Kenya Airways future pegged on fuel pricing

Kenya Airways moved back to profitability in the first half ended September driven by gains from fuel contracts despite sluggish performance of its core business.

Analysts reckoned that the airline’s performance in the current financial year is largely dependent on the direction the petroleum prices in the second half since the firm is forecasting a low demand for travel and cargo services.

The national carrier posted a 17 percent rise in pretax profit to Sh1.23 billion, despite significant pressure on its passenger numbers and cargo volumes.

The reduced activity in these core businesses is underlined by the eight per cent drop in operating profit, pulled down by a 1.7 per cent drop in revenues to Sh33.4 billion.

The profits were mainly driven by the Sh1.72 billion gain on fuel hedging contracts which was a 20 per cent increase compared to the Sh1.43 billion it earned in a similar period a year earlier.

The gain was attributed to the current fuel prices that were trading at above most of hedged contracts that the firm signed in the first half of this year, after the expiry of some expensive hedging contracts.

Now, the firm is expected to maintain the same profit trend if oil prices remain at the current level, since it will be gaining on most of the hedged contracts.

But its investors looked unimpressed as the share remained unchanged at Sh24.50 on Friday despite improved performance. KQ’s share price has fallen by over 80 per cent in the last three years from a high of Sh130 to the current price.

In the second half of last year, the airline booked a Sh7.5 billion loss it incurred from unrealised hedging position in its income statement, taking it deep into the loss-making territory.

At the time, it had hedged 56 per cent of its fuel hedged between $108 and $110, the global financial crisis brought petroleum prices down tumbling and left the national carrier with huge losses from the deep hedging position it had taken in the jet fuel market.

Currently, the airline has hedged 53 per cent of its fuel under, with most hedged held at below current prevailing jet prices.

This means it would continue gaining on the hedged contracts unless fuel prices falls significantly, which is unlikely as oil prices are expected to surge on optimism over the global economic recovery.

“Going ahead the volatile fuel prices will continue being a challenge,” said Bram Steller, the airline’s chief operating officer.

Lower fuel prices, compared to the same period last year, saw the airline record a direct saving of Sh5.7 billion on its un-hedged fuel, the airline’s chief operating officer.

Statistics from IATA, an industry lobby, shows that jet fuel is currently trading at $84.8 per barrel, a 5.9 drop compared to a year ago, meaning that KQ is still making gains on un-hedged fuel.