KQ now courts banks for loan term extension

Kenya Airways planes at Jomo Kenyatta Airport(JKIA), Nairobi. [Boniface Okendo, Standard]

Kenya Airways is in talks with its lenders to extend moratoriums on repayment of loans, with demand in the aviation industry still heavily affected by the pandemic.

The airline expects its revenues to remain subdued this year.

KQ said it was able to conserve more than Sh6.5 billion last year following moratoriums it got from banks as it sought mechanisms to enable it to cope with the adverse effects of Covid-19.

The airline got an initial six-month moratorium to October 2020 that was extended by another nine months to June 2021. Most of its leaders only agreed to a moratorium on the principal loan amount. The carrier had to continue paying interest.

KQ Head of Treasury and Corporate Finance Geoffrey Langat said the company is negotiating to extend the moratoriums, considering that the aviation sector is still experiencing the disruptions caused by the pandemic.

“From March 2020, Kenya Airways Plc revenues declined drastically following the onset of Covid-19. This meant that the airline could not generate enough cash to cover its fixed costs (such as finance fleet costs and overheads) putting pressure on the company’s cash position. This situation called for urgent intervention to ease pressure on the cash position,” said Langat.

“Finance costs constitutes one the largest fixed costs for KQ.”

The carrier has a mix of loans from various lenders including local and international banks. It has also been receiving shareholder loans from the government, which was the only one that advanced the carrier new loans last year, totaling Sh11 billion.

Servicing debts

While the Sh6 billion conserved over the year will be paid over time, once the carrier resumes servicing its debts, it offered KQ money to use during the year when its income substantially dropped due to Covid-19. KQ has recently said it needed Sh55 billion to be able to survive over the next coming year.

For four months, the carrier’s passenger operations were grounded.

While it continued offering cargo services, it has not been strong in that area. Even after the resumption of passenger flights in August last year, demand is yet to pick up.

The carrier’s technical department also said it saved Sh1.4 billion ($13.2 million) following the review of some of its contracts with suppliers as well as insourcing some of the functions such as servicing aircraft that had been outsourced.

KQ Technical Director Evans Kihara said the carrier had reviewed all agreements it had with suppliers, altering most of them to ensure payments are only done when there is work done.

“We reviewed and revalidated all agreements. The objective was to retain only critical value-adding service contracts and to re-engineer those that are still needed to more cost-effective models that ensure payments are done only when repair events occur at lower negotiated costs,” said Kihara.

He said KQ had also over time increased internal capacity to service its aircraft. This included heavy maintenance services for the B787 planes, which is done every three years and had been outsourced to a Jordanian-based firm.

“With the onset of Covid-19, it became impossible to continue sending the aircraft for maintenance to Jordan due to travel restrictions imposed by States and stoppage of flights,” said Kihara.

In-house maintenance saved huge costs on man-hours and associated outsourcing costs such as fuel, flight permits and hotels.

The government had guaranteed airline’s loans totaling $750 million (about Sh81 billion) mostly to international lenders by 2017.