Kenya Airways, KLM pact on 3 year descent

August 7, 2015
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Ngunze said the deterioration of numbers and profitability of the route had negatively impacted on the agreement causing losses/FILE
Ngunze said the deterioration of numbers and profitability of the route had negatively impacted on the agreement causing losses/FILE
NAIROBI, Kenya, Aug 7 – Kenya Airways’ joint venture with KLM Royal Dutch Airlines has for the past three years not yielded any profits, Kenya Airways CEO Mbuvi Ngunze has disclosed.

Appearing before the Senate Committee on Kenya Airways inquiry, Ngunze said the deterioration of numbers and profitability of the route had negatively impacted on the agreement causing losses.

“In the context of the revenues and the costs on the routes in the joint agreement venture which we share 50-50, over the last three years, the route has been loss making,” he said.

He said the Dutch Airline had since paid them a settlement transaction, coming in the wake of the Sh29.7 billion pre-tax loss announced by the airline last week.

“Even though it has been loss making, we get a cash settlement because of the balancing transaction between them, but the reason is very clear, the value of the European routes from a traffic point view has gone down,” added Ngunze.

He decried the travel advisories that had been slapped on Kenya by European countries as the contributors to the losses but expressed hope that the lifting of the some of the bans would mitigate the losses in the future.

The partnership between the two airlines which has been in existence for over 15 years was renewed in 2013 where four new routes London-Nairobi, Amsterdam-Entebbe/Kigali route, Amsterdam-Lusaka and Harare and the Amsterdam-Kilimanjaro/Dar-es-Salam route were added.

The KQ CEO however said some of routes which are not profitable had been shut down for instance last year; Abu Dhabi, Delhi and Bangui were closed, an issue Ngunze says is common practice within the airline industry.

“You start a route and when you do market survey you see certain economics but when you begin operation those economics may not show that way or the competitive environment changes, this is not abnormal,” he pointed out.

Bangui was closed due to the unrest in West Africa while Freetown and Monrovia were suspended owing the to the Ebola outbreak.

The airline was also conducting a market survey on other prospective routes that could be explored in future for instance Italy which they were re-evaluating to assess whether it could be operated seasonally.

KQ Group Finance Director Alex Mbugua who accompanied the CEO admitted to the airline losing a substantial amount of money due to fuel hedging but however said more was saved.

He said many other airlines had suffered from hedging and had lost even more than what the national carrier did insisting that they had made more from hedging than KLM.

“When fuel prices dropped between October and March, Delta airlines made a huge loss, but in their wisdom because they have balance sheet cash bought out all their hedges because they were of their view that the prices would remain there,” said Mbugua.

Responding to a question by Nyeri Senator Mutahi Kagwe over whether there was no hedging loss, Mbugua said there was a hedging cost but they had saved Sh3.2 billion since they were paying the fuel company an operating cost Sh4.8 billion while the financing cost to Goldman Sachs was Sh1.6 billion.

The board together with the CEO will appear before the committee once again to respond to issues relating to the hiring and firing of staff.

Senators present included Peter ole Mositet (Kajiado), Naisula Lesuuda (Nominated) and Omar Hassan (Mombasa).

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