Kenya Airways risks losing millions to Boeing for planes deposit

By Business Daily Africa

Kenya Airways is fighting to save a Sh310 million deposit it made with US plane maker Boeing Corporation for aircraft purchases after the expiry of the preservation period rendered the deposit non-refundable.

The airline disclosed in its annual report for the year ending December 2022 that it risks losing the millions of shillings given deposits made for plane purchases are not refundable if a carrier fails to buy the planes.

The loss-making carrier has made a Sh310 million provision — an amount set aside from a company’s profits to cover an expected liability — for failing to purchase the undisclosed planes.

The deposit rose from Sh280 million in 2021, although the airline did not disclose whether this was due to additional cash being put in or due to exchange rate movements.

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

But years of loss-making and a balance sheet with negative equity have made it difficult for Kenya Airways to proceed with plane purchases. The cash-strapped airline is pursuing the option of extending the preservation period for the plane orders to save the deposit.

“The deposits paid towards acquisition of aircraft represent amounts paid to Boeing Corporation for the option to purchase aircraft in the future,” said KQ in the report.

“A provision of Sh310 million was made in the year as a result of expiry of a purchase option the company had in place with Boeing Corporation. The company is, however, in talks with Boeing to further extend the validity of the options.”

Should the US firm refuse to extend the validity of the option, KQ would be forced to write off the Sh310 million provision, further hitting its bottom line.

By the end of last year, the airline was carrying on its books some Sh3.7 billion in deposits for leased aircraft. KQ reported that during the year, it also received a refund of Sh3.24 billion after terminating a lease for a Boeing 777-300 plane.

It has also disclosed plans to terminate the lease for its other two Boeing 777-300 aircraft that are currently subleased to Turkish Airlines, in a move set to save the carrier between $25 million (Sh3.3 billion) and $30 million (Sh4 billion).

The savings will be recognised after deducting the termination penalties due to the company that leased the planes to KQ. KQ has in the past few years not made additional aircraft purchases after running into financial headwinds and has instead leased out planes 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 Project Mawingu, which intended to cement KQ’s strategy that hinges on connecting African travellers to the outside world through its Nairobi hub.

The plan, which called for the airline to cover about 115 destinations by 2021, required the carrier to buy additional aircraft that would raise its fleet number to more than 100.

The plan, however, stalled after the airline fell into losses and eventually negative equity, forcing it to rely on regular government bailouts to keep afloat.

External shocks such as the Ebola outbreak in West Africa between 2014 and 2016, which saw flights to key destinations such as Sierra Leone put on hold, denied the airline of millions of dollars’ worth of revenue.

Locally, a spate of terror attacks in that period also reduced tourist arrivals into the country, hitting the airline’s bottom line. In 2022, the airline recorded a 10th straight year in the red, doubling its net loss from Sh15.87 billion in 2021 to Sh38.26 billion.

The rise in net loss was majorly due to a Sh18 billion finance cost that was passed through the income statement after the government took over the servicing of $525 million (Sh70 billion) dollar-denominated debt after the airline defaulted on payment.

The company was forced to pass through its profit and loss account the resulting exchange losses once the government converted the loan from dollars to shillings.

The debt is now being carried as a shareholder loan from the government on KQ’s books. Due to the one-off nature of the financing cost, KQ said it was optimistic of returning to profitability by 2024 — something it has not done since 2012 when it closed with net earnings at Sh1.66 billion.

The airline saw its total revenue increase by 66 percent to Sh117 billion as passenger numbers rose by 68 percent to 3.7 million and cargo business uplift increased by 3.5 percent to 65,955 tonnes.

Total operating costs rose 59 percent to Sh122.4 billion, with direct operating costs increasing by 94 percent on increased operations and huge global fuel price increases throughout the year.