KQ plans to borrow more due to delayed tax refunds
Kenya Airways chief executive officer Titus Naikuni (left) and chief operating officer Mbuvi Ngunze during a Press briefing at the KQ Pride Centre in Nairobi on Wednesday. Photo/SALATON NJAU
What you need to know:
KQ disclosed on Tuesday that it was owed Sh1 billion by KRA in refunds and had so far paid Sh700 million, being the 16 per cent consumer tax on spare parts.
It said it expects to pay Sh400 million for a spare engine that will arrive with the Dreamliner next week.
Kenya Airways is looking to borrow more to plug the cashflow gap caused by delayed refunds by the Kenya Revenue Authority and the imposition of Value Added Tax on aircraft spare parts.
The airline disclosed on Tuesday that it was owed Sh1 billion by KRA in refunds and had so far paid Sh700 million, being the 16 per cent consumer tax on spare parts.
It said it expects to pay Sh400 million for a spare engine that will arrive with the Dreamliner next week.
“We have close to Sh1 billion stuck at KRA. By virtue of paying VAT, it is making us uncompetitive, we have to borrow money to plug that hole,” Kenya Airways CEO Titus Naikuni said during a briefing on Wednesday.
Mr Naikuni said the tax on spare parts would impact on the airlines competitiveness and performance, adding that it went against the international practice where spare parts are not taxed.
“In the East African Community, spare parts do not attract VAT. This does not put us in a level playing field. We are not competitive,” said Kenya Association of Air Operators (KAAO) chief executive Eutychus Waithaka on Tuesday.
The tax has hit the aviation sector hard with small players expected to pass the extra cost to passengers through higher fares.
Mr Waithaka said the taxes could compromise aviation safety as airlines delay changing parts.
Kenya Airways’ financial year closes on Monday with analysts expecting better results than the loss of Sh7.86 billion reported the last financial year ending March 2013.
In the first six months to September it returned to profitability of Sh384 million, compared to a loss of Sh4.78 billion in the previous corresponding period.
The airline’s net financing has reduced in the past three years from Sh1.2 billion in 2011 to Sh486 million last year, but the borrowing could reverse this.
On Wednesday, Kenya Airways’ share price fell by a further four per cent under pressure from profit taking, sliding back below the Sh13 level for the first time in a week.
The share closed at Sh12.60, from Tuesday’s closing price of Sh13.10. The stock had risen to a two-month high on Monday, touching Sh13.50 in trading.
Analysts said the delivery of KQ’s first Boeing 787 Dreamliner and the release of full- year results should boost the share.
“For now, the share is affected by normal market swings, with some who bought in the Sh8 range exiting. It is key for the share going forward that Boeing deliver the new planes on schedule, while the security situation is also important since any travel advisories may affect the numbers carried from the Western markets,” said Old Mutual Securities research analyst Geoffrey Maina.
Kenya Airways is preparing to receive six Boeing 787 Dreamliners including the first, which is expected next Friday.
The Dreamliner’s will replace the ageing Boeing 767s, with three others expected in 2015. The airline will also receive its second Boeing 777-300 ER this year.
The new aircraft is expected to help the airline’s expansion plans and reduce fuel costs, which account for more than half of KQ’s direct operating costs. KQ will deploy the aircraft on June 1 on its Paris route after two months of Boeing pilots training the airline crew.
Mr Naikuni said the airline was confident in the aircraft despite a number of setbacks that have led to major delivery delays. Recently the manufacturer reported cracks on the wings of undelivered planes
“We are confident in the aircraft and have been working with Boeing and those already operating it,” Mr Naikuni said.
KQ is also gearing up to launch its low cost subsidiary Jambojet next week on Tuesday. Jambojet is looking to attract the bus travellers and though will cannibalize on KQ’s passengers in the short-term it’s expected to grow the market as a whole.
The airline has introduced low fares of Sh2,850 on the Nairobi to Eldoret, Mombasa and Kisumu routes. KQ has cancelled flights to Eldoret and is expected to scale down operations on other domestic routes leaving only those connecting with international flights.
“We do not plan to cancel Mombasa. KQ morning flights that connect to our international flights will remain,” said Mr Naikuni.
By cutting on domestic flights, KQ is cushioning itself from flying empty equipment due to depressed tourism markets.
The European market, which accounts for 22 per cent of the airline’s turnover, has been “struggling” into Kenya, said Mr Naikuni.
KQ plans to expand its fleet to at least 119 aircraft by 2021, while increasing its destinations to 115 over the same period, with focus on African routes.
