Kenya Airways spending $142m annually on leasing aircraft, report shows

The servicing loans accounts for up to 11 per cent of the airline’s operating costs—way above the global average of five per cent. KQ also told parliament that $53 million of the total amount covers aircraft depreciation costs, leaving $89 million for actual servicing of the leasing costs. KQ has in the past two years revealed that it spent $170 million to clear its tax obligations with Kenya Revenue Authority.

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Transport Principal Secretary Esther Koimet (left) and KQ CEO Sebastian Mikosz at a meeting on the proposed plan to manage Kenya Airports Authority on February 26, 2019. PHOTO | DIANA NGILA | NMG

Troubled national carrier Kenya Airways spends a whopping $142 million annually to service the onerous leasing contracts it signed with financiers to acquire 20 aircraft, a new report shows.

The confidential report, which was submitted to the Transport committee of the Kenyan parliament, means servicing loans accounts for up to 11 per cent of the airline’s operating costs — way above the global average of five per cent.

Kenya Airways, which is struggling to rise from the depths of historic corporate loss-making, also told parliament that $53 million of the total amount covers aircraft depreciation costs, leaving $89 million for actual servicing of the leasing costs.

For the first time last week, Kenya Airways revealed that 11 firms including Bank of China Aviation, China Development Bank Leasing, Nordic Aviation Capital, GE Capital Aviation Services and Aviation Capital Group bankrolled the carrier’s leasing of 20 aircraft, which is half its fleet.

KQ, as the Kenyan carrier is popularly known, also named individuals behind its controversial ownership of Boeing 787, 737-800 and Embraer 190 aircraft through two privately-owned entities Tsavo and Samburu.

The carrier’s chief executive Sebastian Mikosz, said Samburu is owned by Karen Karita Ellerbe, Jonathan David Herrick, Evert Brunekreef and Christopher Bryan, while Tsavo Aircraft Financing LLC is owned by the Wilmington Trust Company registered in the US.

And in a revelation meant to anchor its role as the key tenant at Nairobi’s Jomo Kenyatta International Airport, KQ disclosed that it pays $650 million annually to the Kenya Airports Authority—for use of the airport as its hub.

Landing fees

That amount does not include the $160 million it pays KAA in annual landing fees, $4 million in building and utilities rents and $2 million in concession fees.

“Furthermore, KQ pays KAA the Airport Pax Service Charge [APSC] that is dependent on the number of passengers departing from Kenya with the airline.

“In KQ’s case, that fee amounts to $430 million annually, accounting for approximately 50 per cent of JKIA’s total revenue from APSC per year,” the airline says in its report to parliament.

KQ has partly argued that should its proposal to run JKIA stand, travellers would see a drop in ticket costs in line with the reduction in the service charge, making it competitive in its operating hub.

But the revelation also means that KQ accounts for half of JKIA revenues, and KAA would be the biggest casualty should the heavy debt burden bring the airline down.

KQ has in the past two years revealed that it spent $170 million to clear its tax obligations with Kenya Revenue Authority, but carries security guarantees from Exim bank for six of its Boeing 787 Dreamliner’s, one Boeing 77-300 aircraft and one GEnx Engine.

Airport management

The airline has argued that KAA is currently running the airport on a faulty traditional aeronautical to non-traditional revenue structure of 81:19 compared with well-managed international airports whose revenues are split at a ratio of 60:40.

Landing fees, Airport Pax Service Charge and others make the traditional aeronautical revenues while duty-free shops, concessions paid by airport operators, ground handlers and fuel providers constitute non-aeronautical revenues.

This means that under the JKIA revenue structure, 81 per cent of KAA revenues come from aeronautical services including landing charges, air passenger charges, parking charges, airlift fees, fuelling revenue and fuelling up-lift fee—partly contributing to Kenya Airways’ high cost base.

“It is crucial to grow non-aeronautical revenue in order to balance the revenue streams and cut the cost of core aeronautical services, making the airport more competitive to attract more traffic,” said Kenya Airways.

KQ told parliament that it expects to start reaping the benefits of fuel hedging this month, as the fuel curve projections point to an increase in prices.

The carrier also said that it wholly owned the other half of its fleet, but only three Boeing 737-300s have been fully paid for.

Kenya Airways documents show that six Boeing 787 Dreamliner aircraft and one Boeing 777-300 financed by Citi Bank, Cairo headquartered Afrexim Bank and JP Morgan banks are still on loan.

Another 10 Embraer 190 financed by Standard Chartered Bank International and Afrexim Bank are also still on loan.

Kenya Airways also revealed that its captains are paid some of the highest salaries at Ksh1.6 million a month, while its First Officers take home Ksh900,000 ($9,000) a month.

The airline pays flight operators Ksh225,000 ($2,250) while ground service crew, technical, commercial and cargo employees take home Ksh150,000 ($1,500).

“A KQ captain earns on average 11 times more than the average employee in other high salary sectors, and 29 times more than the private sector average….While significant salaries of the pilots are not unusual in the industry due to influential trade unions and political pressure on national careers, remuneration of the Kenya Airways’ pilots is substantial even in comparison with their peers from wealthy economies,” the airline notes.

But despite KQ’s spirited effort to defend its proposed takeover of JKIA management, Kenya’s Transport ministry officials appeared to beat a retreat.

“Following concerns that have been raised by the public, we are now exploring other options of delivering the objectives of the government to consolidate our aviation sector.

“Once an agreed option has been identified we will submit the same to the Cabinet for approval,” Kenya’s transport cabinet secretary James Macharia said.