Kenya Airways shocks market with Sh4.8bn half-year loss

Kenya Airways on Monday announced a Sh4.8 billion half-year loss, the second highest in its history, and followed up the bad news with a warning to investors that the persistence of the Euro zone crisis and insecurity at home would leave full year result at less than a quarter of last year’s outcome.

The airline, which has recently been in the news over an acrimonious retrenchment programme involving 599 employees, said Europe’s debt crisis had hit its operating environment and depressed demand for travel in key markets that account for nearly a third of the revenue.

Also read: KQ passenger numbers remain flat on Euro crisis

The operating environment was also poisoned by a strengthening of the Kenyan shilling that left the carrier with big exchange rate losses and lower yields from depressed ticket prices in a highly competitive market, said Titus Naikuni, the chief executive.

Revenues dipped by Sh5.1 billion to Sh49.8 billion, and passenger traffic — which accounts for 90 per cent of the business — dipped 10 per cent to Sh43.6 billion causing a net loss of Sh6.6 billion from a net profit of Sh2.0 billion in the first six months last year.

“We believe our profit will be less than 25 per cent of the previous year’s so we have issued a profit warning,” said Mr Alex Mbugua, the airline’s financial director, during an investor briefing. “We expect a better second half but we do not believe it will be sufficient enough to uplift the business form the first half impact.”

Kenya Airways expects to close the year with a modest profit that is less than 25 per cent of the Sh1.7 billion net profit it posted last year, making this the second profit warning in as many years, having issued the first last year due to high fuel costs.

“We hope to reverse some of the losses in the next five to six months but it depends on a lot of things in the market-place going right,” Mr Naikuni said.
Kenya Airways closed the first half of the year with a Sh2 billion exchange rate loss arising from a stronger shilling that stayed at an average of 84 units to the dollar compared to an average of 88 units to the dollar last year.

The strength of the shilling is critical to the airline’s performance because a large portion of its revenue is dollar denominated, exposing it to losses during conversation.

The loss was larger than anticipated but analysts said the airline’s outlook remained positive, especially in the wake of recent cost cutting measures and capacity rationalization that has seen the carrier reduce frequency on selected routes.

“The loss was more than we expected, with the major surprise being the decline in revenues,” said Eric Musau, an analyst at Standard Investment Bank. “But the carrier has held its ground reasonably well compared to other players in the industry.”

The results showed that Kenya Airways suffered a massive Sh4 billion drop in cash generated from operations to Sh252 million mainly saddled by the steep decline passenger revenues and the low yields resulting from a rise in competitive pressure in the market-place.

Kenya Airways share price dropped 3.6 per cent to Sh12 from Sh12.45 as investors absorbed the news of the massive loss but later clawed back some of the losses in late afternoon trading.

The airline, which is 26.73 per cent owned by Air France-KLM and is one of Africa’s largest, hopes to reverse the loss-making trend by the end of the financial year but Mr Naikuni said that would depend on many factors, including the operating environment that is underlined by volatility of fuel prices and the continued perception in Europe that Kenya is high security risk destination that has seen tourist numbers drop.

Kenya is also poised for a possible heightening of political temperatures ahead of the March 4, 2013 elections.

Fuel price volatility and cost management are therefore expected to top the list of challenges for the airline this second half of the year. Fuel cost remains Kenya Airways’ largest expenditure item, accounting for 39 per cent of total operating costs.

In the first six months of the year, KQ’s overhead costs rose to Sh10 billion — a 7.2 per cent increase — including the Sh826 million it spent on the controversial staff rationalisation during which it shed 599 jobs.

Kenya Airways’ wage bill has risen steadily since 2007 from Sh6 billion to Sh13.4 billion at the end of last year due to a collective bargain agreement it signed with the workers’ union.

The carrier’s management have said that the steep rise in the wage bill prompted the retrenchment that is expected to see save the company at least Sh1.24 billion per annum.

Low passenger numbers and yields have seen the airline suspend flights to loss-making routes including Rome and Muscat where competition has been rising and in Zanzibar where growth in passenger numbers has been flat.

Kenya Airways reduced capacity on European routes such as London, which account for about 30 per cent of its revenues.

That action saw revenue passenger kilometre fall by three per cent, resulting in a 9.6 per cent drop in total revenue for the period to Sh 49.8 billion.

Mr Naikuni said passenger numbers between London and Mombasa have nearly halved and that the airline hopes to reverse that with the opening of alternative African routes to feed into the European flights.

Europe’s share of Kenya Airways’ passenger volumes dropped from 29 per cent to 22 per cent in the period under review, while Africa’s share grew from 48 per cent to 52 per cent.

Africa remains KQ’s mainstay and the airline is looking to capitalize on this with an increase of presence in some of the high-yielding routes. Traffic in the Middle East and Asia also grew with the introduction of flights to Delhi, India and the re-launch of Jeddah, Saudi Arabia, flights boosting the numbers.

Domestic travel, however, dropped 0.9 per cent mainly due to a dip in passenger numbers to Mombasa following the wave of insecurity in the region.
Last month’s introduction of flights to Eldoret is however expected to help the airline boost local numbers in the second half.

Kenya Airways raised Sh14.5 billion through a rights issue in the first six months of the year and plans to use the money to grow its fleet and expand the number of destinations from 59 to over 100.

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