National carrier Kenya Airways has sold off its prime landing slot at London’s Heathrow airport for an estimated Sh7.5 billion in a move aviation experts say could significantly affect the airline’s attractiveness to passengers on the UK route and slow down the speed of recovery.
The morning slot, previously used by Kenya Airways, will now be used by Oman Air starting March 27, the same day KQ will begin its afternoon arrivals in London.
It has also emerged that Oman Air has agreed to a wet leasing deal for two of KQ’s Boeing 787-8s as part of the investment by the Middle Eastern airline.
Wet leasing deals in aviation are those where an airline leases out an aircraft, complete crew, maintenance and insurance to another airline in return for pay by hours operated.
KQ, as the Kenyan carrier is commonly known, has sold the morning slot it inherited from the defunct East African Airways under what is termed grandfather rights for US$75 million in addition to the evening departure slot it sold to Emirates for between $15 - $25 million, making a total deal value of $90 - $100 million.
News of KQs sale of landing slots first broke in the UK’s Sunday Times, which reported that the deal between the carrier and Oman Air is one of the three slot transfers that took place at Heathrow this year.
Air France-KLM, which owns a 27 per cent stake in KQ, is said to have transferred two additional slots, one to Oman Air and the other to Emirates.
KQ’s sale of its coveted 5.30 a.m. arrival slot is the highest priced deal to have taken place at Heathrow, beating the previous Sh6 billion ($60 million) record payment that American Airlines made to Scandinavian carrier SAS a year ago.
Reports indicating that KQ pocketed only Sh3 billion of the total Sh7.5 billion earned from the sale of the prime morning landing slot has raised questions as to how the national carrier shared the sale proceeds with its partners AF-KLM.
KQ declined to comment on this story stating that it planned to share the information in due course.
The airline is estimated to have earned Sh3 billion from the deal that is expected to go into offsetting the carrier’s heavy debt load.
Slots at Heathrow lose value as the day progresses, with early morning arrivals fetching the highest value. The value of slots drops by 30 per cent by midday and by 50 per cent by evening, according to an earlier report by Heathrow Airport Holdings.
This means if an early morning slot is valued at Sh10 billion, a midday slot would fetch Sh7 billion and Sh5 billion for the same slot in the evening.
KQ last month announced that it had changed its flight schedule on the Nairobi-London route as part of its cost-cutting strategy but fell short of disclosing any information about the sale of the prime landing slot.
The carrier, which currently departs for London in the evening, arriving at Heathrow the following morning, will now depart from Jomo Kenyatta International Airport (JKIA) in the morning, arriving at Heathrow in the evening.
While previously the plane stayed on the ground for 14 hours at Heathrow Airport until evening for the flight back to Nairobi, it will no longer do so but will fly back two hours after the 4.15pm landing — a schedule that should help the airline to significantly cut its parking costs.
The move has, however, drawn mixed reactions from regular users some of who say the new schedules have wiped out the advantage business fliers had with the early morning arrival that allowed them 14 hours to do their business and travel back home on the same plane in the evening.
“Most fliers on this route are business travellers who prefer to take an overnight flight, arrive in the morning, conduct their business and fly out in the evening,” said Nicanor Sabula, the chief executive officer of the Kenya Association of Travel Agents.
Should many of the clients see the schedule changes as too unsettling KQ could lose a good chunk of its passengers, making analysts to question whether the Sh3 billion the Kenyan carrier is said to have earned from the sale of the landing slot would cover for it.
Evening arrivals mean travellers with business in London have to fly out a day earlier and pay for overnight accommodation, which is an additional cost.
KQ and KLM had been working together since 1995 before they launched a joint venture on the Amsterdam-Nairobi route.
In 2008, the two carriers expanded the joint venture with the addition to flights between JKIA and Charles de Gaulle Airport in Paris, France.
The partnership between the two players was further expanded in 2014 through the addition of the London-Nairobi, Amsterdam-Entebbe/ Kigali route, Amsterdam-Lusaka and Harare routes and the Amsterdam-Kilimanjaro/Dar es Salaam route.
At the time of introducing the new routes, the two carriers estimated their combined revenues to be over $500 million (Sh50 billion) from the 44 weekly flights on the six shared routes.
KLM is the second-largest shareholder in KQ with a 27 per cent stake after the Kenyan government, which has a 30 per cent stake.
Air France-KLM transferred six pairs of slots to Delta Air Lines at Heathrow in a deal that generated $276 million (Sh27.6 billion) for AF–KLM in October.
In August last year, the Kenyan government announced plans to review the partnership between KLM and KQ, with prospects of increasing State ownership in the carrier.
The airline has been on a turnaround strategy after posting a record Sh25.7 billion after-tax loss for the year ended March 2015.
KQ announced mid last month that it had entered into a sale agreement with a US carrier to sell one of the four aircraft earmarked for sale in a bid to increase the amount of cash available for its operations.
The carrier made known its intention to sell four Boeing planes in November 2014. The two planes, which Oman Air is buying, were delivered from Boeing to Kenya Airways between 2004 and 2007 and operated on long haul scheduled routes, especially to Asia and Europe.
Their disposal, including that of two Boeing B777-300 planes, has, however, been delayed following a court case that KQ pilots have filed arguing that the sale would render them jobless.
KQ recently hired advisory firm PJT Partners to help it explore the options of raising an estimated Sh60 billion in new capital, including debt and equity.
The company has started dismantling its ambitious expansion strategy dubbed Project Mawingu that saw it take huge debts to finance the acquisition of new aircraft, which in the end led to expensive over-capacity.
KQ’s debt binge saw its total liabilities surge to Sh209.8 billion in the half year ended September, leaving its shareholders under water by Sh33.8 billion as total assets trailed at Sh176 billion.
The national carrier in November added to its fleet two B787-8 planes worth Sh22.4 billion each, marking the last of a batch of nine orders from American manufacturer Boeing.
These were the last of the nine planes ordered in 2006 under Project Mawingu, blamed for the financial haemorrhaging of the carrier.