UK’s ban on miraa costs Kenya Airways Sh500m

Politics and policy

KQ chief executive Mbuvi Ngunze (left) and group finance director Alex Mbugua. PHOTO | FILE 

By MUGAMBI MUTEGI

In Summary

• KQ, as the airline is popularly known, made the revelation in its latest financial report laying bare for the first time the cost of the UK’s 15-month long ban on the stimulant.
• The list of countries that have banned trading in miraa include the US, Canada, Netherlands, France, Germany and Saudi Arabia, signifying a shrinking market for Kenya’s miraa farmers.
• KQ is offering this service in the Republic of the Congo, Cameroon, Tanzania, Zambia, South Africa and Côte d’Ivoire with plans to “soon” introduce it in India, Mali and Dubai.

National carrier Kenya Airways lost half a billion shillings in the wake of the UK government’s ban on khat (miraa) trade, pushing the struggling airline into deeper loss.

KQ, as the airline is popularly known, made the revelation in its latest financial report laying bare for the first time the cost of the UK’s 15-month long ban on the stimulant.

“(A) major shift in the product (freight) structure was encountered during the financial year with the khat ban imposed in the UK,” Mbuvi Ngunze, KQ’s chief executive, tells shareholders in the airlines’ 2014/2015 annual report.

“This had a revenue reduction impact of Sh500 million.”

READ: Kirubi causes a stir with purchase of Sh2mn KQ shares

Kenya Airways reported a record-setting Sh26 billion net loss for the year ended March 2015 – one year after the UK joined other European nations in outlawing khat on grounds of the health risks it poses to consumers, including mouth cancer and depression.

ADVERSELY AFFECTED

KQ, which shipped out more than 2,000 tonnes of khat to London’s Heathrow airport every year, joins the long list of growers and institutions that have been adversely affected by the trade ban.

Kenya Airways’ cargo business, which consists of freight, courier and mail, grew 3.4 per cent to 73.7 tonnes in the year to March, earning the airline approximately Sh8.6 billion.

The carrier, through its subsidiary KQ Cargo, transports goods to 20 countries including live animals, letters and packages, pharmaceuticals, fresh farm produce and human remains, among others.

The airline said Tuesday that miraa shipment accounted for 10 per cent of its total cargo revenue or Sh860 million, showing the stimulants’ significance to its bottom-line.

“In the 2014/2015 financial year, KQ operated seven flights per week into the UK and the average cargo tonnage on these flights was 140 tonnes per week,” Dick Murianki, the KQ Cargo general manager, told the Business Daily in an email.

“Approximately 50 tonnes of miraa was uplifted weekly into the UK representing an average of 10 per cent of the cargo turnover.”

KQ reported the biggest net loss in Kenya’s corporate history for the financial year ended March, citing a tourism slump and Ebola epidemic in West Africa as reasons for the loss.

Its debt-fuelled aircraft acquisition spree more than doubled its fleet ownership costs to Sh25.9 billion, dragging it deeper into loss-making territory.

The airline had until publication of the financial report, not identified the miraa ban as part of the factors that contributed to its dismal performance.
The report was released ahead of the carrier’s annual general meeting fixed for October 9.

To supplement revenue lost with the miraa ban, the airline has “refined” its valuable cargo business to include the transport of gold bullion and bank notes, a service it had stopped “a few years back.”

PROJECTED TO GROW

KQ is offering this service in the Republic of the Congo, Cameroon, Tanzania, Zambia, South Africa and Côte d’Ivoire with plans to “soon” introduce it in India, Mali and Dubai.

“The cargo team embarked on a substitution strategy to integrate the valuable cargo product, which delivered Sh58.5 million in revenues since launch and is projected to grow in the financial year 2015/16,” Mr Ngunze says in the report.

“This is a fast-expanding venture. We receive requests for security assessment of potential valuable cargo destinations at the rate of one destination every two months.”

Prior to the ban, approximately 2,560 tonnes of miraa were imported into the UK annually, according to statistics released by Britain’s Advisory Council on the Misuse of Drugs.

The UK government earned about £2.5 million per annum (Sh408 million) in taxes from the khat business, money it readily forfeited with the ban.
A kilogramme of khat in the UK retailed at between £3 (Sh490) and £4 (Sh653).

The list of countries that have banned trading in miraa include the US, Canada, Netherlands, France, Germany and Saudi Arabia, signifying a shrinking market for Kenya’s miraa farmers.

Earlier this year, President Uhuru Kenyatta, while on a tour of Meru, promised farmers that the government would petition the UK to lift the ban but the status quo remains.

“We know there have been problems because of the ban. We have put emphasis on this issue and I want to assure Meru residents that it is the government’s responsibility to see to it that this problem is resolved,” Mr Kenyatta said in February even as he encouraged miraa farmers to diversify into other crops to reduce their reliance on the stimulant.

The UK government has insisted that the move “was in no way targeted at Kenya directly” and that it always “had a long-standing intention to review the legal status of miraa.”

The government said the sanction was introduced in order to be at par with its EU and G8 partner states who had banned the herb, to prevent the UK from becoming a regional miraa smuggling hub, and to address health and social concerns over its use.

pmutegi@ke.nationmedia.com