Auditors question viability of KQ’s bid to manage JKIA

The proposed takeover of Jomo Kenyatta International Airport (JKIA) by Kenya Airways (KQ) might not be enough to revive the fading fortunes of the troubled national carrier, according to a new report.

A preliminary study of the proposal done by audit firm KPMG and which was presented to the board of Kenya Airports Authority (KAA) — the operator of JKIA — three weeks ago, says KQ will still require a large cash injection if it is to stay afloat even after acquiring the airport.

KQ, which is Sh230 billion in the red, has pegged its survival on operating JKIA for a period of 30 years under the Privately Initiated Investment Proposal (PIIP) arrangement.

DEBT RESTRUCTURE

KPMG, KAA’s transaction adviser in the deal, pointed out several gaps in KQ’s proposal that will most likely increase scrutiny of the deal that has come under heavy criticism from a section of MPs.

“At the current debt levels (and amortisations), KQ will be unable to fund the PIIP,” the report said, while noting that the national airline was considering a second debt restructuring to unlock greater cash flows.

The report said: “KAA should not accept a project with negative DSCR (debt service coverage ratio) as this may also result in breach of KQ lenders’ cash flows.”

However, the audit firm said it had not received detailed financial information that is required to confirm that KQ is able to fund the PIIP.

The missing information includes confidential documents, such as lenders’ offer letters and terms of the November 2017 restructuring, which KQ told the audit firm it could not release without the approval of the lenders.

“Financial out-turn for December 31, 2018 has also been withheld,” KPMG said.

CASE STUDIES

Based on discussions with KQ management though, KPMG said the carrier was in breach of certain undisclosed “financial covenants” as at June 2018, and received waivers from lenders for the financial year ending December 31, 2018.

Despite having restructured its debt in November 2017, KQ has continued to face difficulties in servicing its debt and is now considering further restructuring, which the audit firm said might not be welcomed by the lenders.

“It does indicate that there are serious liquidity challenges faced by the KQ management team at this time, which therefore questions the ability of KQ, under the existing terms of support from lenders, to be the operator of JKIA and/or the key stakeholder of the SPV (Special Purpose Vehicle) proposed under the PIIP,” the report observed.

Government officials as well as KQ top managers have cited other examples around the world where national carriers also manage the main airports where they operate from as justification for the KQ takeover of JKIA.

The oft-cited example is Bole International Airport in Addis Ababa, which is operated by Ethiopian Airways and Hamad International Airport in Doha, operated by Qatar Airways.

JKIA MANAGER

But KPMG says these examples are exceptions rather than the norm around the world, and questioned the ability of KQ to operate JKIA.

“KQ does not have credentials to develop or operate an airport. It is therefore very difficult to verify the efficiency matrix presented in the PIIP,” KPMG said.

In addition, the report has questioned the uncertainty over who is to manage JKIA after the KQ takeover: a new operator to manage the airport full-time or an operator as a consultant

“This should be clarified upfront to ensure there is sufficient expertise to run JKIA (a national asset) in a fair and transparent manner as well as efficiently,” the report indicated.

The report recommends that JKIA be run by a private-sector operator to maximise revenues and profits.