A Kenya Airways plane at the Jomo Kenyatta International Airport in Nairobi. PHOTO | FILE
By VICTOR JUMA, vjuma@ke.nationmedia.com
In Summary
- The loss-making contracts are the latest culmination of the chain of bad decisions linked to an expansion binge dubbed Project Mawingu, and which it has been unwinding in the past year at a heavy cost to shareholders.
- KQ signed the deals to mitigate even larger losses it would have incurred from cancelling the contracts after it failed to fly the planes profitably.
National carrier Kenya Airways’
decision to sub-lease five aeroplanes to foreign airlines left it with a
Sh4 billion loss, the company’s latest financial statement shows.
The multi-billion shilling loss is the difference between
revenues earned from the sub-leasing contracts and payments to be made
to primary lessors in the same period.
Kenya Airways yesterday said that the prevailing
business circumstances had made it prudent to reduce excess capacity
through leasing, adding that the Sh4 billion loss is an accounting
treatment covering the entire period of the sub-lease.
The loss-making contracts are the latest
culmination of the chain of bad decisions linked to an expansion binge
dubbed Project Mawingu, and which it has been unwinding in the past year
at a heavy cost to shareholders.
KQ, as the airline is popularly known, signed the
deals to mitigate even larger losses it would have incurred from
cancelling the contracts after it failed to fly the planes profitably.
“The airline has sub-leased certain aircraft that
are held on operating and finance lease at lease rentals that are lower
than that charged by the primary lessors resulting into onerous lease
provision,” the Nairobi Securities Exchange-listed firm says in its
latest annual report.
KQ last year leased five Boeing aeroplanes to Oman
Air and Turkish Airlines in the middle of a liquidity crisis that it
only navigated with the help of the government.
The airline recognised a Sh1.4 billion loss in the
year ended March 2016, with the balance of Sh2.5 billion expected to
filter through over the coming years as the contracts roll on in the
medium term.
KQ chief executive Mbuvi Ngunze said at the time of
signing the lease contracts that they would reduce fleet costs by
Sh8.4 billion annually, indicating that sub-leasing at a loss (which
was not disclosed at the time) represents a lesser evil compared to
maintaining a bloated fleet.
“These actions will reduce our monthly fleet costs
by over $7 million (Sh707 million), and improve our liquidity, and is
part of our strategy to return Kenya Airways to profitability in the
next 18 to 24 months,” Mr Ngunze said on a May 26, 2016 statement,
adding that while it was sad to see brand new aircraft going to other
airlines, it was important to understand the context in which the
decision was made.
KQ leased two B787s to Oman Air for three years and
is set to take a loss of Sh918 million in that transaction. Besides,
its lease of three B773s to Turkish Airlines for four years is expected
to result in a loss of 3.1 billion, bringing the total loss to Sh4
billion.
Sub-leasing the aircraft, non-renewal of other
leases and sale of several aeroplanes saw KQ’s fleet drop to 47 planes
in the year ended March compared to 52 units the year before.
The airline plans to further scale back its capacity in the
current financial year to cut costs prevent a further decline into the
negative capital position with the sub-leasing of more aircrafts to Omar
Air and Turkish Airlines.
Kenya Airways has said it is keen on reducing the number of
empty seats on long haul flights and terminating some routes to further
cut costs.
“There will be further reductions in both fleet
count and aircraft type with the initiative to have a lean and efficient
fleet tailored to the company’s network requirements,” KQ said in the
report.
Two B787-8s are to be sub-leased to Oman Air for an
undisclosed number of years, bringing the total number of aircrafts
seconded to the Muscat-based carrier to four.
Three B777-300ER will be sub-leased to Turkish
Airlines for an undisclosed period, raising the number of airplanes sent
to the Istanbul-based carrier to six.
KQ did not indicate whether the upcoming
sub-leasing deals with the same carriers will also leave it underwater
or whether it will break even or book a profit.
The national carrier also plans to sell two
B777-200ERs and return two E170s (Embraers) to their owners at the end
of their lease period.
The mix of aircraft sub-leasing, sales and
non-renewal of leasing will discharge a total of nine aeroplanes from
its fleet that will shrink to 38 units.
The B787 series, also known as Dreamliners, are
among the most expensive airplanes in KQ’s fleet expansion programme
that was based on a projection of flying to 77 countries and 115
destinations by 2021.
Drafters of the Project Mawingu strategy addressed
several risks including funding but did not take into account lack of
demand for the enlarged capacity, a key factor in KQ’s woes as seen in
massive debts unmatched by revenue growth.
Paring down capacity fits into KQ’s broader
turnaround plan that includes staff retrenchment, with pilots and cabin
crew among employees to be rendered redundant by the capacity reduction.
KQ says it let go of 41 pilots in the year ended March, a move that saw their count drop to 489 from 523 the year before.
Its overall staff count dropped to 3,870 from 4,002 over the same period, with further retrenchments having commenced from July.
The airline made a record net loss of Sh26.2
billion in the year ended March, widening the Sh25.7 billion net loss
the year before.
This saw its net worth worsen to negative Sh35.6 billion from negative Sh5.9 billion over the same period.
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