Strike pushes KQ into a headwind

However, one thing that is clear is that the expansion has been sucking all its free cashflows — the cash profits that can be distributed to shareholders — as the management invested into the future. This has somewhat improved in the last three years, which means that as other global airlines have been struggling with liquidity, KQ has a fairly strong balance sheet.

The airline, however, is still facing hard times as it tries to navigate the skies during these turbulent times that have seen it report low passenger numbers.

Before the strike, the airline had just started to record improved passenger numbers as the peak travelling season took off and was expected to improve its passenger numbers for the second quarter after a difficult first quarter this financial year.

Its ability to fill in the seats offered on its planes as measured by load factors have been down due to the ongoing slump in the global travel industry leading to the airline recording a four per cent drop in passenger traffic to 639,348 compared to the same period last year in the first quarter.

For the year ending March 2009, the airline reported losses of Sh5.66 billion, compared with pre-tax profit of Sh6.52 billion the previous year, due to fuel hedging contracts that saw it write down losses amounting to Sh7.5 billion.

The loss was attributed to new accounting requirements.

Fuel costs remain a major risk and concern with the airline now keenly watching the price of fuel as an increase in prices would reduce the airlines exposure and would translate into earnings under its hedging arrangements.

According to analysts, the airline is still not out of trouble despite the slight increase in fuel prices. African Alliance says that the price of jet fuel would have to reach over $100 for the airline to see a shift of the unrealised losses to profits. It hedged against jet fuel price movement till the end of 2010 at the height of turbulence in crude oil prices last year.

It is paying for jet fuel at between $108 and $110 a barrel as per the hedging agreement.

The same hedges had cushioned the airline from recording major losses as fuel prices sky-rocketed. Compared to other global airlines, KQ is heavily exposed to fuel price risks which can easily swing its fortunes into deep losses or profits.

For now, the airline has hedged 56 per cent of its fuel requirements, at a time when global carriers are balking at taking a bet on the movement of oil prices. As long as crude oil prices remain below $110, KQ will continue losing more on its hedges.

In the recent months, there has been an upward movement of crude prices to about $70. IATA statistics show that jet fuel prices are currently at $79.8 per barrel, a 17 per cent increment in the past one month.

Though this works for the airline, management will have to deal with balancing increased fuel prices with increased fuel surcharges as was the case when prices shot up last year.

In a slow travelling industry, the sector will have to balance increasing surcharges and cushioning their costs should fuel prices continue to move upwards. Already the industry has been forced to heavily discount travel in a bid to attract the ever shrinking passenger numbers. Kenya Airways has been unveiling reduced prices on some of its competitive routes like Mombasa, Dubai and Europe.

Increased costs
In addition, the carrier is facing a fresh threat to its earnings due to delays on the delivery on the Boeing 787 Dreamliner that were expected in 2010 to help it expand to new routes, increase frequencies on profitable destinations and replace the ageing Boeing 767s. The planes were expected to increase its earnings through fuel efficiency as fuel accounts for a significant chunk of its operation costs.