Treasury moves to ease KLM’s grip on Kenya Airways

Kenya Airways Chairman Michael Joseph speaking during the Annual General Meeting. (Photo: Wilberforce Okwiri/Standard)
After years of rocky marriage, the controversial KLM agreement with Kenya Airways brokered in 1996 is now set for a major overhaul.

The airline will sign a new joint venture agreement with KLM Royal Dutch Airlines early next week. The deal will replace the controversial agreement signed in 1996 during privatisation of KQ, in which the Government ceded control and gave KLM sweeping powers in running of the Kenyan national flag carrier.

Among the major changes in the new agreement include the addition of Air France (which merged with KLM in 2004) to make the KLM-KQ joint venture a three-way agreement. Kenya Airways chairman Michael Joseph revealed that some financial clauses will be revised, with KLM making major concessions.

The agreement signed on January 11, 1996 may be termed as poison pill due to clauses that gave immense power to the Dutch airline. The deal has been a major source of pain for Kenya Airways and senior officials at the company have admitted as much. They note that there are areas that needed to be re-looked as well as the fact that the Government failed to assert itself during the 1996 privatisation process and ended with the short end of the stick.

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Among the thorny areas in the 1996 agreement include a clause whereby one KLM director had veto power on board decisions, even when such a decision had been passed by other board members.

Other issues where one KLM director could send the whole KQ board back to the drawing board included appointment of the managing director and the chief finance officer, acquisition and disposal of planes and even the sale of shares that the Government still held in KQ.

Unsecured debt

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Government officials and KQ management and board agree that the Dutch airline had an unnecessarily big say in running of the Kenyan national carrier. They agree there is need to cut KLM’s influence. They, however, say the relationship has been to an extent good for KQ and would be maintained.

Joseph said that the the agreement has undergone reviews over time, with the latest being in 2012. He added the agreement is being re-worked with a view of re-looking the financial clauses as well as bring Air France on board.

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“The original agreement has been amended a few times since 1996 and we are currently in discussions to amend it again to include Air France and to change some of the financial clauses. This is a work in progress but hopefully will be concluded early next year,” Joseph told Weekend Business.

“The current partnership is based on the latest version of the agreement which was last amended in 2012.”

Following the just concluded financial restructuring, the Kenya government and 10 local banks converted Sh50 billion of loans into equity and emerged as the two largest shareholders with a combined stake of 87 per cent.

In the restructuring, the Government saw its stake rise from 29.8 per cent to 48.9 per cent. Local banks, through KQ Lenders Company 2017 Ltd, also converted unsecured debt into equity, resulting in a shareholding of 38.1 per cent.

KLM’s stake was significantly diluted, going down to 7.8 per cent, from the previous 26.7 per cent. KLM’s directors on the KQ board was also reduced to just one, with a rider that it would lose this seat should its stake fall below five per cent. This has led to speculation that the Dutch airline could be on its way out.

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Joseph, however, said it is an opportunity to grow the relationship among the new and old shareholders albeit on an equal footing. He added that KQ is looking to deepen the relations with KLM when the Kenyan carrier starts flying to the US. KQ plans to start direct flights to the US next year after years of waiting.

He noted that there are many KLM customers that would want to connect to Africa from America, while there are KQ customers looking forward to connecting seamlessly to other destinations from the US using KLM, which is an opportunity for both airlines to cooperate and maximise on returns.

Active partners

“The partnership has been profitable… it works for us despite what you hear. We will grow it especially when we start flying to New York,” he said.

National Treasury Cabinet Secretary Henry Rotich said KLM is not quitting the partnership and has been part of the restructuring and is still interested in the airline.

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“Our relationship with KLM will continue. They supported this process strongly and we will continue to engage them in the strategic direction. They are still interested in the strategic direction of Kenya Airways and have participated in provision of loans. They will continue being active partners in the bigger scheme of things,” he said during a briefing last week.

KQ former CEO Mbuvi Ngunze, who has also been the lead in the restructuring process as an ‘external’ advisor, noted the dilution in KLM’s shareholding should not be taken to mean KLM was exiting. The said the restructuring was inevitable due to the massive debt owed to the National Treasury and the banks. He added that KLM could in coming years double its stake through further investments.

“The dilution is based on the fact that the Government and the bank debt was so significant relative to the injection of equity that KLM has done because you are talking about $480 million of debt conversion while KLM has injected $26 million in the first phase and will inject another $50 million on meeting certain conditions. Today, they have 7.8 per cent through new capital injection, they can go to 13 or 14 per cent,” he said.

Mr Ngunze has in the past been critical of the agreement. During a 2015 hearing at the Senate, Ngunze had alluded to the relationship between the two carriers as being dysfunctional and costly for KQ, offering little or no benefits.

He still holds the same view, saying it has been a rocky marriage and that some of the clauses in the agreement needed to be re-looked and the just concluded restructuring offered the opportunity for fresh negotiations. He, however, noted that despite the many pitfalls, the partnership has in many instances been beneficial for KQ and said KLM was still an important partner.

“Were there relations at the shareholder level that needed to be refreshed? Yes. And this has been part of the (restructuring) journey. This whole restructuring process has recalibrated that relationship,” he said in an interview.

“There is no marriage that is perfect, sometimes you will go home and you are not talking but you find ways to talk. But I also think sometimes the relationship (between KQ and KLM) was over dramatised. We have had a successful commercial partnership with KLM for a long time and it has brought value.”

Failed in negotiating

He added that in many instances, KLM had to take a hit on account of KQ’s poor financial performance. “As we were making losses, they were making losses because of the commercial relationship that we have with them,” he said. “KLM is an important partner and I felt they were unfairly criticised in the public domain. They are not perfect partners by a mile but I felt that a lot of the criticism was unfair.”

Ngunze added that Kenya may have failed in negotiating a better deal during the privatisation process in the 1990s. This, he notes, would be corrected in the new document that’s currently being negotiated.

“Everybody negotiates their position. We may not have been strong in negotiating our position in certain areas then. But we have become stronger in negotiating and we have now been able to get some concessions,” he said.

And just like his predecessor, new KQ boss Sebastian Mikosz notes that the agreement between KQ and KLM needs adjustments but also adds that it is a critical partnership, which he vowed to strengthen. He said there were benefits due to KQ from the partnership that included over a million passengers being fed to KQ by KLM in 2016.

“Are there ways we can have improvement, absolutely yes. These options are on the table at the moment and I am going to fight for KQ where it seems to get a raw deal from the joint venture. (But) any joint venture in the world works like this and as long as I am in KQ, I will be strengthening these partnership,” he told investors at a briefing Friday.

On January 11, 1996, Kenya Airways and the Royal Dutch Airlines (KLM) finalised a deal where KLM acquired a 26 per cent stake in the Kenyan carrier for $26 million (Sh2.6 billion at the current exchange rate).

This was the culmination of the plan to privatise the airline that had started way back in 1986, with the publication of the Sessional Paper No 1 of 1986 ‘Economic Management for Renewed Growth, which talked of Government divesting from state corporations. The plan gathered momentum in 1992, when the airline’s board was given the mandate to privatise it.

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