recent disparity EUR/USD is hurting the airline..
        3) EU zone is currently our main market and as expected the airline’s passenger load factor will take a hit..
        4) Skyrocketing FUEL price is something they cannot control..
        5) Being a long haul destination worsen the picture in turbulent times.

        When you look at those airline companies and try to build a model, you then realize that no model would be appropriate since they are so many exogenous factors which affect them.

        1. Very helpful, Kamlesh. Many thanks. Many of these also apply to other African airlines. Clearly, it’s an industry that’s better at capturing imaginations than profits.

  5. Hi Ryan,

    A good article. Every time I fly into Africa I wonder if the guys maintaining the plane make enough money not to cut corners!

    Maybe just a few thoughts about the possible reasons on why it is so tough to make money in this space:

    1. High level of competition: Despite a demise of a number of African airlines and other airlines flying into Africa, I think that there is still perception that “size is king”. Kenya Airways raised $250m to expand its fleet, SAA is doing the same by expanding its African destinations, Fly540/FastJet wants to expand on regional basis as well. So to me it seems that there is substantial over-capacity on certain routes and this certainly puts pressure on margins. And don’t forget that in most cases you compete with government owned airlines that have deep pockets and can undercut you on key routes!

    2. High travel costs: Passengers in Africa are being sucked dry all along the way (visa fees, exorbitant hotel costs, taxis/car hire, etc) so in the end airlines are the ones that receive a very small portion of traveller’s spend. Plus the opportunity cost of leaving for the airport 5 hours ahead of the flight just in case of being stuck in traffic, surviving airports with limited facilities, 1-2 hrs for immigration clearance on landing, and often inconvenient flight times, all adds up to prevent people who can afford to fly, from flying as often as they potentially could (or should!)

    3. Operating expenses: I don’t have the information on hand, but I imagine that being based in a place like Nairobi or Lagos does not lend itself to a low cost operating model for an airline. Besides the electricity generators, huge staff numbers required to get the passengers to the airplane due to poor airport infrastructure, limited luggage handling facilities, etc all adds up.

    So a trading opportunity rather than a long-term investment?

    1. Many thanks for this, Maciek. I agree with you on all three. There seems, too, to be a tendency for airlines to grow faster than they should. KQ especially seems to be building its fleet and list of destinations at the expense of profitability. Perhaps they’d be better off scaling back to only the most profitable of routes.

      Perhaps they are a trading opportunity. The trick is how to value a company with so many moving parts. When do you buy and when do you sell? Do you use book value as your guide?

    1. I totally agree with your analysis. The fluctuations are too much with very many unknowns. The overheads are too high; from fuel to the pilots’ salaries. I am sure if KQ would be more profitable, the crews will demand high salaries, thus reducing the margins.

    1. So glad you posted this video, Chris. I highly recommend that everyone take a look. Buffett begins talking about airlines at the 2:30 mark of the clip.

      Buffett also made this terrific quote on airline stocks:
      “How do you become a millionaire? Make a billion dollars and then buy an airline.”

    1. Cement manufacturing, banking, and consumer goods should all see good growth over the long-term. But choose your entry points carefully. Just because a stock is in the right sector, doesn’t necessarily mean it’s cheap.

  6. Thanks for the interesting info. I am one of those who invested in 1994 at the outset. I must admit I have lost track and would like to know what meager returns I have made. How do I go about cashing in?

    Many thanks.


  7. Very good and concise comments with information which would have been invaluable to many who have invested in airlines like Kenya Airways (KQ). The stock holders for the last one year and recent rights issue participants are shocked at the negative KQ performance. I concur that Airline stocks are a big risk!!

  8. And what’s Naikuni still doing in KQ? I think he should have anticipated all this years ago and left the airline before it comes crushing down with his reputation on board!

  9. I actually remember in 2009 the airline stock hitting 135 per share. Now for someone who bought it at 12, he made quite the killing. I noticed a trend with KQ back then. This was during its period of expansion n every time the media would announce a new plane has landed, the stocks would jump a few shillings up. Right now, the stocks are at 10.65. When they start taking in their new 787‘s (as problematic as they are) the stock will jump up. So i‘ll buy my share n wait.

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