KQ profits tumble 62pc

October 30, 2008
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, NAIROBI, October 30 – Kenya Airways (KQ) profits are on the decline, thanks to high fuel costs and the strong shilling against the dollar in the six months leading to September this year.

KQ’s Group Finance Director Alex Mbugua said on Thursday that the airline posted a 62.7 percent drop in its profit after tax from Sh1.9 billion registered in the six months to September last year to Sh736 million this year.

He said fuel costs, which went up by 71.6 percent to Sh12.9 billion greatly contributed to the airline’s operating overheads.

“Despite our fairly robust strategies, we have not been able to contain the fuel costs and it has resulted in an increase in costs of Sh5 billion and that has really primarily impacted our performance,” he explained.
 
The aviation industry around the world has continued to face major challenges arising from fuel prices which hit an all time high of $147 per barrel in July 2008.  This has resulted in a majority of airlines posting losses while some have been pushed into filing for bankruptcy. 

The International Air Transport Association (IATA) has predicted that globally, airlines will make a combined loss of $5.2 billion in 2008. If the situation does not change, a further $ 4.1 billion would be lost in 2009. 

Mr Mbugua however explained that the airline would execute its hedging policy, which allows them to hedge up to five years in advance in a bid to mitigate the fluctuating international prices.

“We have received quotations from our banks that we deal with and we are in the process of implementing a hedge of 2010 and 2011 primarily to take advantage of the prevailing reduced fuel prices,” he revealed.

Currently a barrel is going for $68 but it is projected to rise to between $100 and $136 dollars by next year.

He further added that they were in discussions with their counterparties to work out how they can review (hedging) structures that were entered into about three years ago.

On the exchange rate, he said their forex losses stood at Sh210 million as the shilling had appreciated to an average of Sh64.72 to the dollar which was much lower than Sh67.80 for the previous year.

A weak currency is good for the airline as it earns it revenues in US dollars. However, although this causes the fuel and maintenance costs to go up, the net impact of a low shilling is positive.

“We have done our projections and should the shilling continue to weaken against the US dollar, we expect to see better performance,” he added.

KQ Chief Executive Officer Titus Naikuni concurred with the Finance Director and expressed confidence that they would register favourable results for the next six months if the fuel prices continued to stabilise.

He added that although the post election violence had dealt a hard blow for them particularly in the first half of the financial year, which coincides with the peak season in the industry, he observed that with the marginal recovery in the tourism industry the airline had managed a paltry growth in the passenger traffic over previous year. KQ managed to carry about 1.5 million passengers during the period.

Mr Naikuni disclosed that the major initiatives that the company had been undertaking including improving its control systems and training its staff had begun bearing fruits and they have seen an improvement in the company’s operations such as punctuality.

Commenting on what impact the global economic crisis would have on their operations, the CEO admitted that it was difficult to fully assess the full effect on Kenya Airways as its implications on the Kenyan and African economies was still uncertain.

“The management and board will continue to monitor the situation on a regular basis and take the appropriate action,” he said.

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