Kenya Airways in Sh5.6bn loss

National carrier Kenya Airways has suffered Sh5.6 billion loss for the year ended March 2009 compared to Sh6.5 billion pretax profit the airline recorded during the same period last year. It is the airline’s first loss since being privatised in 1996.

The decline in earnings is in spite of the company’s 19 per cent growth in revenue from Sh60.4 billion in 2008 to Sh71.8 billion.

International Air Transport Association, the aviation industry body, estimates that airlines made a combined loss of Sh680 billion in 2008 and would further make Sh376 billion loss this year.

Although KQ’s earnings from passengers, cargo and handling services rose by over 10 per cent, the airline continued to pay high fuel prices because of its fuel hedging programme.

Protect company

The airlines’ hedging programme aims to protect the company against sudden increases in global fuel prices. The way it works is the airline enters into contract with a bank to guarantee fixed fuel price for a definite period of time.

Started in 2004, the programme shielded the airline from volatile oil prices that characterised most of the second half of last year.

But now it appears as if hedging is working against it because it has been unable to take advantage of falling fuel prices.

During the second half of 2008 it only took five months for the price of oil to plummet from $150 to $40 a barrel, although it had on Friday risen to around $69 a barrel.

Bound by the hedging agreement which ends in December 2010, Kenya Airways will almost certainly never benefit from the low fuel cost because it is paying $110 a barrel. The price would be slightly reduced to $108 a barrel in 2010.

The only reprieve is that this arrangement covers 51 per cent of KQ’s fuel needs meaning the airline is free to buy the remainder from the open market.

Addressing investment bankers and brokers at Nairobi Serena Hotel on Friday the airline’s managing director Titus Naikuni said that cancelling the fuel hedge agreement before the term ends would not be prudent.

“Since 2004 hedging has been beneficial to us but the board is looking into the issue to see whether we should continue or not,” he said.

Finance director Alex Mbugua said the change in fuel hedging accounting rules, requiring unrealised loss or gain relating to hedged fuel be accounted for in the income statement, cost the company Sh7.5 billion.

In order to comply with this standard, the airline is required to change the movement in the unrealised hedge loss of Sh7.5 billion through the current year’s income statement.

“However, it is important to point out that this adjustment does not have any cash flow impact,” said Mr Mbugua. “Moreover, should the fuel prices not change materially, the entire Sh7.5 billion will reverse in the future period thereby increasing reported profit.”

Kenya Airways chairman Evanson Mwaniki said the company had reasons to be optimistic as it expects increased passenger numbers due to increased routes and frequencies.

“We are also investing in three areas; fleet modernisation, our people and systems to deliver this growth,” he said.

In the face of poor financial performance, the airline’s board has recommended a first and final dividend of Sh1 a share. The dividend would be paid around October to shareholders on the company’s register on September 25.