Fuel hedging sinks Kenya Airways deeper into loss

National carrier Kenya Airways’ big bet on fuel hedging paired up with foreign exchange turbulence to sink it deeper into loss even as green shoots of recovery began to show in revenue growth.

KQ, as the airline is popularly known, reported a Sh26.2 billion net loss for the year ended March compared to Sh25.7 billion the previous year.

The outcome was mainly the result of a Sh5.1 billion loss that the carrier booked from fuel hedging as the global dip in oil prices wiped out the gains made from use of discounted fuel prices in the year under review.

The annual results released Thursday also showed that a weakening of the Kenyan shilling against the US dollar saw the airline book a record Sh9.7 billion in foreign exchange losses, adding impetus to the roll down the loss-making slope.

The national carrier’s record-breaking loss came about despite its booking of significant gains from recent asset sales, including the Sh5.4 billion from the sale of a prime landing slot at London’s Heathrow Airport.


KQ also sold two aircraft as part of its “Operation Pride” restructuring plan, a transaction from which a portion of the expected Sh2 billion gain was booked.

The deals helped shore up the airline’s revenue to Sh116.1 billion from Sh110.1 billion in the same period last year, a pointing to a weakness of growth in revenue from its core business.

“We sold two aircraft in February and we have received that money. The net benefit…is the difference between the loans we took to acquire them and what were paid,” said Mbuvi Ngunze, the chief executive.

The airline, however, reported a growth in passenger numbers of half a million to 4.23 million despite operating fewer aircraft.

KQ’s operating loss position improved to Sh4.1 billion from last year’s Sh16.3 billion while the loss before tax improved by 12.1 per cent to Sh26.1 billion.

KQ’s latest results set a new record in corporate Kenya — deepening as it were the erosion of shareholder equity that began with last year’s massive loss.

The latest loss means the airline’s net worth now stands at a negative Sh35.6 billion down from the previous year’s negative Sh5.9 billion, a development that effectively leaves its owners with no exit path in the near term.

“In the current equity position, getting an investor would be very hard since it would be difficult to value the company,” said Dennis Awori, the KQ chairman.

KQ, which is majority owned by the Kenyan government and Dutch carrier KLM, took a heavy beating from the global dip in fuel prices, booking Sh5.1 billion in fuel hedge losses that significantly impacted its bottom line.

Airlines ordinarily enter into forward fuel supply agreements with financiers to lock in prices and limit their exposure to an unexpected rise in the cost of jet fuel.

KQ has long maintained the policy of hedging up to 80 per cent of its oil rations for 12 months and 50 per cent of it for two years.

Recent months of oil price decline have, however, turned hedging into a potent monster that gobbles up large amounts of money and making it difficult for KQ to climb out of the loss-making pit it fell into three years ago.

“We took hedges sometime back when oil prices were high. Nobody knew prices were going to fall. Now we have to pay the counterparty,” KQ’s acting finance director, Dick Murianki, said during announcement of the results at the airline’s Embakasi headquarters.

The big drop in oil price has, however, benefited the airline, and allowed it to consolidate the gains it made from the sale of the fuel-guzzling Boeing 777-200 and Boeing 777-300 aircraft and their substitution with the more efficient Boeing 787.

KQ, which closed the year with Sh113.2 billion in total loans, also suffered from foreign exchange losses and the toxic monetary policies in South Sudan and Nigeria that have since made it difficult for the airline to repatriate hundreds of millions of shillings from the African nations.

Nearly all of KQ’s loans, including the short-term debt from the local market, are dollar-denominated, according to Mr Murianki.

At the time of receiving the funds to grow its business, the shilling was trading at between 75 and 78 units to the dollar but the fall in the value of the Kenyan currency has seen the airline service the debt at the rate of Sh101 to the dollar.

“These payments hit us directly as exchange losses,” Mr Murianki said, adding that KQ’s cost of accessing short-term funds to stay afloat is also high.

As a result, the airline’s finance costs rose Sh2.3 billion to close the year at Sh7 billion.

During the year in review, KQ saw its cash held in South Sudan lose value overnight as the world’s youngest nation devalued its currency by over 80 per cent and Nigeria went into a monetary crisis with the fall in oil prices — its main export.

Between Angola, South Sudan and Nigeria, KQ’s monetary assets are in excess of $25 million, an amount whose value continues to fluctuate as the airline struggles to repatriate portions of it.

KQ was also hit by high cost of maintaining its 36-plane fleet, whose size dropped by seven planes in the past year, meaning the fewer planes are now making more round trips.

Mr Ngunze says the airline is now reviewing its long-term options in terms of capital raising with an announcement on equity raising expected to be made “early next year.”