Kenya Airways Limited (KQ.ke) 2018 Annual Report

We have extracted below the Chairman’s Statement from the 2018 annual report of Kenya Airways Limited (KQ.ke), listed on the Nairobi Securities Exchange:

Economic overview

In 2018, the African continent had a positive and promising economic outlook. Gross domestic product reached an estimated 3.5 per cent in 2018 in spite of the turbulent times experienced in the recent years. This growth was supported by the consumer spending amid eased inflation and public investment.

Surprisingly, non-resource-intensive economies such as Kenya, Uganda, Rwanda, and counties in the West African Economic and Monetary Union, including Côte d’Ivoire and Benin recorded a solid economic growth in 2018. The Africa Development Bank (AfDB)-2019 Economic outlook report states that Kenya’s Real GDP grew an estimated 5.9% in 2018, from 4.9% in 2017. This was supported by good weather, eased political uncertainties following the ‘Handshake’ in May 2018, improved business confidence, and strong private consumption. The same is expected to be even higher in 2019.

Narrowing the scope to aviation economics the ‘2018 IATA-Economic Performance of the Airline Industry Report’ summarised the African airline industry performance as below: Africa region posted an increase in annual international RPK growth compared to 2017 (6.5% vs 6.0% respectfully). Despite the above RPK growth, loses abound due to increase in fuel cost and low break-even load factors, among other factors. Overall, the African airlines performance is improving, but only slowly.

The economic environment and general overview of the aviation sector was reflected in KQs performance in 2018.

Financial performance

Kenya Airways reported a reduced loss before tax position of KShs 7.59 billion. The narrowed loss is a remarkable improvement from the dire position that the company was in three years ago when this board took over.

We continued to focus on the turnaround programme. Some of the actions taken to ensure business sustainability included focus on cost reduction initiatives, revenue enhancement initiatives, Network expansion, revamping our customer experience and changes in the senior management. This saw KQ revenues grow significantly boosted by growth in passenger revenue, cargo and ancillary services. At the same time, we managed to keep our operating costs at manageable levels.

In 2018, the airline industry was heavily impacted by the oil prices which peaked at a three year high of USD 86 per Barrel in September. The price of oil is not only pegged on global supply and demand but also on prevailing geo-political and economic factors which we have no control over. This volatility has serious ramifications on an airline’s finances and it is on this premise that the board considered a fuel hedging option. This has seen a stabilisation of our fuel costs and better cash flow management.

Government support

The recognition of aviation as a strategic arm in the country’s economic progress by the Government of Kenya (GoK) was a major milestone. This paves way for attentive focus and a consolidation of efforts toward developing Kenya into an aviation hub in Africa and the world. Toward this end, KQ and KAA look forward to more collaborative framework as we realise the stated objective KQ affirms its support to the realisation of the Big Four (B4) agenda driven by H.E. President Uhuru Kenyatta. Accomplish- ing the manufacturing, affordable housing, universal health coverage, food and nutrition agenda cannot be realised without the transportation of human resources as well as requisite machinery.

Regional integrations

As the saying goes ‘United we stand, divided we fall’. Economic integration is essential in the sense that it creates consolidated large markets for both products and services, increases the bargaining power of countries in the economic bloc in addition to increased investment opportunities due to a free flow of capital and skills. Kenya stands proud as one of the constituent countries of the East African Community (EAC) which according to the African Development Banks’ African Economic Outlook 2019 is the only fully functional Customs Union in Africa.

For KQ, the progressive regional integration opens the economic potential of individual countries by harnessing the synergies that come about as a result of co-operation. Following growth in the economic capacities of constituent countries in these economic blocs, it is obvious that air transport will also grow. To further accelerate the gains of economic integration, the deployment of efficient and cost-effective aircraft in the form of Bombardier Q400 turbo-props is essential. We believe we are well positioned to provide affordable, comfortable and safe means of air transport to realise the above. All we seek is support.

Reduction of tariff and non-tariff barriers I single out the reduction of tariff and non-tariff barriers to trade to make my comments on the Single African Air Transport Market (SAATM). Kenya is a signatory to the Continental Free Trade Agreement (CFTA) that envisions the African continent as a unified free trade area. The CFTA acknowledges the establishment of SAATM through implementation of the Yamoussoukro Declaration and so does KQ.

However, our firm standpoint is that there should be a progressive as opposed to instantaneous de-regulation of the African. Airspace. In addition, the requisite infrastructure in terms of competition regulation authorities that mirror the European union model should first be established. In the absence of the above mechanism to ensure proper checks and balances, cut throat competition leading to a wasteful race to bottom will occur to the detriment of all of us. Eventually, monopolistic elements will remain in the air transport industry beating the envisioned purpose of liberalisation. The importance of Africa as a market for Kenya airways cannot be over emphasised. 41% of the airline’s total revenue in 2018 was realised from Africa and hence the need to place emphasized on our Africa plan and consolidate our niche market.

KQ driving tourism industry

2018 was indeed an interesting year on the Kenyan aviation front. Kenya’s largest airport and the KQ hub, Jomo Kenyatta International Airport finally attained the coveted FAA Cate- gory 1, the Last Point of Departure (LPD) approval by the U.S. Department of Homeland Security Transportation Security Administration (TSA), eventually culminating in the successful commencement of non-stop USA operations by Kenya Airways. We recognise GoK and specifically support of the Ministry of Transport and Infrastructural Development (MoT), the Ministry of Foreign Affairs, Kenya Civil Aviation Authority and Kenya Airports Authority in realising the above. Nairobi also hosted the 2018 International Civil Aviation Organization (ICAO) Air Service Negotiations (ICAN). This was also the only ICAN event that had the highest number of ICAO council members attending. With the support of the Ministry of Transport, the transport Cabinet Secretary oversaw the signing of at least thirty-four 34 Air Services Agreements (ASA). We remain grateful to MoT and KCAA for organizing this event. Kenya’s 2018 tourist arrivals grew by 37.33% from the previous year to cross the two million mark for the first time. This tremendous improvement is a sign of confidence in Kenya and an affirmation of our world class tourism product. Kenya Airways is proud of its contribution toward the realization of the above and remains committed to propelling the number even higher.

Safety and customer data security

Our expertise in aircraft maintenance continues to gain inter- national recognition. For the third year in a row, Kenya Airways was recognised and certified as an Embraer Authorised Service Centre (EASC). This assured continued in-house servicing of our Embraer fleet as well as the generation of extra revenue by servicing third party clients. It is also worth noting that we are also a European Union Aviation Safety Agency (EASA) certified airline.

A new development regarding the use of data and its protection dominated a big part of 2018. The culmination was the passing of the European Union General Data Protection Regulation (GDPR) that came into effect in May 2018. GDPR enforces the right of customer data by providing a legal framework to ensure and enforce data rights such as the right to data access, the right to be forgotten and the right to be notified. Consequences for corporations that violate the GDPR regulations are dire; 4% of the global turnover of €20 million. KQ has set in place mechanism to remain compliant to the GDPR regulations as well as assuring its customers that their data privacy is secured and guaranteed.

Sustainability

One of our Corporate Social Responsibility obligation is our commitment to ensuring the protection of the environment and its sustainability alongside our ever-progressing development. In line with this, the ICAO Assembly Resolution A39-3 decided that states implement a Global Market Based Measures (GMBM) scheme in the form of Carbon Offsetting and Reduction Scheme for International Aviation (CORSIA) to address any annual increase in total CO2 emissions from international civil aviation from 1st January 2019. At this point in time, KQ supports the initiative but continues to assess the implications of adopting CORSIA.

Going forward

As we head into the future, the Kenya Airways PLC board remains focused on steering the company towards financial stability as well as growth.

Kenya Airways PLC enters into the year 2019 steadfastly pursuing the goal of achieving financial stability, guest service excellence, growth in market share as well as the sustainable development of Africa. Kenya Airways will continue to implement the prudent financial management and the turnaround initiatives started in 2018. Success in our network expansion, growth in revenues as well as in passenger numbers are worthy of note. This growth is in tandem with the overall positive economic outlook in Kenya and the world in general. I am optimistic that our fundamental strengths will enable us to remain resilient and propel us forward. Kenya Airways is Kenya’s National flag bearer and holds market share among the top ten African airlines in the Market. This makes me conscious of the huge responsibility not only to our customers, colleagues and shareholders but to the entire Kenyan public.

Acknowledgement

My sincere thanks to my fellow Board members for leading the group through this challenging turnaround period. To our management and staff, our utmost appreciation for your continued efforts and dedication.

Michael Joseph
Chairman