Kenya Airways' partnership with KLM Royal Dutch Airlines has not yielded any profits for the past three years according to Kenya Airways CEO Mbuvi Ngunze. Mr. Ngunze made these claims when he appeared before the Senate Committee during an inquiry why the airline made a 29Billion losses.
"In regard to the revenues and the costs on the routes in the joint agreement venture which we share 50-50 over the last three years, the route has been loss making," he said.
He said the Dutch Airline had since paid them a settlement transaction, coming in the wake of the Sh29.7 billion pre-tax loss announced by the airline last week.
"Even though it has been loss making, we get a cash settlement because of the balancing transaction between them, but the reason is very clear, the value of the European routes from a traffic point view has gone down," added Ngunze.
He decried the travel advisories that had been slapped on Kenya by European countries as the contributors to the losses but expressed hope that the lifting of the some of the bans would mitigate the losses in the future.
The partnership between the two airlines which has been in existence for over 15 years was renewed in 2013 where four new routes; London-Nairobi, Amsterdam-Entebbe/Kigali route, Amsterdam-Lusaka and Harare and the Amsterdam-Kilimanjaro/Dar-es-Salam route were added.
Mr Mbuvi Ngunze however said some of the routes which are not profitable were shut down last year; Abu Dhabi, Delhi and Bangui, an issue Ngunze says is common practice within the airline industry.
"You start a route and when you do market survey you see certain economics but when you begin operation those economics may not show that way or the competitive environment changes, this is not abnormal," he pointed out.
Bangui was closed due to the unrest in West Africa while Freetown and Monrovia were suspended owing the to the Ebola outbreak.
The airline was also conducting a market survey on other prospective routes such as Italy that could be explored in future.
KQ Group Finance Director, Alex Mbugua who accompanied the CEO, admitted to the airline losing a substantial amount of money due to fuel hedging but said more was saved.
He said other airlines had also suffered from hedging and lost even more than what the national carrier did, insisting that they had made more from hedging than KLM.
But what is hedging :This is a strategy used to eliminate or reduce the risks of loss that could be brought about by adverse price movements. One can hedge against inflation, forex, oil and grains. The Nairobi Securities Exchange will introduce derivatives market, which will be trading future and options contract that hedge against risk.
Responding to a question by Nyeri Senator Mutahi Kagwe whether there was hedging loss, Mbugua said there was a hedging cost but they had saved Sh3.2 billion since they were paying the fuel company an operating cost Sh4.8 billion while the financing cost to Goldman Sachs was Sh1.6 billion.
The board together with the CEO will appear before the committee once again to respond to issues relating to the hiring and firing of staff.
