Analysts query value of KQ assets as aircraft resale causes Sh5bn loss

The sale of old aircraft affected Kenya Airways’ financial performance in the six months ending September, during which the airline plunged into a Sh10 billion loss.

Announcing the results to investors in Nairobi on Thursday, managing director Mbuvi Ngunze said half of the reported loss included an impairment deficit of Sh5.4 billion on depreciation of aircraft approved by the firm’s board for sale.

(READ: Kenya Airways posts Sh10bn loss on reduced travel over insecurity, Ebola)

KQ is selling four of its old aircraft after it acquired six new Dreamliners as part of its fleet upgrade programme nine new Dreamliners were ordered from Boeing, and the rest will be delivered in the course of time.

“We have realised that we have been running on excess capacity and decided to dispose some of the aircraft that we no longer use often. They will be replaced by our new fleet that is more modern and has better efficiency on fuel consumption,” Mr Ngunze said.

Aviation industry and financial analysts are now raising questions about the true value of KQ’s assets following revelation of the Sh5 billion loss.

It also puts in the board in an awkward position. Its responsibilities include ensuring the company maintains proper accounting records that accurately reflect its financial position as well as safeguarding it assets, the understanding being that a company’s true financial position can only be portrayed if its assets are accurately valued.

“Shareholders might have questions on whether all the assets could be similarly overvalued, and what would happen if KQ were to sell all its old aircraft,” Eric Musau of the Standard Investment Bank said.

The national carrier is in the process of upgrading its fleet, which it hopes will help cut costs by increasing efficiency. It’s recovery plan depends on it.
The new planes give the company additional capacity for international flights while the launch of Jambo Jet its low-cost subsidiary is expected to tighten the airline’s grip on the domestic market.

“I see a place that we can go to as a business. We have spent the past few years investing in the improvement of our fleet, and today we have the youngest fleet in Africa. My focus will be on the service. As I take over, I am excited because this will be a transformative season,” Mr Ngunze said.

The company has blamed its poor performance on the drop in passenger numbers due to insecurity and the Ebola epidemic.

According to KQ management, regional insecurity had resulted in depressed passenger numbers after a number of western countries issued advisories on travel to Kenya after a series of terrorist attacks.

The fear of Ebola contagion forced the airline to indefinitely suspend flights to and from Sierra Leone and Liberia, resulting in a more than 20 per cent drop in passenger numbers. Most of the travellers used Nairobi as a hub to transit to the Far East and other parts of Africa.

Analysts said they expected KQ to report a loss but not one of this magnitude.

Total revenue for the period increased by 4.5 per cent to Sh56 billion, but that was outweighed by the cost of operations. The company has put in place recovery measures, but Mr Ngunze said earnings for the full year period are still expected to be below last year’s by more than one quarter.

“Given the factors and the concerns stated above, second-half year results are unlikely to reverse the full impact of the first half loss to attain results close to or at last year’s levels,” he said.

Part of these recovery efforts include the hiring of financial experts to help the company restructure its debt with a view to renegotiating the maturity of its loans.

The MD said he hopes the country’s security situation will improve so tourist numbers can recover and grow.

Mr Ngunze is also hoping to win over Kenyan travellers who he claimed do not support the national carrier, and he promised to improve the customer experience.