Kenya Airways half year 2014-15 financial results

Summary
Kenya Airways continued with its fleet renewal plan and by the close of the first half year ended 30th September 2014, it had received five (5) of the fir st set of six (6) units of the 787 Dreamliner fleet into the network. The airline also took delivery of the second and third Boeing 777-300 aircraft introducing an additional 800 seats into the operation while grounding for return the entire Boeing 767 fleet of 6.

Within the period, the airline also commenced operations into Abuja, a second point in Nigeria, much in line with the carrier’s focus in connecting Africa to the rest of the World. Further, Kenya Airways launched Jambojet at the beginning of the period, a low cost operator and wholly owned subsidiary.

The main purpose of the low cost carrier is to stimulate domestic travel amongst the growing middle class in Kenya.

Kenya Airways however operated under a very challenging business environment in the first half of the year. This is a continuation of the trend from last year, following the fire at the hub airport JKIA, and regional insecurity leading to reduced travel into Kenya and hub avoidance. This trend continued into the first half of the year leading to travel adviso ries being issued by various countries. These had a negative impact on major traffic flows into the region. The situation has been further aggravated by the Ebola pandemic, which led to the suspension of our flights to Sierra Leone and Liberia in August 2014.

The turnover achieved at KShs 56,788m indicates a KShs 2,450m (4.5%) improvement compared to prior year, but not commensurate with the capacity increase as a result of the above events. Direct operating costs rose to KShs 42,171m representing a 13% increase on prior year mainly from the additional capacity. Kenya Airways posted an operating loss of KShs 5,047m within the 6 month period compared to KShs 1,739m profit recorded in the same period last year.

Loss before tax at KShs 12,499m compared to a prior year profit of KShs 548 million includes an impairment loss of KShs 5,408m on write down of air craft approved for sale by the Board.

REVENUE

Passenger
The airline put into the market a capacity of 8,183 million measured in Available Seat Kilometres (ASK) representing a 15.2% growth against prior year. The growth in uptake of this capacity measured in Revenue Passenger Kilometres (RPK) at 5,236 million, was higher than prior year by 5.2%. The Yield achieved per RPK fell below prior year by 5.6%. The total Passenger related revenues including Excess Baggage for the period at KShs 48.1 billion improved by KShs 1.3 billion (+3%) compared to prior year on the back of a 15% expansion in capacity.

Capacity offered into Europe grew by 15.2% driven by the introduction of the new 400 seat B777-300 operations to Amsterdam in place of the B777-200, as well as the commencement of the Paris operation with the Dreamliner with 18 more seats th an the B767-300. Capacity into the Middle East and Far East regions combined grew by 20% from the replacement of the old fleet by the new and larger fleet to operate most of the destinations.

Within the African marketplace, capacity grew by 11% mainly from increased wide body operations on our key feeder routes to Kinshasa, Lagos, Lusaka, Lilongwe, Harare and Johannesburg. Further growth was spurred by increased frequencies to the larger East African catchment areas like Entebbe, Dar-es-Salaam, Kigali and Bujumbura. Political instability kept Cairo out of the network during the period under review, while capacity into South Sudan reduced by 11%. In response to the Ebola pandemic in parts of West Africa, Kenya Airways suspended operations into Monrovia, Liberia and Freetown, Sierra Leone resulting in a capacity reduction of 20% compared to prior year.

The domestic market registered a 42% growth in capa city from the commencement of Jambojet operations. The Group introduced 3 additional daily frequencies to Mombasa and 2 extra flights into Kisumu.

Cargo
Cargo tonnage uplifted within the six months grew by 8.4% following increased sales effort, and the rollout of freighter destinations within Africa.

COSTS

Direct Operating and Fleet Costs
Direct operating costs increased to KShs 42,171m a 13% increase on the back of a 15% capacity growth. Fuel costs remained the single largest driver at 35% of total operating costs and grew by 11% largely driven by the expansion in operations. Fleet ownership cost increases reflect the additional aircraft acquired in the period. Overheads

Overheads at KShs 11,908m increased by KShs 2,528m compared to prior year mostly driven by increased manpower and marketing costs aimed at sup porting the renewed fleet and expanded network.

Exchange rate
During the period under review, the Kenya Shilling weakened slightly against the US Dollar with the average exchange rate at KShs 87.68 per US Dollar compared to prior year average of KShs 85.52 per US Dollar.

OUTLOOK

Going forward, the prospects for our business are positive driven by the following factors, amongst others:-
• Deployment of new fuel efficient fleet
• Opening of Terminal 1A at JKIA dedicated to Kenya Airways
• New lounges at the hub offering superior customer experience
• Hub redesign with improved infrastructure at the airport The Board has retained a financial advisor to review and propose appropriate refinancing options.

PROFIT WARNING

Given the factors and the concerns stated above, second half year results of Kenya Airways are unlikely to reverse the full impact of the first half loss and attain results close to or at last year’s levels. It is reasonable at this time to anticipate earnings for the financial year 2014/15 that will be lower than the previous year’s by at least 25%.

The Board of Directors has taken adequate measures to guard against further erosion of shareholder value and remains optimistic that the revamped customer experience offered by various investments, and other initiatives by Management will return the airline to profitability.

The Board takes this opportunity to thank all its shareholders, customers, staff, management, the Government and suppliers for their dedicated contribution to the growth of the airline.