Kenya Airways: The bird with a broken wing
By Macharia Kamau | February 16th 2021
The long wait for Kenya Airways’ (KQ) safe landing from the financial turmoil that has stalked the national carrier for years now is not about to end any time soon.
This as it becomes more evident that after years of pumping money into the airline, taxpayers may never reap any benefits from the project.
The numerous State bailouts of KQ came at a time when the carrier was majority-owned by private investors.
With most of them not playing any role in its recapitalisation, leaving the heavy lifting to the government and in the process the numerous cash injection now poses a threat to its famed privatisation.
The carrier has for years received funds from the State, mostly in form of shareholder loans, but these almost always end up being converted into equity or in some instances written off altogether.
The government has also had to go to the trouble of sourcing for other loans to enable the airline to meet its other debt obligations.
Despite the government currently being the largest shareholder with a 48.9 per cent stake in the airline, it last got a dividend in 2012, which is also the last time that the carrier turned a profit.
In the latest attempt to keep KQ afloat, the government said it would inject Sh26.5 billion into the airline in the course of the financial year to June 2021 as part of plans to nationalise the airline.
In the recently published Supplementary Budget, the National Treasury said the cash would be in the form of a shareholder convertible loan.
“Key areas with adjustments include… additional funding to Kenya Airways as a shareholder convertible loan,” said Treasury about the differences between the main budget for the current financial year and the mini-budget.
This comes barely a year after the government advanced a Sh5 billion loan to the airline early last year to enable it to overhaul engines for its E190 Embraer Fleet.
But Gerishon Ikiara, an economist and former Transport Permanent Secretary Transport, said the government needs to support the carrier without necessarily looking at direct returns such as loan repayments and dividends because of its strategic nature.
He said the Kenyan economy is better off with KQ operational as opposed to the carrier being out of the picture.
“I regard it as one of the most strategic companies in the country. It has linkages with all kinds of sectors from agriculture, manufacturing, tourism and even the small scale traders who import goods from China and other markets,” he said.
“The value is not simply the profit line but a much bigger picture. We have to look at the total picture that a good airline brings to a country… look at the totality of the economy with KQ and the totality of the economy without the carrier.”
The 2017 reorganisation was perhaps the biggest rescue act in the recent past when a Sh16.8 billion loan by Treasury was restructured into equity, increasing government’s stake to 48.9 per cent from 29.8 per cent.
At the time, a consortium of local banks also converted their loans into equity, resulting in the lenders holding a 38.09 per cent stake in the carrier, while KLM saw its shareholding diluted to 7.8 per cent from 26.7 per cent after it failed to inject any cash during the restructuring.
Retail shareholders, on the other hand, were diluted from 24 per cent to 1.78 per cent.
Following the restructuring, the government still had Sh7.7 billion worth of convertible debt in the carrier.
Other instances where the government has bent over backwards for the airline include in 2018 when it secured a Sh20 billion loan to help it repay a short-term facility it had taken from the African Export and Import Bank in 2015.
Three years earlier, Treasury had advanced the carrier Sh4.2 billion to help modernise its fleet. There have also been numerous instances where Treasury has written off debts owed by the airline.
The State is expected to fork out more in buying out other shareholders as the nationalisation of the carrier enters the home stretch.
KQ and KLM recently agreed to mutually terminate their long-running partnership with KQ effective September 1 but did not disclose the financial ramifications of the deal, including whether it would entail KLM abandoning its shareholding in the carrier.
There is also the case of lenders that have been in talks with Treasury on the possibility of converting their 38 per cent stake into bonds as well as the retail shareholders who are likely to be paid in cash for their diluted stake.
Ikiara, who sat on the KQ board for five years as a director while he was the Transport PS, however, noted that reverting KQ’s ownership to the government is a big blunder and might as well spell the death of the carrier.
“I am, however, opposed to the nationalisation. Almost all national airlines in Africa have never succeeded. The technical and complex nature of an airline cannot be managed with the government bureaucracy. We are making a big mistake by overreacting the small challenge of the airline not making profits at the moment.” he said, noting that even the Ethiopian Airlines – which has largely been used as a benchmark in Africa in the aviation industry – had difficulties when the State had a heavy hand in its running.
“Even Ethiopian Airlines was at some point at risk of collapse when there was too much interference by the government and the country experienced a shortage of foreign exchange after which the government agreed to only assist it from a distance – it is owned by the government but run line a private airline.”
Over and above the billions Treasury has advanced to the carrier, KQ also accounts for a sizeable chunk of state-guaranteed loans.
According to a recent Treasury report, these increased to Sh160.45 billion in the year to June 2020 compared to Sh154.8 billion previously.
KQ is among the three State-owned firms responsible for the government’s stock of guaranteed debts – the other being KenGen and Kenya Ports Authority (KPA), which going by their past performances may not be a concern for the taxpayer.
KQ accounted for the largest share of the publicly guaranteed debt at Sh79.89 billion as of June 2020, up from Sh76.7 billion in 2019. This is close to half of the guaranteed loans.
Before then it had slightly reduced from Sh77.78 billion in 2017. KPA took up Sh39.37 billion, while KenGen’s stood at 41.18 billion as of June 2020.
Treasury noted that the increase in the amount of State-guaranteed debt had been “mainly attributed to the drawdown of the guaranteed loans to KPA and Kenya Airways.”
Debts, it seems, have been the undoing for the carrier since its formation in 1977 following the collapse of the East African Airways owned by Kenya, Uganda and Tanzania.
A world report on KQ’s 1996 privatisation, noted that in the 15 years to 1992 (when the decision was made to privatise the carrier), the airline accumulated massive financial losses, along with crippling debt arrears from its failure to service its loans.
In the years that followed, the privatisation decision appeared to pay off as the carrier posted profit within the first five years.
Its performance, however, started to slide back to the pre-privatisation years. Among the factors that have been blamed for the poor performance in the 2000s was a decision by African carriers after meeting in the Ivorian city of Yamoussoukro to deregulate air services and open up airspaces.
This increased competition for the national carrier and appeared to erode gains made in 1996, resulting in the airline struggling financially and constantly seeking support from the government through bailouts.
It is against this backdrop that KQ has been pushing for renationalisation, which is currently underway and expected to be concluded in the course of this year.
The National Aviation Management Bill, 2020 is expected to be key in facilitating the process of KQ’s ownership reverting to government. It is already being discussed in Parliament.
The Bill proposes the formation of the Kenya Aviation Corporation – an umbrella company that will own three operating entities - Kenya Airways, the Kenya Airports Authority and the Aviation Investment Corporation.
Key aviation hub
“The government has also initiated an aviation sector reform programme that will, among other things, see the consolidation of aviation sector assets in Kenya. This programme is, in part, aimed at nationalisation of the airline into a State corporation that will belong to a group structure that will see the merger of the airport and the airline assets, thus significantly strengthening the consolidated aviation balance sheet,” said the carrier in its latest annual report.
While ownership reverting to the government has in the past been drummed up as the key to KQ’s survival and positioning the country as a key aviation hub in Africa, the airline cautioned that the coronavirus pandemic had dealt the aviation business globally a major blow that could take time to recover from.
“The directors recognise that there can be no assurance that the group and company will be successful with its strategic initiatives and balance sheet restructuring plans,” said the airline.
“Actual results could differ materially due to numerous factors, including the material disruption of our strategic operating plan as a result of Covid-19, and our ability to execute our strategic operating plans in the long term; risks of doing business globally, including demand for travel and the impact that global economic and political conditions.”
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