Pact that State seeks KLM approval complicates Kenya Airways rescue

Details have emerged about the co-operation agreement that Kenya Airways entered into with KLM, granting the Dutch airline sweeping powers on the operations of the national carrier. This ranges from the appointment of directors, sale of aircraft, route network and a say in allotment and issue of any shares in the capital of the company.

With such clauses in the agreement granting KLM key control, there are concerns that even the proposed Government bailout would not go through without the approval of the Dutch airline.

The operating pact could also make a mockery of the Government’s plan to bail out the national carrier through fresh capital injection, much less buying KLM out. Articles of the co-operation agreement, whose copy The Standard has obtained, hands KLM absolute authority on all the aspects of the company, including approving the sale of any shares held by the Government.

An objection by a single KLM director is enough to overturn a resolution passed by the 12-member board. Among the resolutions that the Government will require KLM’s approval is the replacement of the top management and the acquisition of aircraft.

It now appears that the plans to dispose off seven planes announced last week with the expectation to boost cash flow may have been sanctioned by KLM, as per the terms of the pact.

Kenya Airways CEO Mbuvi Ngunze (right) and Finance Manager Alex Mbugua during the release of the financial results for the year ending June 30, 2015 where profit dipped to Sh25 billion. (PHOTO:WILBERFORCE OKWIRI/STANDARD)

KQ can also not allot and issue any shares in the company without approval of KLM’s directors, who include the chief executive and finance director. But National Treasury Cabinet Secretary Henry Rotich has expressed the Government’s position in reviving the airline through a bailout of Sh60 billion. “We have to re-look at the agreements we have had before making a decision on the scope of the revival,” he said, pointing out that other national airlines owned by various governments in Africa were vibrant and profitable.

Mr Rotich was responding to a panelist, who is also a shareholder in the airline, who had proposed that the airline should be nationalised. He may also have dirtied the waters when he said on an evening talk show on local TV station that Kenya would have to re-assess the strategic alliance that was entered with KLM almost two decades ago.

The 1996 agreement, drawn by law firm Kaplan & Stratton, however bars the airline from entering into any other co-operation agreement with an airline that was deemed to be a major competitor of KLM.

Strategic investor

Who constitutes a ‘major competitor’ of KLM could significantly reduce the options available to KQ, in the case that a different strategic investor is found. Before the co-operation agreement was entered, KQ was a wholly-government-owned airline that was struggling with debt.

KLM was among the strategic investors approached to steer the turnaround, with British Airways, Lufthansa and South African Airways being the other hopefuls. KQ was listed at the Nairobi Securities Exchange in March 1996, where KLM acquired a 26 per cent while the State retained a 23 per cent stake – after capitalising billions worth of debts in the firm. It was at this time that KLM, as the single largest shareholder in the airline, was granted veto powers.

But in a subsequent rights issue of 2012 to help the firm actualise project Mawingu, Kenya upped its stake by buying off untaken rights to increase its stake to 29.8 per cent. Rotich said the financial bailout could involve the re-assessment of its operating partnerships, in the strongest pointer that its marriage with KLM could be rocked.

Speaking for the biggest shareholder of the airline, he expressed his dissatisfaction with the alliance and said the State will rescue the ailing carrier. “We are going to re-look at this linkage with KLM and may have to review the partnership,” Rotich said on Citizen TV Wednesday evening.

He added that the State was not keen on just capital injection, as was the case with Mumias Sugar, without evaluating a turnaround strategy to be presented by the management.

Already, the airline has appointed two separate management firms to carry out a viability study, and advise management on how best it would reverse its plunge. The firm has reported a Sh29.6 billion pretax loss for the financial year ended March 2015.