Corporate News

KQ eyes cost savings to restore profit

Kenya Airways CEO Titus Naikuni. The firm is closely watching its costs with the aim of rebounding from losses. Photo/FILE
Kenya Airways CEO Titus Naikuni. The firm is closely watching its costs with the aim of rebounding from losses. Photo/FILE  NATION MEDIA GROUP

Kenya Airways is banking on cost-cutting measures to recover from tough two years that saw the national carrier swing to the biggest loss ever in the history of companies listed on the Nairobi bourse.

The national carrier posted a loss of Sh7.86 billion in the year to March compared to a profit of Sh1.66 billion last year, which was still a 57 per cent drop from the 2011 numbers.

Kenya Airways said Wednesday it has negotiated fleet maintenance contracts that will save it Sh5 billion over the next five years, together with modernisation of its fleet with more fuel-efficient Embraers and Boeing B-787 Dreamliner planes.

Analysts led by Citigroup say that increased competitions among global carriers and a soft global economy has made it critical for KQ to cut costs and restore profits.

“The aviation industry traditionally has high operating costs. This is the reason why we are continually reviewing our operations to ensure that we are able to deliver a world-class experience to our customers while keeping an eye on our costs,” said Titus Naikuni, KQ’s chief executive.

The airline did not give details including names of suppliers that it has re-negotiated contracts with.

Kenya Airways revenues dropped by Sh9 billion to Sh98.8 billion on a drop in passenger traffic. The airline says passenger traffic dropped 3.6 per cent to 9.5 million.

Costs changed little at Sh107 billion. The direct costs, including fuel and labour expenses, stood at Sh77.2 billion the same level as last year when they rose 44 per cent.
This could be a pointer that the national carrier is getting on top of its costs, which have previously influenced profits.

But the airline is not putting brakes on cost management. The possibility of opening a hotel in Nairobi to cut expenses associated with putting up staff and passengers whose flights have been delayed is on KQ’s radar.

The national carrier also plans to set up a fuel procurement company in order to increase efficiency in the buying of the commodity that accounts for 38.5 per cent of total operating costs.

Citigroup projects the airline to post a net loss of Sh3.1 billion in the current financial year ending March 2014 on higher costs that will wipe out sales.

KQ’s sales are expected to rise 15.3 per cent to Sh114 billion but Citigroup says expenses such as direct costs and net interest payments will rise to Sh118.5 billion, offsetting sales.

The national carrier is projected to return to profitability in the year ending March 2015 with a net profit of Sh618 million, on which Citigroup does not expect it declare dividends.

This means that shareholders could face a three-year dividend drought. KQ failed to declare a dividend this year.

The airline, which listed at the NSE in 1996, previously only failed to pay a dividend in 1999 despite a dip into losses in 2009.

KQ’s share price has fallen 21 per cent in the past year to the current price of Sh10, making it one the worst performing counters at the NSE over the period that saw firms record double-digit share appreciation.

Management blamed the eurozone debt crisis, fears of unrest during Kenya’s March elections and a string of gun and grenade attacks — following Kenya’s foray into Somalia in pursuit of Al-Shabaab militants — for its losses.

vjuma@ke.nationmedia.com