After years of disastrous financial results, KQ was finally able to reduce its pretax losses last year from Sh9.44bn to Sh7.59bn due to debt restructuring
BY ANTONY MUTUNGA
Kenya was put on the world’s limelight in the late 90s after Kenya Airways (KQ), the country’s national carrier, became the first African carrier to be partially privatized. Apart from being a symbol of Kenyan pride, KQ identified as one of the airlines that would create a global competitive rivalry, bringing Africa out of the world’s shadows.
However, as years went by, KQ started struggling. It experienced consecutive losses. In 2015/2016 financial year for instance, the company posted its worst results recording a net loss of Sh26.2 billion. The airline is dropping down the pecking order of the best African airlines. It now falls behind Ethiopian Airlines and South African Airways. The losses are because of, among other things, costly aircraft purchases, for example, the purchase of two aircraft at Sh2 billion from KLM Dutch Airlines only to sell them at a loss of Sh210 million, and the slump in tourism and business travel that was as a result of Islamist militants.
After years of losses, KQ was finally able to reduce its pretax losses last year from Sh9.44bn to Sh7.59bn due to debt restructuring. However, this was not enough to take the company back to its former glory. As a result, in 2019 the company recorded yet another huge loss. According to its records, the company saw its net loss for the six months to June 2019 increase to Sh8.6bn from Sh4bn in the same period to June 2018.
The management has cited different reasons for the increase in its losses once more. One of the reasons is the increased operating cost that KQ recorded when compared to 2018. It increased by 15.6% from Sh53.2 billion to Sh61.5 billion while its revenues increased at a smaller margin of 12.3% from Sh52.2bn in 2018 to Sh58.6bn. The operating cost, which ate into its revenue, was as a result of the return of two aircraft that the company had sub-leased to Oman Air in 2016. Their return saw the airline’s capacity increase as it looked to increase flights to New York, USA.
According to Michael Joseph, KQ’s chairman, the rising operating cost was inevitable. “The increase was mainly an attribute of the return of two Boeing 787s that had been sub-leased to Oman Air,” he said, also citing fuel increases as a contributor. With more aircraft and increased flights, the cost was only going to increase. The increased flights to New York and new flights to Geneva and Rome have contributed much.
On the other hand, the cancellation of frequent flights has also played a role in increasing the airline’s losses. When Kenya Airways increased its flights, it failed to increase its personnel, thus resulting in loses. For instance, in August 2019, the company recorded 91 flight cancellation of which 68 were due to less staff. KQ had to pay for the accommodation of its guests who were affected by the canceled flights. With the number of cancellations in the year having increased, the number of customers to be compensated has soared. In its defense, the airline has partially blamed some of its pilots for unprofessionalism, which has caused some flight cancellations. Sebastian Mikosz, KQ CEO, said that some pilots wouldn’t come to work for up to two days without giving any explanation.
Taxes are next on the list as the CEO claims they are one of the biggest hindrances for the company. As a result of heavy taxes in most African countries, the industry is at a disadvantage in terms of competition with external players. In some cases, according to the KQ chief executive, the companies’ taxes almost swallow half the revenue it acquires from ticket sales. It causes tickets to be expensive compared to its external competitors who are taking away the majority of the customers.
As the company faces these challenges, it is also facing competition from its neighbours in East Africa. For example, Ethiopian Airlines is now the leader of the region. Coming up as well is Rwanda Air, which, despite being new, is increasing its market share at a fast rate. Our neighbours, Uganda, and Tanzania, who recently revived their airlines, are also upcoming competitors for our national carrier.
The government believes renationalization of the airline is the best way to save the sinking ship, however, it faces difficult times ahead. The period of transition will not be easy and, the airline has to prepare for the additional challenge. The move has also received criticism based on government interference, which some believe will only bring about mismanagement and corruption. It isn’t the only challenge, as the operating cost might be about to increase further as the other three airlines sub-leased to Turkish Airlines, will return in the next two years.
Last but not least of the airlines’ problems is the matter of its CEO already announcing his retirement at the end of 2019. It puts the company at a tough spot as it looks for a replacement. These challenges need to be dealt with if the airline is to get back to its glory days as the pride of Africa.