Tax bill for new aircraft thought to be a bigger threat to Kenya Airways than all competitors combined

KENYA AIRWAYS FLEET EXPANSION SET TO CONTINUE, FOR NOW, AS COMPANY ENGAGES GOVERNMENT OVER 14 BILLION SHILLINGS TAX BILL

(Posted 09th May 2014)

Kenya Airways’ Director of Finance, Alex Mbugua, during the recently concluded AFRAA 3rd Suppliers and Stakeholders Convention in Nairobi, confirmed that the airline will take delivery of a further 5 Boeing B787-8 Dreamliners and 3 Boeing B737-800NG’s before the end of the year.

This will bring this financial year’s deliveries to a total of 10 new aircraft, 7 twin aisle long haul and 3 short to medium range single aisle jets to boost KQ’s ability to add more destinations in Africa – by the end of next year does Kenya Airways intend to connect all political and commercial capitals across the continent – but also save money by replacing the aged B767-300ER fleet with state of the art B787’s.

The confirmation came at a time when it became more widely known that new tax legislation will bleed Kenya Airways of over 14 billion Kenya Shillings in cash through VAT being levied on aircraft spare parts and new aircraft, a move widely seen as the ultimate folly by a misguided parliament failing to comprehend the damage they are inflicting on the aviation industry and how they are catapulting Kenya Airways out of continental competition vis a vis such direct rivals like Ethiopian or the Gulf airlines, all of which do not face such or in the latter case any taxes and can therefore continue to offer substantially cheaper tickets for travelers who inevitably will vote with their purse, should these tax measures not be rescinded. It is understood from usually reliable sources that the Kenya Airways Board of Directors and the top managers are keen to engage with government to demonstrate the financial impact of these tax decisions and the likely outcome, should the decision not be reversed soon, and the impact ticket and cargo sales would suffer if the added cost would have to be loaded on to fares and cargo tariffs.

As the graph above shows does Kenya Airways under their strategic plan intend to boost their fleet from presently in the mid to high 40 range to 107 passenger jets [sic: the airline is also planning to operate up to 12 freighters at that
time] by the financial year 2021 and the tax implications for such an increase would be beyond the measure of any, even the most profitable airline leave alone an airline just coming out of the doldrums of a record loss of some 7.8 billion Kenya Shillings, which the airlines is still absorbing inspite of a return to operational profitability. Industry observers are united in their opinion that unless therefore the VAT Act is once again amended will the Kenyan national assembly have handed a financial death sentence to their national airline, better than any fifth column of any rival airline could even have done through even the worst corporate dirty tricks campaign.

Only time will tell which way the pendulum will swing but this, as previously the decision to load tourism services with VAT, where the downturn was as a result accelerated and has already put thousands of workers out of their jobs, is not a scenario any corporate executive floor will be keen to face up to when members of parliament not only are totally deaf and blind to reason but appear hell-bent to destroy what it took a generation to build. Watch this space for breaking and regular aviation news from Eastern Africa.