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Kenya Airways posts massive losses

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The losses announced at the Kenya Airways’ investors briefing were 25.7 billion Kenya shillings (around US$252 million) – the highest ever in the airline’s history. Financial analysts, some with an inkling of what was coming, as well as aviation pundits, must have held their combined breath for a moment, before moving on to dissect the range of additional information the airline put out ahead of the upcoming annual general meeting when shareholders will have their say.

A closer look at the balance sheet shows the key elements which led to the airline writing a deep red bottom line, such as doubled fleet ownership costs, which rose from last year’s 12.5 billion Kenya shillings to nearly 26 billion Kenya shillings, while the company’s finance costs also doubled from 2.4 billion to 4.7 billion Kenya shillings.

Operating losses in the meantime rose from 2.7 billion Kenya shillings in 2014 to 16.3 billion Kenya shillings this year. Higher labor costs were also cited in comparison with key continental competitors, raising questions on union demands.

Mitigating factors for this performance was the halt of flights to key markets in West Africa on order of the Ministry of Health in Kenya during the height of the Ebola crisis, which cost the airline between 4 and 5 billion Kenya shillings in revenues. Crippling anti-travel advisories inflicted by Britain and some other countries were another factor beyond the airline’s ability to fight off, and impacted on load factors of key European routes to Nairobi.

At the same time, competition has heated up, not only from Gulf airlines, a fact also decried by the African Airlines Association (AFRAA) as an Africa wide phenomenon, but also from Ethiopian Airlines which doubled their services between Addis Ababa from 2 a year ago to 4 and is luring passengers from Kenya to fly with them via Addis at what some have suggested are below cost fares, an allegation hard to substantiate. Many airlines, when selling against a national airline, offer fares below those of the home airline though the differing variances are an indicator just how hard they are trying to gain market share.

The airline, in a statement availed to this correspondent, made various comments vis-a-vis the financial results and key elements will be shown here for readers to understand better the challenges at hand:

Start quote:

COMMENTARY

Kenya Airways (KQ) successfully completed the first phase of its fleet renewal program in the year involving the acquisition of the long-delayed 5xB787 Dreamliners, 2xB777-300 and 3xB737-800NG. In the same period, the entire fleet of 767s were exited from operations.

These investments however coincided with a difficult business environment driven by the incidences of terrorism in the region together with adverse external factors like West African Ebola crisis and the effects of travel advisories. These factors cumulatively had a negative effect on the Kenyan tourism and aviation sector. As a result, both the operational and financial performance of the airline for the period under review has been adversely impacted.

Revenues

The airline offered to the market a capacity of 15.406 million measured in Available Seat Kilometres (ASKs) representing a year-on-year growth of 8.6%. The uptake of capacity measured in Revenue Passenger Kilometres (RPKs) rose to 9,793million, a growth of 5.2%, driving down the achieved cabin factor to 63.6% for the period from 65.6% prior year. At KShs 90.4 billion, the passenger revenue base remained flat and at the same level with prior year’s Kshs 90.2 billion.

The capacity availed into Europe grew by 13% mainly driven by the deployment of the larger
B777-300ER to Amsterdam in place of the B777-200ER, as well as the upgrade of the Paris operations to a B787 Dreamliner. The combined capacity into the Middle East and Far East regions expanded by 9% due to the substitution of the B767s with B787 to most of the destinations.

Within Africa, the capacity offered increased by 3.6% as a result of the additional frequencies to most destinations despite the suspension of operations into Sierra Leone and Liberia since August 2014 and suspension of operations into South Sudan earlier in the year. The capacity within the domestic market registered a 29% growth following a successful entry of our low-cost carrier JamboJet into the arena.

During the period, passenger numbers increased from 3.7 million to 4.2 million.

Costs

Direct operating costs at KShs 76.1 billion remained flat compared to prior year despite the
8.6% increas in capacity mainly driven by savings in fuel cost. Fleet ownership costs increased to KShs 26 billion compared to prior year at Kshs 12.5 billion arising from the impact of the fleet renewal plan. Included in the fleet costs are impairment and other costs associated with the retirement of fleet. Overheads increased from KShs 21 billion to KShs 24.5 billion driven by support costs for the expanded network and additional fleet.

Financial items

• Finance costs at Kshs 4.7 billion are Kshs 2.3 billion higher than prior year due to acquisition of additional fleet and short-term financing costs.

• Include unrealized losses on fuel derivatives of Kshs 5.8 billion.

Exchange Rate

During the period under review the Kenya shilling weakened against the dollar with the average exchange rate at Kshs 89.05 compared to Kshs 85.92 in the prior year.

Outlook

Against this background, the Board has taken a number of measures aimed at safe guarding the long-term viability of the business. These measures include:

• The agreement with Afrexim Bank to act as a financial advisor for an optimal funding structure and to provide a USD 200m bridge loan.

• The acceleration of the commercial action plan geared at revenue generation.

• Engagement with key shareholders for support.

The Board believes that the KQ product offering is greatly enhanced with the fleet renewal and improvements at the hub. The Board takes this opportunity to thank all its customers, staff, and
management, government of Kenya, the shareholders and suppliers for their dedicated contribution to the airline.

End quote

On the positive side for Kenya Airways is the move during the past financial year into their new home, Terminal 1A, a bonus for their passengers, with substantially improved comfort levels from check-in to the gates. New lounges for premium passengers offer unparalleled facilities and services, again providing the right incentive for front cabin passengers to fly with Kenya Airways, more so as the on-board services in business class were also upped.

The arrival of yet more new B787 Dreamliners which offer substantially improved operating economics will allow the airline to dispose of the larger but more expensive to operate Boeing B777-200ERs. Kenya Airways has 4 of those planes on the fleet but had mothballed them during the past year when demand on routes where these aircraft were deployed reduced. An airline source yesterday confirmed that negotiations are ongoing with potential buyers to sell at least these 4 and possibly even the newer 3 B777-300ERs with the aim to operate all long-haul routes with the state-of-the-art B787 Dreamliners.

Once sold, the proceeds will no doubt help to not only reduce operating costs but also improve the financials of the airline through a leaner but much more efficient fleet, leaving room to expand again when demand rises by adding more Dreamliners.

Towards that end, it has also been confirmed that Plan Mawingo has already and continues to undergo a major review taking into account the changed parameters since the strategic plan was originally launched. This applies apparently not only to the projected fleet growth but also vis-a-vis new destinations, and a team of consultants has been brought on board to help come up with an updated version, reflecting the present reality and match it to what can be accomplished, not what past ambitions wrote into the hymn sheets. Grapevine talk has it that a newly-formulated realistic 5-year plan covering the period up to 2020 has been produced, but is being kept under wraps to avoid key competitors from obtaining and using such crucial details as Kenya Airways’ flies into friendlier skies again.

What is clear is that the company’s CEO, Mbuvi Ngunze, is determined to turn the airline’s fortunes around, and with the 2014/15 financial year results now out in the open, attention will turn to the announcements of Q1 results. Those keenly-awaited figures will be covering the period April to June, as and when they become available in a few weeks’ time and will be a good indicator if the past trend, like with tourism in Kenya overall, has bottomed out and a recovery is underway.

Source: http://tinyurl.com/pelcv5l

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