Kenya Air Looks For Cuts After Profit Drop

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Published: June 14, 2012

Kenya Airways will cut costs this year to protect its bottom line, its chief executive said after a sharp rise in its fuel bill hit annual profits.

The airline, which is owned 26.73 percent by Air France-KLM and 29.8 percent by the Kenyan government following this month’s rights issue, is ranked among the largest carriers in sub-Saharan Africa, alongside South African Airways and Ethiopian Airlines.

Titus Naikuni said the cost-cutting measures would be far-reaching and affecting procurement, staff productivity and fuel costs but would be preceded by a thorough review of the airline’s cost structures.

“You can’t let costs run away with you,” he told an investor briefing after the company reported a 57 percent drop in pre-tax profits in the year to end-March to KES2.15 billion Kenyan shillings (USD$ 25.2 million), after oil prices jumped during the period, sending its direct costs up by 44 percent to KES77 billion shillings (USD$ 902 million).

Revenue increased by a quarter to KES107 billion shillings, buoyed by higher passenger and cargo traffic.

Earnings per share dropped to KES3.58 shillings from KES7.65 shillings and the dividend was cut to 0.25 shillings from 1.50 shillings last time, but will go to the holders of a billion new shares issued in this month’s USD$ 250 million cash call to fund its expansion plans. Around 70 percent of the rights issue was taken up by investors.

Kenya Airways’ said a move to bring together carriers under the African Airlines Association to buy fuel jointly in bulk, would save it USD$ 2 million this year, adding they would also carry on with fuel hedges in order to manage the costs.

Analysts said focusing on costs was the right step, adding that next year’s delivery of the first of nine 787 Dreamliner planes ordered from Boeing, would also cut costs as the planes are more fuel efficient.

“This is a very volatile business because fuel costs are something that airlines cannot really control,” said Gregory Waweru, who covers Kenya Airways at Kestrel Capital.

AL SHABAAB WAR RISKS

Naikuni said the firm would also drive revenue growth through increasing its fleet to 40 planes this year from 34, while opening new routes to Beirut and Abuja.

The airline, whose strategy hinges on connecting Africa to the rest of the world through its Nairobi hub, will also increase its fleet of freighters to three from one.

He said, however, that worries over an upcoming general election and the country’s security situation could pose risks to the business as foreigners cancel their trips to Kenya.

The east African nation sent its troops to Somalia last October in pursuit of al Shabaab rebels, drawing a series of retaliatory grenade attacks in the far north, the capital and in the coastal city of Mombasa.

“The security situation does not augur well for us in the travel industry,” Naikuni said.

Voters are expected to go to the polls by March next year to pick a president and other leaders, in the first election since December, 2007, when a disputed result in the presidential election led to violence in which more than a 1,000 people were killed.

Although African aviation is seen as a fast-growing market due to rapid economic growth and lack of good roads and rails, carriers face a tough and unforgiving market.

Over and above the costs and security difficulties facing Kenya Airways, a jostling herd of small national flag carriers and private companies struggle to compete with global airline giants, which control 70 percent of air traffic to the continent.

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