What you need to know:
- KQ says the losses arise from leasing out aircraft at rentals lower than that charged by the primary lessors.
Kenya Airways is set to incur an additional Sh3 billion accounting loss from new aircraft sub-leasing contracts, representing the deficit between what it is earning on the deals and its payments to the primary lessors.
The national carrier disclosed the new onerous leases in its financial statements for the half-year ended September.
These follow the leasing of five Boeing airplanes to Oman Air and Turkish Airlines last year in a deal that left the Nairobi Securities Exchange-listed firm with a Sh4 billion accounting loss in the year ended March.
KQ, as the airline is known by its international code, says the losses arise from leasing out aircraft at rentals lower than that charged by the primary lessors.
The leases are part of the company’s efforts to cut costs at a time when slow revenue growth and mounting liabilities have kept it in the loss territory.
The additional sub-leasing of aircraft involves the same carriers, with Oman Air taking two B787-8s and Turkish Airlines taking three B777-300ERs.
This brings the total number of aircraft seconded to the Muscat-based carrier to four while those sent to the Istanbul-based airline rises to six.
The Sh3 billion loss on the new contracts is split into long-term leases that will generate a Sh2.07 billion deficit and short-term leases whose loss stands at Sh980 million.
Part of the losses has been realised, with others to filter through over the coming years as the contracts roll on over the medium term.
The loss-making contracts represent the heavy cost to shareholders of unwinding Project Mawingu.
KQ signed the deals to mitigate even larger losses it would have otherwise incurred from cancelling the contracts at a time when it could not fly the planes profitably itself.
The airline has said the contracts would reduce the airline’s fleet costs by an equivalent of Sh8.4 billion annually, indicating that sub-leasing at a loss is a lesser evil compared with maintaining a bloated fleet.
Sub-leasing the aircraft, non-renewal of other leases and sale of several airplanes saw KQ’s fleet drop to 47 units in the year ended March, compared with 52 units the year before.
The airline plans to further scale back its capacity in the current financial year to cut costs.
The company says it is keen on reducing the number of empty seats on long-haul flights, with the capacity reduction also being accompanied by termination of some routes and a decrease in the frequency of flights on others.