KQ risks Sh14bn refunds for unused flight tickets

Kenya Airways risks paying Sh13.9 billion in refunds to customers for unused tickets bought last year, mainly due to cancelled flights in the wake of the Covid-19 pandemic.

This could see the national carrier revise its revenue downwards, according to disclosures made by the company’s external auditor PricewaterhouseCoopers (PwC) for its financial year ended December.

The airline, like its peers across the world, is now asking customers to accept vouchers which allow them to travel in future, while conserving the much-needed cash to remain afloat, instead of making refunds.

Passenger ticket sales are accounted for as current liabilities and later recognised as revenue when customers fly or the ticket expire.

PwC says that the option of letting the tickets expire is largely shut out because of the unique challenges caused by the pandemic.

“In the current year, management have expressed significant judgments in relation to recognition of revenue on unused tickets in view of extensions in ticket expiries and refund options offered to passengers as a result of the Covid-19 disruption to the aviation sector,” PwC said in its report.

The Sh13.9 billion in unused tickets represents 26.3 percent of the Sh52.8 billion revenue that the airline reported in the review period.

Extension of the validity of tickets means that the airline’s revenue could drop if it opts to refund customers who have not flown.

It also means that it will take longer for the revenue to crystalise if KQ, as the carrier is known by its international code, opts to allow customers to fly in the future at a date of their choice.

Most customers were ready to fly on schedule but governments and airlines around the world have taken decisions that have led to an unprecedented cancellation of flights starting last year.

“The Covid-19 crisis has caused airlines to cancel more than one million flights globally,” the International Air Transport Association (IATA) said in a statement.

“This changed the way airlines process refunds or offer credit for future flights. IATA has launched several activities to assist the industry efficiently address the customer vouchers and refunds topics.”

Cash-strapped KQ is leaning towards settling most of the outstanding tickets using vouchers.

Customers will have to weigh the pros and cons of accepting vouchers versus pressing for a cash refund. The vouchers may have expiration dates and conditions such as who can travel using them – the original customer or members of his or her immediate family.

Some airlines are luring customers to accept vouchers by offering a higher value than the ticket price.

A customer who spent Sh100,000 on a ticket, for instance, can be offered a voucher worth Sh110,000.

KQ’s aircraft were grounded between April and July last year as the Kenyan government banned international travel to curb the spread of coronavirus.

The airline has also cancelled numerous flights since then as various governments around the world announced bans on flights from other countries, including Kenya.

The carrier, for instance, recently stopped flying to the United Kingdom after London and Nairobi engaged in a tit-for-tat travel restriction ostensibly to stop the spread of the virus.

Uncertainty over the unused tickets means that KQ’s financial statements are largely provisional and could be restated in the future.

“This item [unutilised tickets] is reduced either when Kenya Airways or another airline completes the transportation or when the passenger requests for a refund, which is paid in full,” KQ says in its latest annual report.

“Unutilised tickets are recognised as revenue on expiry based on the group’s policy of 13 months from the ticket’s date of issue.”

The company reported a record Sh36.2 billion net loss in the year ended December, widening it from Sh12.9 billion the year before as costs surpassed revenues by a large margin.

The performance, which the national carrier says was exacerbated by the grounding of its aircraft between April and July last year, also expanded its negative equity to Sh64.1 billion from Sh17.8 billion.

This has further exposed lenders to major losses as shareholder funds have been wiped out, leaving the airline to rely on government guarantees and bailouts to protect the interests of some of its major creditors, including international financial institutions.

KQ’s income fell 58.8 percent to Sh52.8 billion, underlining the disruption suffered by the aviation sector amid the Covid-19 pandemic which hit the country in mid-March 2020.

The carrier, whose shares have been suspended from trading on the Nairobi Securities Exchange pending its proposed nationalisation, was unable to make commensurate cuts in its expenses.

Total operating costs dropped 38.5 percent to Sh79.9 billion, leaving the company with negative margins and the unprecedented loss.

The airline responded to the crisis by retrenching all of its 1,041 contract employees. A total of 82 staff on permanent terms also left through a mix of resignations and layoffs, a move that saw its overall workforce shrink to 3,652 from 4,775.

The remuneration of the remaining employees was also cut by double digits, with the actions leading to employee costs declining by Sh3.4 billion to Sh13.6 billion.

KQ made a pivot to the uninterrupted cargo business by converting some of its high-capacity, long-haul aircraft into freight vessels.

The company says about 70 percent of total passengers carried in the review period were flown during the first three months of the year, underlining the drop in demand for travel in the crisis.

A total of 1.8 million customers flew KQ in the period, representing a 65.7 percent drop from the year before.

The global aviation sector is betting on the attainment of herd immunity, including through widespread vaccinations against coronavirus, to recover lost ground.