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Kenya Airways Seeks Safety of Shore from Sea of Red Ink

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Kenya Airways Seeks Safety of Shore from Sea of Red Ink

Kenya Airways Seeks Safety of Shore from Sea of Red Ink
May 24
10:00 2016

LONDON – Sometimes, you just get the timing wrong. Which is the simplest explanation behind Kenya Airways’ current struggle to recover from last year’s record loss of $274 million.

The deficit, a huge deterioration from 2014’s $38.6 million loss, stunned observers, who knew the results were likely to be bad, but not that bad. So severe was the financial impact that the airline had to call in Cairo-based AfrEximbank for a bridging loan of $200 million while it tried to restructure its long-term debt. The bank is also advising Kenya Airways on raising capital.
The main reason for the loss, says the airline, is that it expanded rapidly but that passenger growth failed to keep pace with rising capacity.

In the past couple of years, the airline has acquired five Boeing 787-8s, three 777-300ERs and three 737-800s. But at precisely that time, the country was hit by several terrorist incidents, carried out by the Islamist group Al Shabaab, Al Qaeda’s affiliate in neighboring Somalia.
Angered by the Kenyan armed forces’ intervention to help the fragile Somali government in the capital Mogadishu, several attacks by Al Shabaab on beach resorts and even a central Nairobi shopping mall have severely dented Kenya’s vital inbound tourism trade.

Several western nations have issued travel advisories warning their citizens not to travel to Kenya. This has had a substantial effect on Kenya Airways’ passenger loads.

There have been other factors beyond the airline’s control, such as last year’s Ebola epidemic in West Africa, which dampened air travel demand over a swathe of the continent.
And unfortunate fuel hedging – understandable when oil prices were heading north of $130 a barrel just a couple of years ago – meant that Kenya Airways was unable to benefit from the slumping price of fuel over the past year or so.

In addition, a major problem has been rapidly-increasing competition, from both neighbors and further afield. Ethiopian Airlines has been expanding steadily and Kenya Airways has been slow to spot the growing threat from its northern neighbor.

Probably more serious, however, has been a major push into Africa by the three major Gulf carriers, Etihad, Emirates and Qatar Airways, as well as Turkish Airlines. All four airlines are increasing capacity at a frantic pace and need to find new routes to absorb their new aircraft.

As a result, they are all elbowing their way into Africa, heading to cities that just a few years ago would never have been considered targets for major carriers. The object, of course, is to pull more and more passengers into their hubs before pushing them out again on connecting flights.

Kenya Airways is not the only African carrier to be feeling the heat from its huge rivals, but combined with the other factors noted above, this added complication has helped push the Nairobi-based carrier deeply into the red.

Various cost-cutting measures are underway to try to stem the tide of red ink. Last autumn it was decided to sell part of its triple seven fleet. Two -200ERs were sold to Omni Air International, while all 777-300ERs were transferred to Turkish Airlines.

Also, two of its 787s are being leased out to Oman Air, while the Muscat-based carrier is also reportedly close to signing a deal to acquire one of Kenya Airways’ slot pairs at London Heathrow. Heathrow is heavily slot-constrained, which perhaps explains reports that the price being paid for the two slots is an eye-watering $75 million.

Also on the financial front, Kenya Airways has called in New York investment bankers PJT Partners as ‘transaction advisors’, to give advice on restructuring the carrier’s balance sheet and on raising new capital.

On a much more modest level, it has also gone live with an online program that allows economy-class passengers to bid for upgrades to business-class seats – anything to increase yield.

CEO Mbuvi Nguze said recently that the airline’s turnaround strategy is starting to gain traction. Just how strong a grip the airline has got on its financial problems will become apparent in mid-summer when it reveals its 2015-16 financial results.


About Author

Alan Dron

Alan Dron

Old-school scribe who now is fortunate enough to earn a fair percentage of his income by writing about aviation. Still laments the passing of Concorde and has been known to take a day trip to the Middle East to interview an airline executive.

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