KQ cuts loss to Sh9.9 billion, held back by high fuel costs

Kenya Airways (KQ) has reduced its loss by 14 per cent on the recovery of the global travel industry. However, high fuel prices continue to slow down its recovery.

The airline reported a net loss of Sh9.89 billion for the half-year to June 30, this year compared to a loss of Sh11.49 billion reported over a similar period in 2021.

This comes even as the airline said it has made progress in implementing a restructuring programme dubbed re-ignite, which is expected to see a permanent reduction in costs such as aircraft leasing.

The national carrier said it has concluded negotiations with its aircraft lessors and agreed to a 19 per cent reduction in leasing costs.

Despite success in cutting aircraft leasing expenses as well as optimising its fleet and routes as part of the restructuring, the cost-cutting measures were eroded by a surge in fuel prices that saw its operating costs grow by more than 50 per cent.

KQ Chief Executive Allan Kilavuka on August 24 said the company expects to complete the restructuring exercise next year while further cutting losses, and turning profitable in 2024.

He said the internal changes have been aided by the recovery of the global travel market.

"The turnaround efforts are bearing fruits and we are not relenting. We are bullish that over the next 12 months, we will have completed a significant proportion of our restructuring," Mr Kilavuka said during an investor briefing. "There is also an improvement in uplifts globally and we are looking at how to tap into this."

Revenues rose 76 per cent to Sh48.1 billion from Sh27.35 billion in a similar period last year, which KQ attributed to increased travel as more economies opened up and spurred recovery from the initial impact of the Covid-19 pandemic.

Passenger revenue increased 109 per cent and was a key driver in pushing up income. The cargo business grew 18 per cent.

The airline's recovery efforts were dented by higher fuel prices, with its operating costs going up 53 per cent to Sh53.11 billion from Sh34.63 billion last year.

Lower oil prices, the airline said, would have seen it reduce the loss further.

"The group saw an increase of 53 per cent in total operating costs. This is mainly driven by the increase in fuel prices and major currency fluctuations witnessed this year, in addition to increasing operations for the period," KQ said in a commentary on the results.

"Jet fuel and crude oil prices rose markedly in the first quarter of 2022, putting pressure on the already strained airline finances. The elevated jet fuel price adds to the airline's operating costs."

The carrier's 19 per cent reduction in aircraft leasing costs was, however, short of the 35 per cent reduction in costs that KQ had hoped to get. Mr Kilavuka said that was the best deal they could get, terming the negotiations difficult and lengthy. The lessors agreed to the cut in their revenues on the condition that the airline pays their arrears that including payments deferred when Covid-19 hit and the airline's revenues drastically dropped. The cash-strapped KQ however expects a government bailout to aid its restructuring programme.

The reduction in aircraft leasing costs is among the milestones that the airline needed to achieve before the National Treasury can disburse more money to enable the carrier complete the restructuring.

KQ Chairman Michael Joseph said the government agreed to finance the airline over the next two years, which will enable it to find a firm footing. "Earlier this year, Parliament approved additional budget support to KQ," he said. "After lengthy negotiations with IMF and Treasury, it was agreed that KQ would get the financing over the next two years.

"The release of these funds was conditional on KQ reaching certain milestones including reducing costs. This support will not be continuous. It will be the last but will put us on a path to recovery."

Parliament approved Sh36.6 billion in the budget for the current financial year to fund the carrier's turnaround plans.

The government is also expected to service KQ's loans to the tune of Sh102.8 billion, according to a July IMF report. IMF has been pushing for restructuring of State-owned enterprises to cut their reliance on government funding, with KQ being among those earmarked.