Kenya Airways risks losing millions to Boeing for planes deposit

Kenya Airways is struggling to save the Sh310 million deposit it made with US aircraft maker Boeing to buy the planes after the expiration of the holding period made the deposit non-refundable.

The airline revealed in its annual report for the year ending December 2022 that it risks losing millions of shillings since deposits made for the purchase of aircraft are not refundable if the carrier fails to purchase the aircraft.

The loss-making carrier was charged Sh310 million – an amount set aside from the company’s profits to cover expected liability – for failing to purchase the undisclosed aircraft.

The deposit was up from Sh280m in 2021, though the airline did not say whether that was due to extra cash being put in or due to exchange rate fluctuations.

The national carrier had plans to order new planes worth billions of shillings to bolster its fleet of Boeing and Embraer jets and grow its business in the face of stiff competition from rivals such as Ethiopian Airlines.

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But years of loss and a negative equity balance sheet made it difficult for Kenya Airways to move forward with the aircraft purchase. The cash-strapped airline is seeking the option of extending the holding period for aircraft orders to save the deposit.

“Deposits paid for aircraft purchases represent amounts paid to Boeing Corporation for option to purchase aircraft in the future,” KQ said in the report.

“Shillings 310 million a year has been appropriated as a result of the expiry of a purchase option the company had with Boeing Corporation. However, the company is in talks with Boeing to extend the validity of the options.”

If the US company refuses to extend the option’s validity, KQ will be forced to write off the provision of Sh310 million, which will further affect its bottom line.

By the end of last year, the company had on its books around Sh3.7 billion in aircraft charter deposits. KQ reported that during the year, it also received a refund of Sh3.24 billion after terminating a lease on a Boeing 777-300.

It also revealed plans to end the lease of two more Boeing 777-300s currently sub-leased to Turkish Airlines, in a move aimed at saving between $25 million (Shillings 3.3 billion) and $30 million (Shillings 4 billion). .

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The savings will be recognized net of termination penalties payable to the company that leased the aircraft to KQ. KQ has not in the past few years purchased additional aircraft after encountering financial headwinds and has instead leased aircraft and terminated some leases in an effort to contain costs.

A decade ago, the airline was regularly acquiring new planes from Boeing as part of its Mawingu project, which aims to further KQ’s strategy of connecting African travelers to the outside world through its Nairobi hub.

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The plan, which called for the airline to cover about 115 destinations by 2021, required the company to buy additional planes that would bring its fleet to more than 100.

However, the plan stalled after the company plunged into losses and eventually suffered negative equity, forcing it to rely on regular government bailouts to stay afloat.

External shocks such as the Ebola outbreak in West Africa between 2014 and 2016, which led to the suspension of flights to key destinations such as Sierra Leone, deprived the airline of millions of dollars in revenue.

Domestically, a series of terrorist attacks in that period also led to a decrease in the number of tourist arrivals in the country, which hurt the company. In 2022, the airline marked its tenth consecutive year in the red, doubling its net loss from Sh15.87 billion in 2021 to Sh38.26 billion.

The rise in the net loss was largely attributed to a Sh18 billion financing cost passed through the income statement after the government took over $525 million (NIS 70 billion) dollar-denominated debt after the airline defaulted.

The company had to pass the resulting exchange losses through a profit and loss account once the government had converted the loan from dollars into shillings.

The debt is now charged as a shareholding loan from the government in the books of KQ. Given the unique nature of its financing cost, KQ said it was optimistic of returning to profitability by 2024 – something it has not done since 2012 when it closed with a net profit of Sh1.66 billion.

The company saw total revenue increase by 66 per cent to Sh117 billion, with passenger numbers up 68 per cent to 3.7 million and freight business growing by 3.5 per cent to 65,955 tons.

Total operating costs increased by 59 per cent to Sh122.4 billion, with direct operating costs increasing by 94 per cent with increased operations and massive increases in global fuel prices over the year.

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