New aircraft budget weighs heavily on KQ

Kenya Airways (KQ) cut its net loss by 57 per cent last year, helped by increased sales and cheaper fuel, even as a heavy capital expenditure budget pointed to a sharp rise in the national carrier’s financing costs.

The national carrier Wednesday announced that its net loss for the year ended March 2014 had dropped to Sh3.3 billion from Sh7.8 billion reported in 2013.

It announced that it would spend up to Sh87 billion ($1 billion) on acquisition of new aircraft in the current financial year, a significant outlay that analysts said would impact on its turn-around plan.

“Finance costs are likely to go up over the coming year with the additional debt being taken up to finance the fleet expansion,” said Standard Investment Bank in a research note.

Kenya Airway’s interest costs stood at Sh2.4 billion in the year ended March, during which it racked up Sh89 billion in short and long-term debt.

Its operating costs stood at Sh108.7 billion. The carrier can however take courage from growth in revenue, which rose 7.2 per cent in the year to Sh106 billion.

It is hoping that the new long-range aircraft, majority of which include the fuel-saving Dreamliner, will help to grow sales and cut operating costs.

The capital expenditure will be financed by new debt from the African Export Import Bank.

READ: Afreximbank in second phase of $1.9bn KQ financing

The company is betting on fleet expansion to grow its capacity and route network, with an eye on increased demand for air travel.

The airline said its performance this year is dependent on economic growth in its key markets of Africa and Asia as well as travel advisories from the European source market.

The performance saw the airline’s share price close at Sh10 at the Nairobi bourse yesterday, having dropped eight per cent from Sh11.5 on Tuesday.

The carrier had posted a net profit of Sh384 million in the first half ended September 2013, compared to a Sh4.7 billion net loss a year earlier, indicating a weaker performance in the second half.

It said it recorded lower passenger numbers from last year’s fourth quarter, attributing it to a mix of travel advisories and security risks that has hurt Kenya’s image as a travel destination.

“During the second half, the company made a loss largely driven by reduced passenger revenues,” the firm said in a statement.

The JKIA fire incident in August, the terrorist attack at Nairobi’s Westgate mall, and a series of travel advisories against travel to Kenya were main drivers of the lower passenger numbers.

New attacks at the coast have resulted in fresh travel alerts from key source markets of the US and UK. Kenya’s rising risk profile has hurt the tourism and aviation sectors, including KQ.

Besides the risks brought by insecurity, the airline sees an economic slowdown in Asia and political instability in multiple African countries as presenting new challenges in the current financial year.

It recently suspended flights to Cairo, Ouagadougou, Bangui, N’ Djamena, and Libreville owing to a mix of civil unrest and unsatisfactory ticket sales.

The firm, which has already received two Boeing 787s or Dreamliners, is expected to add four similar aircraft by October as part of the Sh87 billion capital expenditure.

The Dreamliners, which are estimated to burn 20 per cent less fuel compared to aircraft of similar size, will replace KQ’s ageing Boeing 767 fleet.

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