The Deputy President (DP) Rigathi Gachagua is suffused with the passion of his convictions. He is convinced that public institutions in Kenya are under State capture. He does not hesitate to go hammer and tongs against perceived “personal interests” in State corporations. He declares vehemently that the overarching principles of engagements in these corporations will be informed by ‘national interests’.
In a recent television interview, the DP singled out the national carrier Kenya Airways (KQ) for censure. He claimed, “Kenya Airways makes losses because of State capture.” He said, “the people who lease the planes and who do repairs are overcharging because of State capture.”
Not for the first time, this column has pointed out patent falsehoods about the national carrier that are deemed incontrovertible truths. Some of these fatuous allegations have to do with KQ’s aircraft leasing arrangements. Aspersions have been cast on the probity of financial lease arrangements with claims that the Special Purpose Vehicles (SPVs) behind them are owned by politically connected types.
Yet information in the public domain proves otherwise. It shows that the SPVs used to purchase close to half of the airline’s fleet are owned by credible international financial institutions. It is standard practice for aviation and maritime industries for fleet operators to take syndicated loans for large-scale purchases of equipment. Lenders then incorporate SPVs, as they would rather have an independent legal personality as a borrower, free from any financial distress that may be experienced by an airline company. The borrower (SPV) then enters into a finance lease with an airline until the loan is repaid, after which the title to the vessel is handed over to the airline.
Successful carriers like Turkish Airlines have used this option to increase their fleet. Through an SPV called Balthazar, owned by PNB Paribas, they recently bought five Airbus 321 Neo aircraft. KQ, in the 90s, purchased four Boeing 737-300s with the support of the Exim Bank of America. The SPV then was Simba Finance Limited. Titles to these aircraft were transferred to KQ after the loan repayment. Other SPVs like Samburu, Tsavo and Amboseli can be traced to international lenders of repute like JP Morgan, City Bank, Standard Chartered, Ned Bank, among others. It is noteworthy that information on the existence of all current SPVs is contained in KQ’s annual reports.
The national carrier also has operating leases from international leading lessors like GE Capital Aviation and Nordic Aviation Capital. Annual reports also capture these. In an ideal environment, operating leases favour airlines that have high cabin intake and utilisation of aircraft. One of their downsides is that they are susceptible to demand shocks and therefore exclude force majeure clauses. One such demand shock was occasioned by the Covid-19 pandemic. As such, all payments governed by these leases still have to be made, notwithstanding the fact that the aircraft were non-operational for most of 2020.
There is a nefarious group whose raison detre is to sully the reputation of KQ’s management through specious arguments. They purport to have evidence of inflated leasing costs. But such evidence cannot be put to strict proof. Nor can it be found in any report from credible organisations.
It cannot be overemphasised that KQ, as a contributor of more than 5 per cent of Kenya’s GDP, is a strategic national asset that must be supported to ensure its survival. Allowing it to fold up would see the loss of more than 500,000 direct and indirect jobs attributed to the airline. Post-Covid, the government’s support remains crucial as the airline continues to restructure towards profitability. And there is nothing unusual about that as globally, legacy carriers are similarly being supported by their governments.
No doubt, the DP’s fight against State capture has popular support. But he will need to be empowered with appropriate tools. As Abraham Maslow once said, “if the only tool one has is a hammer, it is tempting to treat everything as if it were a nail.”
Mr Khafafa is a public policy analyst