State now orders review of skewed KQ-KLM pact

The Government has initiated a review of the joint venture agreement that Kenya Airways entered with Dutch partner KLM.

Through a Cabinet session last week, Transport Cabinet Secretary James Macharia was directed to take necessary steps towards reviewing joint venture agreements the national carrier has signed with other foreign firms, some of which have ended up hurting the former.

Kenya Airways 787 Dreamliner taking off
The decision was taken after it was revealed during the Cabinet meeting that the troubled KQ is flying into further losses. The airline made the biggest net loss in the country’s corporate history of Sh25.7 billion in the year ended March.

Highly placed sources in government told The Standard on Sunday that there is general consensus that the agreements contribute immensely to KQ’s losses. “I can confirm there is a Cabinet decision to review the agreements signed between Kenya Airways and other foreign firms. The Cabinet Secretary in charge of Transport was instructed to spearhead this process,” said a source at the Cabinet meeting.

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But even as government moves to review what may turn out to be a major scandal, details are already flowing in that Kenya Airways has approved the sale of its landing slots in London. The proceeds of the sale, like the ongoing leasing and sale of aircraft, would be invested in settling debt that has thrown the airline deep into losses.

Senior managers at KQ said a resolution had been taken to dispose the slots and lease from KLM. This technically means that while KQ has traditionally landed and taken off for free in London, the airline will be paying KLM every time they land or take off from the latter’s slot.

A discussion around this matter and other related issues is something Kenya Airways management would not respond to. Kenya Airways Managing Director Mbuvi Ngunze had not responded to our questions by the time of going to press.

A landing or a takeoff slot is a right granted by an airport owner that allows the holder to plan landing or departure during a specific time period. Landing slots are allocated in accordance with guidelines set out by the International Air Transport Association (IATA).

“This is unconscionable. It would essentially mean we no longer are in the East African Hub Business. Flight connectivity to London via a national airline is a sine qua non (an indispensable condition) of being a hub,” said investment analyst Aly-Khan Satchu.

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Landing slots are hard to acquire, have a commercial value and can be traded between airlines. For instance, Continental Airlines paid Sh20.9 billion for four pairs of landing slots from GB Airways at London Heathrow Airport. The slots are so important that some airlines can choose to operate empty flights to preserve slot allocations.

Commercial law expert Mbugua Ng’ang’a said allocation of a landing slot is a matter of State to State negotiations. “Landing slots are important for any airline looking at becoming a serious player in the aviation industry. It is a very difficult facility to acquire,” he said.

Sweeping powers

If an airline doesn’t use its allocated slot (typically 80 per cent usage over six months) then it can lose the rights. Airlines may operate ghost or empty flights to preserve slot allocations.

Details have also emerged that KQ’s poor performance is partly attributed to a skewed agreement that the airline signed with KLM. Kenya Airways entered into co-operation agreement 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.

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With such clauses in the agreement granting KLM key control, there are concerns that even the proposed restructuring 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 on Sunday 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.

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kenya airwaysKLMTransport Cabinet Secretary James Macharia