Kenya Airways cancels Sh2.3b McKinsey contract
By Paul Wafula
| February 11th 2017
Kenya Airways is ending the controversial contract with a global consultancy firm which has cost it a staggering Sh2.3 billion in ten months.
Instead, the airline will hire the consultant, McKinsey of US, when it is needed as opposed to the previous arrangement where the firm had permanently set up shop at the airline.
Mckinsey, one of the world’s biggest restructuring consultants, were brought in to steer the airline through cost-cutting and to re-engineer its revenue streams so it could begin making money again.
It signed with Kenya Airways a consultancy contract widely criticised as lopsided and considered the most expensive in Kenya’s corporate history. Analysts argued the airline was not getting value for the huge costs.
Yesterday, explaining the decision to pull out of the arrangement, the airline’s chairman, Mr Michael Joseph, said: “It was a two-year contract but at the end of the first year we have decided to change it because we think we have done what we need to do.”
He added: “There were about 400 initiatives that were started by the company. The fee was based on cost savings or revenues increases. That we have received by mutual agreements to stop.”
Even though management had continued to defend the deal, Invoices seen by The Standard on Saturday show that Kenya Airways had paid the consultancy firm about Sh2.3 billion in only ten months ending November, 2016.
The massive payments were being made at a time when the airline was fighting to remain afloat by sacking its staff and selling off some of its aircraft, having reported losses of more than Sh50 billion in two years. Kenya Airways has paid Mckinsey Sh43 million every week since March last year.
Insiders said the consultancy bills — settled in dollars — were hurting KQ’s cash flow.
One of the most recent payments was on November 2016, where Mckinsey was paid Sh52million or ($525,000) for that week.
Mr Joseph, who oversaw the exit negotiations, explained that the fees had been based on cost savings achieved under the firm guidance or increases in revenues but declined to say if he thought the fee was excessive.
“Was it worth it? That is still to be determined but I said when I was coming on board that we would review the contract and that is what we have done,” said Mr Joseph, who as CEO built Safaricom into one of Africa’s biggest companies.
On his part, the airlines Chief Executive, Mr Mbuvi Ngunze, defended the contract saying his team came on board when the airline was going through severe turbulence.
“They were willing to stake their name on KQ’s turnaround plan and they brought credibility to the process,” Mr Ngunze said.
In addition to the weekly fees, the company also billed the airline for various services, among them performance and professional fees.
For instance, invoice number 127CM dated September 19, 2016 of Sh43.5 million ($435,000) was received by the airline for “implementation stage weekly fees”.
Similar invoices were entered in March, April, May through to September. On August 14, the firm sent in a Sh46.4 million invoice for professional fees. Similar fees were entered for December, January and February. There were about 40 different invoices entered in the period.
The single-largest invoice was in July and September when it billed Sh290 million and Sh600 million as performance-based fees.
McKinsey was brought in after the airline made cumulative losses of Sh52 billion in the last two years, throwing the national carrier into its biggest financial distress in the last decade.
McKinsey officially set up shop in Nairobi in 2014 and had become a favourite of blue chip companies and rich parastatals.
The New York-based firm was hired by East African Breweries Limited (EABL) to advise on efficient movement of products from its Ruaraka factory to distributors and on to retailers across the country.
The firm has worked for the National Bank of Kenya (NBK), KCB and the Kenya Revenue Authority (KRA), among other local companies.
Mr Joseph, defended the joint venture between KLM and KQ which some of the airline’s critics, especially its pilots, claim was to the airline’s disadvantage .
“Right now KLM is the best partner for us in terms of the route structure. The benefit is to KQ because KLM flies more routes and sells more tickets. We get revenues from the countries we don’t fly to into the joint venture. In the end, we benefit,” Joseph said. He conceded there was ‘some room for improvement’ in the partnership. KLM, for instance, no longer had veto powers over the choice of the the airline’s chief executive or any other members of the senior team.
According to the joint venture, revenues from routes flown by both airlines from East Africa (Uganda, Tanzania and Kenya), to, Amsterdam, Paris London and other European destinations were put into the joint venture.
“As an example, KLM sells more tickets originating from Nairobi than KQ because many of the tickets bought here go to other destinations belonging to KLM that KQ cannot fly to,” he said.
Then each airline deducts its costs from the revenues it earned. But KLM takes away more money from the joint venture on costs given that it has more expensive planes than KQ. What is left is now divided into two equal half’s between them.
“They have two members on the board because they have 24 or 25 per cent of the shares just like the government has two members for the 28 per cent of the shares. One board member for every 10 per cent shares and that is it,” he said.
Joseph added that the airline only uses some of the KLM staff in its management. Currently there are two new executives in the top management seconded to Kenya Airways. There other employees in other lower levels of the airline.
In a bid to stem the losses, the airline has had to take painful decisions and had to sell some of its assets to free up money to meet its daily obligations.
So far, it has fired almost 100 employees in its restructuring plan known as “Operation Pride” and it is preparing for the second phase of sackings that will see off another batch of employees.
The airline said it had stopped mass sackings. The company put up for sale a prime plot in Embakasi and has also sold parking slots at Heathrow Airport. It has also sold a number of planes and leased others. Since March this year, the company sub-leased two Boeing 787 and three Boeing 773 aircraft as part of the turnaround initiatives aimed at increasing its liquidity.
The airline is also shaking up its management, with replacements both at the board and the senior management levels. The end to the process will be the exit of Ngunze.
Those who have left include its long-serving finance director Alex Mbugua and former chief operating officer and fleet director Rick Sine.
Others who have exited include Gerard Clarke (commercial director) and Alban Mwendar (human resources director).
The exits were given momentum by a series of pilot strikes since October last year. The airline is also facing persistent pressure from pilots who want a complete overhaul of the management team.
The airline has also lost between 60 and 70 technical staff in the engineering unit to competitors, especially to Middle East carriers.
The airline said the final forensic audit by Deloitte will be submitted to the board but it has been acting on the findings.
The explosive report had shown that the airline lost billions of shillings from ticket sales, sale of aircraft and has some money stuck in foreign countries due to currency blocking.
“There were nine different reports and we have taken steps where necessary. We have to involve the board and shareholders,” Joseph said.
He declined to give the number of people who have faced some action due to the findings of the report but indicated that they are less than ten.
The firm said there were some errors in the report by Deloitte which have now been rectified after consultation.
“It was a smoke screen. There were some things in the report that were not true but there were others that were true,” Joseph said.
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