Kenya:Why drop in fuel prices is not good news for cargo business

Its cargo division, launched 12 years ago as next growth area, has increasingly come under pressure, with clients demanding lower charges in proportion to oil prices, its executives

“The cargo volumes look lower than last year,” says KQ’s acting finance director Dick Murianki said during the release of the financial statement for the year ended March 31. “Shippers are demanding lower rates for cargo in line with the dip in fuel prices.”

The crude prices have dipped from levels above Sh10,000 ($100) per barrel two years ago to levels below Sh5,000, pulling down the retail price of aviation fuel.

During the announcement of the annual results on Thursday at the airline’s Embakasi headquarters, it emerged that the airline had reduced freight charges after customers lobbied for bargain prices while basing their argument on the decline of fuel prices.

This saw the national carrier revise its cargo charges “as a preventive measure” to guard against losing clients to competitors.

The KQ Cargo – initially touted as the airline’s next growth area – has also suffered after KQ cut its fleet of planes from 43 to 36. With the seven larger aircraft removed, the executives say the remaining ones are comparatively narrow, something that has led to low cargo uptake.

“The reason (for low volumes) is that cargo is delivered in big bags and we now have smaller aircraft,” says Mr Murianki.

When it was launched, the cargo division at times recorded up to 47 per cent growth on annual basis, raising the airline’s fortunes as passenger transport faced stiff competition.

Other than saying it recorded low volumes and revenues, the executives would not release this year’s performance figures of the division which earned approximately Sh8.6 billion in the previous year.

The airline reported a Sh26.2 billion net loss for the year ended March 31 and another Sh25.7 billion the financial year before.

The Sh5.1 billion loss that the carrier booked from fuel hedging still features prominently in its financial statement as the global dip in oil prices wiped out the gains made from use of discounted fuel prices in the year under review.

Kenya has been the hub for the East African region, providing a key entry point to smaller economies in the East African block.

The international air cargo front in Kenya has been largely dominated by Kenya Airways, Emirates and Ethiopian Airlines, upping the competition for cargo, especially perishables, which are a major export for Kenya.

The airline in January last year opened a retail shop in Tea Room in downtown Nairobi, targeting thousands of small traders who buy their goods in the Middle East and Asia.

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Credit: Business Daily