Kenya Airways foresees Sh32b losses from weakening shilling

Kenya Airways Group Chief Executive Allan Kilavuka. [Elvis Ogina, Standard]

Kenya Airways (KQ) expects to get a major beating from the continued slide of the Kenya Shilling.

The carrier on Tuesday told MPs that it expects the losses directly attributed to the weakening of the shilling against the US to hit Sh32 billion by December this year. This could double by the end of next year to Sh64 billion.

The airline has already been hit hard by the weak shilling over the first half of this year, where despite being profitable at the operational level, the losses for the six months to June doubled.

While appearing before the parliamentary committee on transport, Kenya Airways management led by Group Chief Executive Allan Kilavuka sought to make a case for the airline's need for a government bailout.

The airline said the existing debts continue to make it hard for the management to turn it around, owing to debt pressures occasioned by forex volatility with the shilling continuously losing against the greenback.

While KQ gets most of its revenues in local currency, most of its expenditure including fuel purchases and payment for aircraft leases is in foreign currency.

"The depreciation of the Kenya Shilling against the US dollar has negatively impacted the airline's financial standing," Mr Kilavuka said.

"For instance, the negative foreign exchange impact on KQ operations already booked in KQ books between January and September 30, 2023 is Sh26.6 billion.

"Assuming that the US dollar to Kenya Shilling exchange rate is one dollar for 151.86, by December 2023 KQ will have booked an additional negative forex impact estimated to be 5.5 billion.

"In total, the negative forex impact on KQ operations in 2023 financial year will be an estimated to Sh32.1 billion."

The CEO added that the negative forex impact is further illustrated in the movement of KQ's -dollar denominated loan balances from inception of the Tsavo facility in 2014 to September 2023, noting that in 2014 the shilling was trading at 90.59 to the dollar compared to 148.21 on September 30, 2023.

"Consequently, the negative forex impact booked from loan inception to September 30, 2023 was Sh40.7 billion. Assuming the US dollar to Kenya Shilling exchange will be one dollar to 151.86 by December 2023, the negative forex impact on loans only will be an additional Sh2.1 billion," he said.

"Further, assuming the dollar to Kenya Shilling exchange will be one dollar to 178.88 by December 2024, this will lead to an additional negative forex impact of Sh21.6 billion shillings."

By the end of the year 2024, the negative forex impact on KQ loan balances is estimated at Sh64.5 billion.

"Therefore, a weakening shilling significantly increases the airline's financing and operating costs," Kilavuka told the committee.

This raised more questions from the MPs who wanted to know what the worst-case scenario for Kenya would be if the airline were to fold and spare the taxpayer from shouldering the Sh196 billion debt.

"Do you think KQ needs to be disbanded?" asked Charibari Chache MP Zaheer Jhanda.

Kilavuka responded that there is a choice to disband, but it has its pros and cons...

"There are very many ramifications of starting afresh. If we were to, we would lose all the bilateral air service agreements and we would have to renegotiate afresh.

"We also have the loans, they would mature immediately."

KQ says it is in the process of implementing Project Kifaru, a three-year plan that among other things seeks to monopolise its fleet to reduce the training and maintenance cost.

It is also seeking a strategic equity partner to inject funds to turn around the airline, with Kilavuka saying in the absence of an equity investor the airline will continue to struggle in its operation.

"Can we survive in the short term? Yes, we can survive but it will be a difficult survival."

[Additional reporting by Macharia Kamau]