KQ sinks deeper, but sticks with Boeing

Tuesday May 7 2019

Kenya Airways plane JKIA

Kenya Airways planes parked at the Jomo Kenyatta International Airport, Nairobi. PHOTO | REUTERS 

JAMES ANYANZWA
By JAMES ANYANZWA
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Kenya Airways has sunk deeper into the red, weighed down by rising competition, soaring fleet operational costs, slower growth in passenger numbers and high fuel prices.

But the national carrier has not considered switching its future plane orders to Airbus after Boeing’s 737-MAX jet crisis, the airline’s chairman said on Tuesday.

According to the airline’s audited financial results for the year to December 31, 2018, its losses grew to Ksh7.5 billion ($75 million), from Ksh6.4 billion ($64 million) in 2017.

After the material announcement on April 30, its stock fell three per cent to Ksh4.71 ($0.0471) per share, from Ksh4.85 ($0.0485) the previous day.

Total revenues increased to Ksh114.2 billion ($1.14 billion), from Ksh80.8 billion ($808 million), but total operating costs jumped to Ksh114.8 billion ($1.14 billion), from Ksh79.8 billion ($798 million) in the same period last year.

Fleet costs hit Ksh18.9 billion ($189 million) from Ksh12.4 billion ($124 million) while overhead costs increased to Ksh20.9 billion ($209 million) from Ksh15.5 billion ($155 million).

KQ chairman Michael Joseph told Reuters that the airline has a plan to grow the fleet “and it is both wide bodies and narrow bodies. That means the 787s, 737s and Embraers.”

Boeing jets

Airlines and regulators around the world last month grounded the 737-Max planes, a narrow body industry workhorse, after two horror crashes in Indonesia and Ethiopia.

The airline, whose balance sheet swung back into negative equity territory wants to run the main airport in Nairobi to boost its cash flow and allow it to buy new planes.

It expects to add two Boeing 787 Dreamliners to its fleet later this year. The planes had been leased out to Oman Air, as the then cash-strapped Kenya Airways trimmed its fleet size to stay afloat.

The rejection

According to the airline, the increase in oil prices by 30 per cent in 2018 posed the biggest challenge to its profitability, prompting the management to start fuel hedging in the fourth quarter to cushion against volatility in oil prices.

Fuel represents over 40 per cent of the airline’s direct costs.

KQ is, however, among carriers that have in the past borne the pain of counterproductive hedging, coinciding with a severe drop in global oil prices.

KQ’s daily passenger numbers increased by six per cent to 13,258 from 12,484 during the period under review.

Although the airline launched direct flights to New York on October 28, 2018, the new route has not been profitable.

Mr Mikosz had pinned his hopes of the long-term survival of the carrier to its takeover of Jomo Kenyatta Airport.

However, KQ’s privately initiated investment proposal for the takeover of the running of the airport has been rejected by both parliament and the Kenya Airports Authority.

KQ submitted its proposal to KAA on October 3, 2018 seeking a 30-year concession to manage and develop JKIA setting the annual concession fee at $28 million in 2019, which will gradually rise to $35 million in 2028 compared with KAA’s non-JKIA operations which are budgeted to cost $66 million.

KQ’s problems worsened when it was forced into a restructuring programme in 2017, which the current management says did not favour the carrier but simply put taxpayers in a situation where they would have to pay a whopping $750 million if KQ were to collapse.

The restructuring allowed the Kenya government to own 48.9 per cent of the airline and 11 local banks 38.1 per cent shareholding after agreeing to convert their combined Ksh23 billion ($230 million) debt into equity.

KLM Royal Dutch Airline owns 7.8 per cent stake and the airline’s Employee Share Ownership Scheme 2.4 per cent. Other shareholders own 2.8 per cent.

—Additional reporting by Reuters.

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