KENYA Airways is considering setting up a fuel procurement company as part of its new cost cutting measures.
The airline, which cut its staff numbers by 476 in the last financial year, announced on Friday a sh10.8b pretax loss for the year ended March 2013 due to lower passenger traffic on the European route, high operational costs among them fuel and a strong shilling.
“We are looking at the possibility of starting our own fuel procurement company,” KQ chief executive Titus Naikuni said at an investor briefing held over the weekend in Nairobi. Naikuni added that discussions have started on proposals for such a set up to cut the cost of fuel which is the single largest expense for the airline accounting for an average 40 per cent of its direct costs each year.
The airline spent sh41.3b on fuel in period 2012/2013 compared to sh40.7b in the previous year.
In the last financial year under review, KQ which takes up fuel hedging contracts to guard itself against price increases of the commodity made a loss of sh1.2b compared to the previous year’s sh1.1b.
Fuel hedging allows a company to set up a price cap on the product such that whether it fluctuates up or down the company will still pay the amount agreed on the hedge contract, if the price goes lower than that fixed, the airline loses but if the price goes up, the higher costs are absorbed by the financing firm of the hedge contract.
If KQ goes ahead to implement this plan, it will join list of other global airlines that have taken similar measures to reduce their fuel expenses. Last year, American airline Delta, bought a refinery in Philadelphia to cut its jet fuel expense.
KQ’s plan is to reduce the number of intermediaries in the supply chain for its jet fuel and save some of the money charged by middlemen.
“When we set up our own fuel company, we will take out the margin and that money will come back to KQ,” said finance director Alex Mbugua.
KQ said the average cost of jet fuel per gallon in US cents went up by 5 per cent.