Fuel hedging is where airlines agree to purchase oil in the future at a predetermined earlier price, thereby mitigating risks in the event of volatility. This means that hedging costs are mainly for future benefits depending on how soon the oil market becomes volatile.
However, the Nairobi Stock Exchange-listed company suspended its hedging policy in 2016 after contract losses led to financial strain following protracted business inactivity and the airline did not return to hedging in 2021, which left it reeling under soaring global fuel prices this year.
The Group’s Managing Director and CEO Allan Kilavuka says the company may hedge only after a cost-benefit analysis for a near-term goal.
“There is no point in hedging if you are only going to increase the hedging cost and not get its benefits,” Kilavuka tells The Africa Report on the sideline after an investors briefing held on 24 August. “We are monitoring the efficiency of flying and operation. We want to reduce the amount of fuel burned.”
The CEO says the price of jet fuel, currently retailing at about KSh148 per litre, has increased by almost 65% over the past 12 months on the back of the Russia-Ukraine war. This has piled pressure on the airline’s already strained coffers at a time when the demand for flying is yet to hit pre-Covid-19 levels. Fuel accounts for roughly 20% of KQ’s budget cost.
Pooling profits
In the half year ending June 2022, the Group saw total operating costs increase by 53% to KSh53.11bn, compared to KSh34.63bn witnessed in a similar period in 2021. This was attributed to surges in fuel costs and the weakening of the shilling against the US dollar.
Net losses before tax stood at KSh9.86bn, a 15% reduction from KSh11.54bn in the half year of 2021. KQ executives say the pretax loss would have been KSh3.328bn if it were not for this year’s hike in fuel prices.
The Africa Airlines Association (AFRAA) projects African airlines to record a $4.1bn loss this year on the back of expensive jet fuel, equivalent to 23.4% of 2019 revenues. The International Air Transport Association (IATA) earlier warned that rising jet fuel prices were likely to cause airfares to increase this year.
African airlines are now pooling efforts to remain profitable. A committee under AFRAA, composed of major carriers like Kenya Airways and South African Airways (SAA), was formed last May to oversee bulk purchase and negotiation of fuel prices for the African airlines, a move aimed at staving off potential crisis triggered by costly fuel.
[The] overall aim is to consolidate aviation space in Africa so that we can be able to compete with other large airlines
In a separate pan-African collaboration, the KQ-SAA deal signed last year (which is part of the common initiative aimed at establishing an African airline by 2023) is currently being fast-tracked to give participating airlines a competitive edge over their rivals.
This will involve, among other things, the use of joint lounges and operating together to lessen common longstanding financial woes that have gripped both KQ and SAA. Other African countries that have shown interest in this pan-African collaboration are Nigeria, Côte d’Ivoire, and Senegal.
“[The] overall aim is to consolidate aviation space in Africa so that we can be able to compete with other large airlines,” Kilavuka says.
In July, KQ and SAA inked a codeshare agreement that became effective immediately, allowing each airline to sell, under its own code, flights operated by each other as travellers combine flight segments and baggage on a single ticket.
The partnership is expected to include the likes of Zambia, Ghana and Nigeria, subject to government approval as African countries seek to ease travelling options for their customers. Mr Kilavuka says KQ had tried a near similar approach that would have allowed it to ease delays by using its own personnel in UK’s Heathrow Airport, but the application was rejected by London.
Restructuring
KQ started a restructuring strategy in February 2022 with the help of US-based advisory firm Seabury Consulting, focusing on a revival plan through four key areas – network optimisation, fleet rationalisation, rationalisation of employees, and opportunities for cost-out initiatives.
The airline is also looking to cut jet-leasing costs by more than a third as part of measures to break even by 2024. During the investors briefing, Kilavuka said negotiations with lessors have so far contributed to about 19% in overall rental costs.
The airline is also unable to access blocked funds – a situation where the transfer of funds is blocked as a result of regulations imposed by the government of a country where the money was generated – needed for operation costs, such as settling of bills, paying salaries, and maintenance of aircrafts as governments seek to retain hard currency amid dollar scarcity. Ethiopia and Nigeria are the top African countries with KQ’s blocked funds.
#Nigeria, #Ethiopia, #Malawi withholding $28m revenue, says Kenya Airways CEO | TheCable https://t.co/bIsGO2oiRR pic.twitter.com/65SuoLmj1V
— TheCable (@thecableng) August 29, 2022
Leading airlines like Fly Emirates recently took drastic measures against Nigeria by suspending flights to the West African nation. In May this year, KQ announced it was suspending air ticketing activities in Malawi due to the decline of FX there.
“These are funds we continue to pursue bilaterally because they are significant. We are in discussions directly with customers and also using the government to help negotiate for a repatriation of funds particularly in Nigeria,” says KQ Chief Finance Officer, Hellen Mwariri, in reference to the case of Nigeria.
Return to normal?
The IATA is confident that global airline passenger numbers will reach 83% of pre-pandemic figures in 2022, and the aviation industry’s recovery to profitability will be within sight despite ongoing uncertainties.
KQ recorded a total of 1.61 million passengers in the first half of this year, up 85% compared to the previous year. This, however, remains 33% lower than the pre-pandemic period of 2019. Cargo tonnage increased by 39% compared to the same period in 2021, demonstrating continuous outstanding growth in air freight services.
“The opening of borders worldwide has led to quick rebounds in some key markets. Lingering travel restrictions in some markets have limited the recovery,” says KQ Board Chairman Michael Joseph.
“It is also important to note that these results were further affected by the high price of aviation fuel, which is over 65% more than last year,” he adds.
Understand Africa's tomorrow... today
We believe that Africa is poorly represented, and badly under-estimated. Beyond the vast opportunity manifest in African markets, we highlight people who make a difference; leaders turning the tide, youth driving change, and an indefatigable business community. That is what we believe will change the continent, and that is what we report on. With hard-hitting investigations, innovative analysis and deep dives into countries and sectors, The Africa Report delivers the insight you need.
View subscription options
