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State takeover of KQ back on course but headwinds await

By Macharia Kamau | July 14th 2020
Kenya airways plane at Jomo Kenyatta international Airport on March 24, 2020. [Edward Kiplimo, Standard]

The National Aviation Management Bill was tabled in Parliament two weeks ago, setting the stage for the nationalisation of Kenya Airways (KQ) as well as major changes in the aviation industry in the country.

If passed into law, the Bill will radically change the landscape of the local aviation industry with proposals to bring major entities in the industry under one umbrella while giving the President a major role in the running of the local aviation sector.

Local and international stakeholders have in the past pushed for the liberalisation of the industry, including pushing the government to play regulatory and enabling roles.

There is growing optimism that the Bill could sail through the National Assembly, becoming law in the coming months.

This would see the government revert to being the owner of the national carrier KQ, including making major decisions on what to do with the other major shareholders.

Currently, the State has a 48.9 per cent stake in the carrier. Another 38.1 per cent is owned by the banks through the KQ Lenders Company 2017 Ltd, while Air France-KLM has a 7.8 per cent shareholding.

The balance is held by retail shareholders, many of them ordinary Kenyans.

KQ Chairman Michael Joseph noted that the Covid-19 pandemic had slowed down the progress in getting the new proposed law in place, having previously been scheduled for tabling in Parliament two months ago.

“It will just be delayed by a few months. We wanted to complete by August, but this will probably come a little bit later… the process is ongoing and only delayed by two or so months,” said Joseph speaking at the airline’s Annual General Meeting last month.

“It is a complex process. It is not a matter of just rationalisation but also how do we deal with the minority shareholders, the bank shareholders, which has to be finalised and concluded.”

National Assembly’s Departmental Committee on Transport Chairman David Pkosing expressed optimism that the proposed law would pass through the House by August.

Besides the KQ issue, the Bill proposes the establishment of a powerful National Civil Aviation Council, which will be chaired by the President.

Its members will be the cabinet secretaries of transport, internal security and the National Treasury as well as the Attorney General and the Kenya Air Force Commander.

The council’s job will be to “integrate policies relating to the aviation sector and the other sectors of the economy to enable all the national organs and the sectors of the economy requiring access and support of the civil aviation sector to cooperate and work with the sector to ensure the effective performance of its mandate.”

According to the Bill, the council will also assess and appraise, the objectives, commitment and the risks to the country in respect of actual and potential civil aviation capabilities.

It also proposes the formation of the Kenya Aviation Corporation – an umbrella company that will own three operating entities - Kenya Airways, the Kenya Airports Authority (KAA) and the Aviation Investment Corporation.

According to the proposed law, the initial share capital of KQ will be Sh7.48 billion, divided into 74.8 million ordinary shares.

KAA’s initial share capital shall be Sh66 billion, divided 66 million ordinary shares.

The Aviation Investment Corporation – which will own aviation schools, offer maintenance and repair services, flight catering and other ancillary services – will, on the other hand, have an initial share capital of Sh1 million.

“The share capital of each operating entity shall at all times be held by the corporation and may not be transferrable other than by authority of the Cabinet Secretary to the National Treasury upon approval by the National Assembly,” reads the bill in part.

The aviation holding company has been exempted from certain laws that tied it to the bureaucracy that many State-owned entities have to grapple with.

The Bill also revises the Public Procurement and Asset Disposal Act in a bid to give KQ and other corporations certain exemptions when acquiring aircraft and other goods and services.

“Except for the provision applying to State-owned entities under the Companies Act 2015, none of the other provisions of the companies Act 2015 or any amendment thereof, or of any other law relating to companies shall apply to the corporation or the operating entities,” says the Bill.

It proposes to revise the procurement law by introducing a clause that allows the Transport CS, with permission from Parliament and Cabinet, to “exempt a State organ or public entity from the application of this Act.”

It adds that such an exemption “shall be based on procurement guidelines developed by that State organ or public entity and approved by the National Treasury.”

Regulations that will help operationalise the law are also expected to offer more incentives to the airline and its parent company, including tax breaks.

The proposals mirror how Ethiopia runs its aviation industry.

The Ethiopian Airlines and the Ethiopian Airports Enterprise are sister companies under the Aviation Holding Group, which was set up in 2017.

The airports company runs aviation hubs in the country. Other companies forming the Aviation Holding Group include Cargo Airline and Logistics Company, Ethiopian Aviation Academy, Ethiopian Inflight Catering Services and Ethiopian Hotel and Tourism Services.

This is also the case with Emirates Airline, where the Dubai Airports Company – distinct from the airline – manages the Dubai International Airport, the airline’s hub.

While making a case for why KQ needed to change the way it operates, Joseph has in the past maintained that the airline needs to function in a manner that is in sync with the objectives of positioning Nairobi as a key hub.

“When you look at the competition and what they are doing, it is better than what we are doing. They – the airlines and the airports – have advantage of being owned by one holding company,” he said at a past event.

“If you look at Dubai, there are many companies that have their African headquarter offices there. They should be in Nairobi. Dubai has the connectivity of Emirates; with the airline, you can fly anywhere. Our idea is to create something similar here so that Nairobi becomes the centre of aviation in Africa and companies can be headquartered here and bring jobs to the country.”

Opinion is, however, divided on whether aviation is better off with an increased government presence, considering that it is already a heavily regulated industry by government agencies at every turn.

Stephane Lopez, chief executive Nas Servair, noted that while the airline turned around fairly fast following its privatisation in 1996, it suffered following an agreement by African governments to open their skies.

“Back in 1996, Kenya Airways became the first nationally-owned African airline to be privatised. This was mainly due to a poor structure that led to huge losses. A decision was then reached to privatise the airline, which paid off with a gross profit reported within the first five years,” he said.

“Following the Yamoussoukro Decision of 2002, the Airline was dealt a blow. The turn of events that took place to date has seen the airline struggle financially constantly seeking support from the government through bail-outs. Nonetheless, both the airline and the aviation industry in the country can develop new policies that work in their favour especially during these unprecedented times.”

Mr Lopez noted the current crisis offers the local aviation industry an opportunity to press the reset button.

“The current situation brought about by the pandemic and travel restriction is the gateway to work on policy development while revisiting charges to make them cost effective,” he said.

He added that liberalisation is still the surest way to achieving success in the industry, which is critical to economy as it supports over 600,000 jobs directly and indirectly. Lopez noted that implementing an open sky policy and reducing government’s interference in certain areas such as pricing of products and routes would increase the affordability and efficiency of aviation services for consumers.

“Having learnt from the bold, the beautiful and the ugly sides of major decisions such as privatization of KQ, it is safe to say that we can make decisions that will help us stay ahead of the curve,” he said.

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