Aircraft lease: Kenya Airways opts for hourly rates in place of fixed cost, saves $45m

One of the biggest airlines in Africa, Kenya Airways, has saved $45 million ((Sh4.7 billion) after it changed the lease terms on its aircraft fleet, opting for hourly rates in place of fixed costs.

Kenya Airways Chief Executive, Allan Kilavuka, said the airline reached a deal with lessors in 2021 to only pay when they fly leased aircraft.

The deal saved the airline billions, switching from paying for idle aircraft during the year affected by COVID-19 to only making payments when leased planes were flying.

The East African national carrier has a fleet of 36 aircraft and it owns 19 of these, while it has leased 17 from the lessors that include Nordic Aviation Capital and GECAS. Embraer forms the bulk of its fleet with 15 aircraft.

“The big one in 2021 was negotiation with our lessors and got concessions reduced on our lease rentals from fixed to what we call pay by the hour. So, you pay by the hour, which is where you pay as you fly.

That was big, saved us almost 45 million dollars for 2021,” he said.

KQ, as the airline is known by its international code, has been trying to cut costs to remain afloat amid the challenges of COVID-19 and legacy problems.

It has also cut $3.1 million after terminating a leasing agreement of the two Boeing 737-700 from the lessors.

Cost-cutting measures

The carrier is planning to cut its aircraft fleet to 30 from the current 36, a cost-cutting measure that is likely to see a number of employees sacked. A source privy to recommendations by Steer Group and attended an induction meeting between a new consultant and KQ top management told Aviation Metric under strict condition of anonymity that the national carrier is considering cutting Boeing 787s to five and reducing Embraer 190s from 15 to 10.

According to the source, the consultancy firm, Steer Group, concluded its turnaround plan for the airline late last year. It is, however, expected to maintain the number of B737s at 15.

Talks of fleet cut perhaps signals reorganisation plan at the country’s national carrier, which was presented to the International Monetary Fund (IMF) ahead of the Sh26.6 billion capital injections by the National Treasury in the supplementary budget for the current financial year.

More bailout

The carrier said it has also resorted to delays in paying creditors and suppliers, even as it eyes additional resources from a multibillion government bailout currently in parliament. “We did a lot of cash containment measures, for example, deferment of some of the payments. It is not the best thing, but we didn’t have a lot of money, so we negotiated for deferment of payments,” Kilavuka said.

Cut in frequencies due to low demand

The airline has cut down on its frequencies at the moment due to low demand. However, it has failed to reach a deal for its pilots to be paid per trip as it seeks a lower wage bill.

Pilots account for 10 per cent of the airline’s total workforce, but take home the equivalent of 45 per cent of the overall payout to employees or Sh6.1 billion, based on the carrier’s wage bill for the year to December.

Kenya Airways’ cut its workforce in 2020 to survive an economic slowdown triggered by the pandemic. The airline also resorted to a hiring freeze and unpaid leaves to stabilise its operating costs.

The carrier’s narrows losses were occasioned by COVID-19 as the carrier expects a 20 per cent in revenue in 2022, according to Kilavuka.

The airline in which government has a 48.9 per cent stake saw revenue go down by half at the height of the pandemic in 2020 as airlines around the globe were forced to ground their airplanes.

Kilavuka said: “We have been through the worst patch,” adding that passenger revenue had grown 21 per cent in 2021 as recovery started.

Narrowing losses

The improving situation helped the airline to narrow its losses by a fifth during the first half-year, but it still lost $101 million during the six months.

The airline slipped into insolvency long before the pandemic, mainly due to an expansion drive that saddled it with hundreds of millions of dollars in debt to finance the purchase of new planes, followed by travel warnings in 2013 due to insecurity in the country.

This year’s Kenya Airways growth forecast is dependent on no further travel disruption or restrictions caused by any new coronavirus variant, the CEO said. African carriers hinge hope on cargo.

Government is seeking to take over $750 million of Kenya Airways’ debt, which it had guaranteed in 2017, as part of the restructuring effort, Kilavuka said.

Cut in frequencies due to low demand
The airline has cut on its frequencies temporarily due to low demand. However, it failed to reach a deal for its pilots to be paid per trip as it seeks a lower wage bill. Pilots account for 10 percent of the airline’s total workforce but take home the equivalent of 45 percent of the overall payroll, based on the carrier’s wage bill for the year to December. The airline also resorted to a hiring freeze, and unpaid leaves to stabilize its operating costs.

Wole Shadare