June 25, 2014 / 6:04 AM / in 6 years

UPDATE 2-Kenya Airways looks to transit business to offset drop in tourist traffic

* Load factor falls to 65.6 pct from 68.7 pct

* Shares drop 6 percent to 10.85 shillings (Adds incoming CEO, analyst)

By Duncan Miriri

NAIROBI, June 25 (Reuters) - Kenya Airways is to focus on carrying transit passengers through its Nairobi hub as tourists have been put off visiting the east African nation by the series of attacks blamed on Islamists, its new chief executive said on Wednesday.

The airline, which picked chief operations officer Mbuvi Ngunze to replace Titus Naikuni as chief executive when he leaves in December, has suffered following a fire at the Nairobi airport last August and attacks by Somalia’s al Shabaab rebels.

The carrier, which is 26.73 percent owned by Air France-KLM and 29.8 percent by the government, reported a 55 percent drop in pretax losses to 4.86 billion shillings ($56 million) in the year ended March 31.

But investors were disappointed that the number of passengers was not keeping up with the expansion of its fleet, sending its shares down 6 percent to 10.85 shillings.

“They are getting more planes which means getting more capacity but they are not able to fill them up,” said Eric Musau, a research analyst at Kestrel Capital.

The so-called load factor, which measures seat sales as a percentage of capacity, slipped to 65.6 percent from 68.7 percent the previous year, weighed on by a drop of as much as 20 percent in traffic on some routes, especially in Europe.

Ngunze said he expected the airline, which flies to 65 destinations around the world, to weather the challenge.

“We of course are concerned by the reduction in numbers but we have got to buckle in,” he told Reuters after a briefing for investors.

Capacity at Kenya Airways will rise by 40 percent this financial year on the back of the delivery of new Boeing 787 and 777 widebody jets, its finance director Alex Mbugua said, indicating the scale of the challenge faced to sell seats.

Ngunze said they would overcome the problem by targeting travellers from the rest of Africa who can use Nairobi as a hub to and from other destinations in the world.

“Insecurity (in Kenya) is a concern,” he said. “The capacity we are putting in is not short-term capacity ... We are putting in assets that have a 15-, 20-year outlook.”

Kenya Airways started flying to Abuja in Nigeria this year as part of plans to improve connections.

During the year in review, total revenue increased by 7 percent to 106 billion shillings, mainly due to higher average fare yields from the passenger business.

Direct operating costs fell by 2 percent, driven mainly by savings of 1.5 billion shillings from favourable oil prices and more efficient fuel consumption, Mbugua added.

The airline, which was privatised in 1996, also benefited from a realised gain of 972 million shillings from its fuel-hedging positions.

Naikuni, who has run the company since 2003, said they were planning to open new routes this year using the new 787 Dreamliners.

“We are also looking into going to Beijing this year,” Naikuni told the investor briefing, adding the route will be launched in September. ($1=87.5500 Kenyan shillings) (Editing by Edmund Blair, Greg Mahlich)

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