Moody’s airline industry outlook offers KQ hope

Global ratings agency Moody’s has predicted that profits in the global airline industry will be strong for the next one-and-half years, boosted by the plunge in oil prices, offering hope for struggling national carrier Kenya Airways.

Moody’s expects that the airline industry’s operating profit margin will top 10 per cent this year.

But the ratings agency warned that the strong US dollar and higher investment in capacity exceeding demand could constrain growth.

Moody’s projections are in line with those of the International Air Transport Association (IATA), which recently said that it expects global airlines’ net earnings to grow by a tenth this year to $36.3 billion.

“Growing passenger demand, especially in the Middle East, Asia and Latin America, will help boost margins for the overall airline industry,” said Moody’s Vice President Jonathan Root.

International oil prices touched a 12-year low of $30-per-barrel last week, extending a plunge that that seen prices fall from peaks of above $100 a barrel in June 2014.

Higher labour costs, continuing revenue pressures, fuel hedging, and a potentially stronger US dollar will however mitigate the benefits of the price decline, the rating’s agency said.

“Demand is rising due to modest but steady global economic growth, higher disposable incomes amid lower petroleum prices, attractive fares, and the growth of air travel in the developing world,” said Mr Root.

This outlook is good news for KQ where flat-lined revenues saw it post a Sh10.95 billion net loss for the six months to September up from the Sh10.45 billion it posted during a similar period the previous year.

The sale of some of its aircraft last year lowered KQ’s operating costs by Sh8.3 billion to Sh58.9 billion and improved its operating loss position to Sh2.18 billion from the previous year’s Sh10.5 billion.

“From an operating perspective, this is a significant improvement, meaning that the business is fundamentally on the right course,” Alex Mbugua, the airline’s finance director, said during the release of the half year results.

READ: KQ sells two Boeing aircraft to US firm

The airline’s total negative equity position stands at a Sh33.9 billion, indicating the premium being placed on a restructuring strategy currently being undertaken by American consultancy McKinsey.

KQ’s management is currently undertaking an asset sale, from which it hopes to raise Sh14.6 billion and which it plans to complement with Sh20 billion from the ongoing business re-organisation.

While the airline digs itself out of losses, IATA predicts that the demand for passengers will grow by 6.9 per cent this year compared to 6.7 per cent recorded last year.

The association projects that the average price of a barrel of oil will be $51.