Plane leasing deals leave Kenya Airways with Sh4 billion loss

[Geza Ulole]

Plane leasing deals leave Kenya Airways with Sh4 billion loss

A Kenya Airways plane at the Jomo Kenyatta International Airport in Nairobi. PHOTO | FILE

IN SUMMARY

• The loss-making contracts are the latest culmination of the chain of bad decisions linked to an expansion binge dubbed Project Mawingu, and which it has been unwinding in the past year at a heavy cost to shareholders.
• KQ signed the deals to mitigate even larger losses it would have incurred from cancelling the contracts after it failed to fly the planes profitably.

National carrier Kenya Airways’ decision to sub-lease five aeroplanes to foreign airlines left it with a Sh4 billion loss, the company’s latest financial statement shows.

The multi-billion shilling loss is the difference between revenues earned from the sub-leasing contracts and payments to be made to primary lessors in the same period.

Kenya Airways yesterday said that the prevailing business circumstances had made it prudent to reduce excess capacity through leasing, adding that the Sh4 billion loss is an accounting treatment covering the entire period of the sub-lease.

The loss-making contracts are the latest culmination of the chain of bad decisions linked to an expansion binge dubbed Project Mawingu, and which it has been unwinding in the past year at a heavy cost to shareholders.

KQ, as the airline is popularly known, signed the deals to mitigate even larger losses it would have incurred from cancelling the contracts after it failed to fly the planes profitably.

“The airline has sub-leased certain aircraft that are held on operating and finance lease at lease rentals that are lower than that charged by the primary lessors resulting into onerous lease provision,” the Nairobi Securities Exchange-listed firm says in its latest annual report.

KQ last year leased five Boeing aeroplanes to Oman Air and Turkish Airlines in the middle of a liquidity crisis that it only navigated with the help of the government.

READ: KQ leases two more planes to Turkish, Oman Air

ALSO READ: KQ plane sales and leases to earn carrier Sh11bn

The airline recognised a Sh1.4 billion loss in the year ended March 2016, with the balance of Sh2.5 billion expected to filter through over the coming years as the contracts roll on in the medium term.

KQ chief executive Mbuvi Ngunze said at the time of signing the lease contracts that they would reduce fleet costs by Sh8.4 billion annually, indicating that sub-leasing at a loss (which was not disclosed at the time) represents a lesser evil compared to maintaining a bloated fleet.

“These actions will reduce our monthly fleet costs by over $7 million (Sh707 million), and improve our liquidity, and is part of our strategy to return Kenya Airways to profitability in the next 18 to 24 months,” Mr Ngunze said on a May 26, 2016 statement, adding that while it was sad to see brand new aircraft going to other airlines, it was important to understand the context in which the decision was made.

READ: Kenya Airways board to share recovery plan with shareholders

KQ leased two B787s to Oman Air for three years and is set to take a loss of Sh918 million in that transaction. Besides, its lease of three B773s to Turkish Airlines for four years is expected to result in a loss of 3.1 billion, bringing the total loss to Sh4 billion.

Sub-leasing the aircraft, non-renewal of other leases and sale of several aeroplanes saw KQ’s fleet drop to 47 planes in the year ended March compared to 52 units the year before.

The airline plans to further scale back its capacity in the current financial year to cut costs prevent a further decline into the negative capital position with the sub-leasing of more aircrafts to Omar Air and Turkish Airlines.

Kenya Airways has said it is keen on reducing the number of empty seats on long haul flights and terminating some routes to further cut costs.

“There will be further reductions in both fleet count and aircraft type with the initiative to have a lean and efficient fleet tailored to the company’s network requirements,” KQ said in the report.

Two B787-8s are to be sub-leased to Oman Air for an undisclosed number of years, bringing the total number of aircrafts seconded to the Muscat-based carrier to four.

Three B777-300ER will be sub-leased to Turkish Airlines for an undisclosed period, raising the number of airplanes sent to the Istanbul-based carrier to six.

KQ did not indicate whether the upcoming sub-leasing deals with the same carriers will also leave it underwater or whether it will break even or book a profit.

The national carrier also plans to sell two B777-200ERs and return two E170s (Embraers) to their owners at the end of their lease period.

The mix of aircraft sub-leasing, sales and non-renewal of leasing will discharge a total of nine aeroplanes from its fleet that will shrink to 38 units.

The B787 series, also known as Dreamliners, are among the most expensive airplanes in KQ’s fleet expansion programme that was based on a projection of flying to 77 countries and 115 destinations by 2021.

Drafters of the Project Mawingu strategy addressed several risks including funding but did not take into account lack of demand for the enlarged capacity, a key factor in KQ’s woes as seen in massive debts unmatched by revenue growth.

Paring down capacity fits into KQ’s broader turnaround plan that includes staff retrenchment, with pilots and cabin crew among employees to be rendered redundant by the capacity reduction.

KQ says it let go of 41 pilots in the year ended March, a move that saw their count drop to 489 from 523 the year before.

Its overall staff count dropped to 3,870 from 4,002 over the same period, with further retrenchments having commenced from July.

The airline made a record net loss of Sh26.2 billion in the year ended March, widening the Sh25.7 billion net loss the year before.

This saw its net worth worsen to negative Sh35.6 billion from negative Sh5.9 billion over the same period.

Plane leasing deals leave Kenya Airways with Sh4 billion loss

MY TAKE
From 52 aircraft fleet to 38 aircraft! Gosh pretty sure the number will fall more when Air Tanzania start slicing the passengers from or to Tanzania! Magufuli plans to buy at least 3 planes each year he is in power i.e. means by 2020 ATCL will have at least 15 aircraft! And if he is to win a second term that means at least 30 aircraft by 2025!


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[Geza Ulole]

It is stupidity of highest order for KQ management to buy over 10 Dreamliners n yet they can't fill them up with passengers!

When i remember the way Nyang'aus in here were boasting of KQ having the latest state of art aircraft, I laugh since that same project Mawingo has made KQ evaporate in the clouds!

One thing i have learned, Never make a mistake calling ur project Mawingo! Bwahahah

 

[Geza Ulole]

If u people r or were smart enough u should have invited govts of TZ, UG, BUR n SS to inject money in KQ in return of stakes. But unfortunately greedy makes KQ collapse.

I can't wait when GOT n GOU start their national carriers the that free room KQ is enjoying in the region will even shrink as each of these 2 countries will try to protect their interests!

 

[Juakali1980]

If u people r or were smart enough u should have invited govts of TZ, UG, BUR n SS to inject money in KQ in return of stakes. But unfortunately greedy makes KQ collapse.

I can't wait when GOT n GOU start their national carriers the that free room KQ is enjoying in the region will even shrink as each of these 2 countries will try to protect their interests!

How can countries that don't have national carrier airlines inject money into(A USELESS LOSS MAKING) foreign owned KENYA AIRWAYS?? Do you sometimes listen to yourself?? as you mentioned...
KENYA AIRWAYS =47 AIRPLANES
TANZANIA AIRWAYS=3 PLANES

 

[Juakali1980]

It is stupidity of highest order for KQ management to buy over 10 Dreamliners n yet they can't fill them up with passengers!

When i remember the way Nyang'aus in here were boasting of KQ having the latest state of art aircraft, I laugh since that same project Mawingo has made KQ evaporate in the clouds!

One thing i have learned, Never make a mistake calling ur project Mawingo! Bwahahah

ENJOY THE VIDEO KQ STARTS@1.40

 

[Dhuks]

I would rather the airline fall with a dud than have it rescued with Tanzanian money. You will massage your egos for some time but once we buy out the stake of KLM you will be left with an egg in your face.

 

[Geza Ulole]

Dhuks, Only a fool like u believe KQ can survive on its own! U were making loss before KLM acquired KQ shares n u will definety revert to permanenty loss making again!

 

[Dhuks]

Dhuks, Only a fool like u believe KQ can survive on its own! U were making loss before KLM acquired KQ shares n u will definety revety to loss making again

Okay strike me as one of the fools in your list, let us exchange notes after three years. We have already witnessed an upturn despite your negative press

 

[Quickly]

If u people r or were smart enough u should have invited govts of TZ, UG, BUR n SS to inject money in KQ in return of stakes. But unfortunately greedy makes KQ collapse.

I can't wait when GOT n GOU start their national carriers the that free room KQ is enjoying in the region will even shrink as each of these 2 countries will try to protect their interests!

Rubbish

 

[Quickly]

Geza: traffic volumes in Tanzania are so low, they cannot reach the minimum threshold required to operate an air matatu service, talk less of an airline. Mtatoa watu wapi. Excuse me but your suggestion is as laughable as selling pork in the open market in Saudi....... Soma hapa chini:
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Intra-African connectivity is so mediocre that passengers have to travel thousands of kilometres out of the continent just to be able to make a connection to another African destination. A quarter of the intra-African routes are actually served by just one airline. ILLUSTRATION | JOHN NYAGAH | NATION MEDIA GROUP
By Carlos Lopes
Posted Monday, September 12 2016 at 10:28
IN SUMMARY
The continent has to create more space for low-cost flying. In an interconnected world, air travel is no longer a luxury, it is a necessity for a prosperous continent.
Even though Africa is home to 15 per cent of the world’s population, it only accounts for a relatively small proportion of air traffic, in fact less than three per cent of the world’s total. Small though this may be, the African aviation market is growing fast.
International air passenger numbers have grown consistently year on year since 2004, except in 2011 where the numbers dipped as a result of political instability in parts of North Africa.
From less than 40 million passengers carried in 2004 by African airlines, passenger numbers increased to 73.8 million in 2013. Domestic passenger numbers within the region also increased significantly, reaching 28 million in 2013. This growth is projected to continue.
Boeing’s long term forecast for 2014-2033 indicates that, driven by a positive economic outlook, increasing trade links, and the growing middle class, traffic to, from, and within Africa is projected to grow by about six per cent per year for the next two decades.
This growth will translate into a demand for an additional 1,170 new airplanes, valued at $160 billion. But as with all good things, the proof of the pudding is in the eating.
According to the Air Transport Action Group, in 2014, the aviation industry in Africa supported 6.8 million jobs and contributed $72.5 billion to Africa’s GDP. This accounted for 11 per cent of the jobs and three per cent of the GDP supported by the air transport industry worldwide.
These encouraging developments however do not reveal some of the major obstacles still faced by the aviation industry on the continent. It remains one of the most unsafe regions to fly, it has lagged behind others on liberalisation of the skies, its airport infrastructure continues to require massive investments and the training of skilled personnel is not being properly planned.
Consolidation is another challenge. During the 1970s and 1980s there were about 36 African airlines of which 26 had intercontinental flight services. Today, there are only about 12 African airlines with intercontinental operations.
Over the past two decades, a total of 37 new airlines were launched in Africa but almost all of them failed. Most countries continue to act solo, motivated by choices that are political rather than economic.
We continue to see attempts to create or sustain national carriers, opposing international trends. It is true that Middle East carriers and the good performance of Ethiopian Airlines contradict the doomsayers of state-owned airlines, but these are exceptions that need to be understood in terms of the bigger picture. Which is that 80 per cent of the continent’s long-haul traffic is dominated by non-African carriers.
The average cost of a flight in Africa is higher than anywhere else in the world. High landing fees, exorbitant taxes levied on airfares as well as above-average aviation fuel prices, almost 30 per cent higher than in Europe, do not help.
Funding access for the aviation industry is uneven. Dubai, Abu Dhabi and Qatar-based airlines have reportedly enjoyed a host of benefits over the past decade, valued at more than $42 billion.
That includes subsidised access to capital and sponsored first-class infrastructure. American commercial aviation has since 1918 also benefited from government support, valued at $55 billion. Obviously, African airlines are not in the same league and have been left to fend for themselves.
Without the same easy access to capital markets, export credit financing (which can cover up to 85 per cent of the actual aircraft price), or insurance subsidies, African airlines either have to finance the difference from their own funds or opt for junior loans with punitive rates from commercial banks; or lease aircraft at an even heavier cost. The financing options open to African carriers severely limit their chances for expansion.
It is therefore hardly surprising that mega carriers are doing so well, including in their operations in Africa. They have the ability to expand quickly, to build a market from scratch, increase market share and continue investing heavily in service and marketing.
Intra-African connectivity is so mediocre that passengers have to travel thousands of kilometres out of the continent just to be able to make a connection to another African destination. A quarter of the intra-African routes are actually served by just one airline.
Despite African states signing up for a full liberalisation of the regional market at Yamoussoukro in 1999, restrictions and protectionism, instead of being eliminated, are becoming rampant.
What could constitute a good base for a turnaround? With regard to safety, 2014 marked a significant change. Despite aviation disasters dominating headlines that year, African airlines actually stood out for zero jet hull losses (write-offs) per 1 million flights compared with 2.22 in 2013 and 4.63 in 2012.
This is encouraging news, suggesting regional measures to improve safety are working. Ethiopian Airlines is already leading the way among its continental competitors in terms of establishing ambitious targets, meeting them and turning a profit. With 93 destinations across five continents, including 53 in Africa, its future looks promising.
Having experienced a phenomenal 700 per cent growth in its revenue since 2005, Ethiopian Airlines has demonstrated the strength to face stiff competition.
However, as long as Africa fails to establish a single aviation market and countries continue to restrict African carriers while welcoming their European and Middle East competitors, the performance of Ethiopian Airlines may remain an exception.
An open skies policy would drive the cost of tickets down and increase substantially the number of flyers. According to IATA, by just deregulating and liberating African air services in 12 key markets, an extra 155,000 jobs and $1.3 billion could be generated.
Evidence shows that open skies agreements have worked in other regions. For example, in Europe, they led to an exponential increase in the number of routes and a 34 per cent decline in ticket fares.
Indeed, where African nations have liberalised their air space, either within Africa or with the rest of the world, positive benefits have resulted. For example, the agreement of a more liberal air market between South Africa and Kenya in the early 2000s led to a 69 per cent rise in passenger traffic.
Indeed, just allowing the operation of a low-cost carrier service between South Africa and Zambia (Johannesburg-Lusaka) resulted in a 38 per cent reduction in fares and a 38 per cent increase in passenger traffic.
The continent has to create more space for low-cost flying. In an interconnected world, air travel is no longer a luxury, it is a necessity for a prosperous continent.

Dr Carlos Lopes is UN Under Secretary-General and Executive Secretary of the Economic Commission for Africa.