Kenya Airways Incurs Sh.4 Billion Loss From Sub-Leasing Airplanes

The National carrier Kenya Airways (KQ) disclosed that it incurred a Sh.4 billion loss from sub-leasing five of its aeroplanes to foreign airlines.

In a statement, the company incurred the multi-billion losses from the difference between revenues that were earned from sub-leasing contracts and payments to be made to the primary lessors in the same period.

The airline further stated that the prevailing business circumstances had made it prudent to reduce excess capacity through leasing, adding that the Sh4 billion loss is an accounting treatment covering the entire period of the sub-lease.

The loss-making contracts are the latest culmination of the chain of bad decisions linked to an expansion binge dubbed Project Mawingu, and which it has been unwinding in the past year at a heavy cost to shareholders.

KQ, as the airline is popularly known, signed the deals to mitigate even larger losses it would have incurred from cancelling the contracts after it failed to fly the planes profitably.

KQ last year leased five Boeing aeroplanes to Oman Air and Turkish Airlines in the middle of a liquidity crisis that it only navigated with the help of the government.

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The airline recognized a Sh1.4 billion losses in the year ended March 2016, with the balance of Sh2.5 billion expected to filter through over the coming years as the contracts roll on in the medium term.

KQ chief executive Mbuvi Ngunze said at the time of signing the lease contracts that they would reduce fleet costs by Sh8.4 billion annually, indicating that sub-leasing at a loss (which was not disclosed at the time) represents a lesser evil compared to maintaining a bloated fleet.

A report showed that the company has some leasing deals in place that include sub-leasing two B787-8s to Oman Air for an undisclosed number of years. This will total up the total number of aircrafts seconded to the Muscat-based carrier to four. Moreover, three B777-300ER are in the process of being sub-leased to Turkish Airlines for an undisclosed period thus raising the number of airplanes sent to the Istanbul-based carrier to six.

The report further stated that plans are in place to sell two B777-200ERs and return two E170s  to their owners at the end of their lease period. The mix of aircraft sub-leasing, sales and non-renewal of leasing will discharge a total of nine aeroplanes from its fleet that will shrink to 38 units.

The B787 series, also known as Dreamliners, are among the most expensive airplanes in KQ’s fleet expansion programme that was based on a projection of flying to 77 countries and 115 destinations by 2021.

The airline plans to further scale back its capacity in the current financial year to cut costs prevent a further decline into the negative capital position with the sub-leasing of more aircrafts to Omar Air and Turkish Airlines.