KQ now extends aircraft lease on lower rental fee

Kenya Airways #ticker:KQ has extended the lease of three aircraft to Turkish Airlines for an additional three years, a move that will likely deepen sub-leasing losses on the planes that were bought new in 2013.

The airline’s chief executive officer Sebastian Mikosz told Business Daily that the lease extension for the three Boeing 777-300 aircraft was agreed on in November 2018.

The Turkish carrier, however, negotiated to pay a lower rental fee in order to make the deal. The initial leases were to expire in April 2020.

This means that KQ, as the airline is known by its international code, will likely deepen the Sh731 million sub-leasing loss it made last year —this being the difference between revenues earned from the sub-leasing contracts and payments made to primary lessors in the same period.

Mr Mikosz, who is exiting the airline in December, said KQ has no choice but to enter into the loss-making sub-lease agreements, having bought the planes at top price which translates into high monthly payments even as their value decreases over the years.

“There is also a larger number of Boeing 777s in the market so you can find the same plane for half the price. We had a quite normal rate with Turkish for two-and-a-half years, but when we were negotiating for the lease extension they said we needed to lower the rate,” said Mr Mikosz.

“If we did an outright sale it will be an even bigger loss because we still have a loan to service. If we do sell we will have to repay the full loan promptly, and we would only likely get half price on them. It is too big an aircraft for KQ, and bringing them back to park them will cost up to Sh6.5 billion a year.”

He added that it is likely that Turkish Airlines will look to extend the lease further after three years once the new extension expires, with KQ also unlikely to bring them back into the fleet having shifted preference for long-haul service to the smaller, more economical Boing 787 Dreamliner.

The airline has been forced to shed capacity after hitting headwinds in its ambitious expansion plan dubbed Project Mawingu.

which it has been painfully trying to unwind in the last three years.