Job cuts loom after State drops Kenya Airways nationalisation

A container of live fish before being loaded in Kenya Airways plane at Moi International Airport. [Omondi Onyango,Standard]

The government has dropped plans to nationalise Kenya Airways (KQ).

The National Treasury will instead roll out a $1.3 billion (Sh147 billion) multi-year restructuring programme that includes taking over debts.

The change of plan is contained in the latest International Monetary Fund (IMF) staff report on Kenya.

Nationalisation was expected to give KQ renewed growth impetus, but Parliament has delayed in passing the National Aviation Management Bill, 2020, which was meant to revert the airline’s ownership to government.

The report shows Treasury will take over the national carrier’s debts and roll out a series of measures, including reducing the frequency of flights, cutting fleet size and laying off staff.

Treasury has told the IMF that the government will take over $827 million (Sh93.5 billion) of KQ’s debt and offer the airline $473 million ( Sh53.5 billion) as direct budgetary support to clear overdue payment obligations and cover the upfront costs of restructuring.

“The authorities are developing plans to restructure KQ and anticipate providing significant financial support over the medium term,” says IMF in the report.

“The authorities do not intend to nationalise the carrier and are considering appropriate mechanisms to protect the Exchequer’s financial interests during the restructuring process.”

The Sh147 billion restructuring process at the expense of the taxpayers adds to a series of interventions to keep the national carrier afloat, which was as of the end of June this year, carrying accumulated losses of Sh127 billion in its books.

The analysis assumes that the government will service the debt based on the original amortisation schedule of KQ‘s loan agreements.

This approach, IMF says, would avoid the risk of acceleration of guaranteed loans, which contain cross-default clauses to past-due debts owed by KQ to other creditors.

The Bretton Woods Institutions says the significant financial support to KQ over the medium term is unavoidable since the government had previously guaranteed the airline a $750 million (Sh84.8 billion) debt that is now in arrears. Treasury has told the IMF that it wants to pursue an approach that will minimise the cost to the Exchequer.

“This will require that KQ undergoes a fundamental restructuring of its business model---, including downsizing of its operations and staff, measures to enhance its operational efficiency, and renegotiation of its lease and suppliers’ contracts,” said IMF.

Treasury, which owns the largest stake (48.9 per cent) in KQ, reckons that the airline has been insolvent, with ongoing financial difficulties compounded by the onset of the Covid-19 pandemic.

“Due to its severe cash flow problems over the past three years, KQ has not been able to pay lessors and creditors due invoices, resulting in significant outstanding obligations,” says Treasury.

“The company had to negotiate moratoriums and waivers with lenders and lessors and has been dependent on cash injections from the budget.”

Treasury’s financial evaluation conducted in the year had also identified that it will require Sh383 billion to bridge the liquidity gap for 18 state-owned enterprises, excluding KQ, over the next five years.

The large foreign exchange needs associated with the support to KQ and the increase in national debt repayment are projected to reduce Kenya’s foreign reserves to $8.9 billion (Sh1.006 trillion ) or 4.2 months of imports by the end of next year, IMF estimates show.

It estimates foreign exchange outflows related to KQ support at 117 million by end of December next year. Kenya’s foreign exchange reserves stood at $8.64 billion—equivalent to 5.28 months import cover—at the end of last week.