National carrier Kenya Airways is grappling with a Sh220 billion debt and needs a government bailout to compete favourably with foreign airlines flying into Nairobi, a confidential report recently tabled in the Cabinet shows.
The document, titled Project Simba Memorandum and dated February 20, paints a desperate picture of an airline, which has no cash flow buffer and whose level of revenue does not allow it to generate positive cash flow.
DEBT INTO EQUITY
“Kenya Airways board and management wish to warn that without immediate remedial action, the company may revert to technical insolvency,” notes the document.
Sources say the report was first handed to President Kenyatta, who then asked Transport Cabinet Secretary James Macharia to rework it as a Cabinet paper.
It was this Cabinet paper that approved the running of Jomo Kenyatta International Airport by Kenya Airways (JKIA), abbreviated as KQ, much to the chagrin of the Kenya Airports Authority (KAA) and the aviation workers’ union.
“Insolvency of the airline will result in the immediate repossession of aircraft and engines by lessors and trigger the $750 million (Sh74 billion) government guarantee in place on behalf of Kenya Airways,” notes the document.
The government issued a sovereign guarantee to local banks that turned their debt into equity, and in the event of KQ’s collapse, they could cash $750 million (Sh75 billion).
Among the proposals given to save the troubled airline is the government buyout of its foreign partner KLM, banks whose debts were turned into equity, and minority shareholders.
The government has also been asked to oversee the delisting of KQ, manage its nationalisation, and protect it as a national asset.
“Kenya Airways should be treated as a national asset… and not a financial one because it is the only carrier interested in the growth of the Nairobi hub,” says the document, which was accepted by the Cabinet.
With 60 per cent of business at JKIA derived from KQ, insiders say the airline’s collapse would lead to closure of several terminals and reducing the airport to a white elephant.
The government is currently the majority shareholder in KQ, with a 48.9 per cent stake.
KQ Lenders 2017 Limited is the second largest shareholder at 38.1 per cent, and KLM the third with 7.8 per cent. The rest is shared out among minority shareholders (2.8 per cent) and KQ employees (2.4 per cent).
“For 17 years, before competition arrived, KQ was one of the most profitable airlines on earth, but this market has dramatically changed. KQ has made mistakes in the past, but we have to either face the competition or copy their model or they will run us out of town,” says the airline’s CEO, Mr Sebastian Mikosz.
He proceeds to warn: “We either change the mandate of KQ or we sink.”
It is the proposal to form a Kenya Aviation Holding Company to operate all airline businesses that sparked this week’s strike after Kenya Aviation Workers Union members downed their tools in protest, arguing that the new arrangement would lead to job losses.
The proposed Kenya Aviation Holdings Company will also run other aviation-related businesses within the airport and generate more revenue.
The document before the Cabinet argues that allowing KQ to run JKIA will create an opportunity for the national carrier to generate more revenue that will be channelled to upgrading both its own operations and those of the airport.
The takeover would see KQ set up a maintenance centre that other airlines will pay to use, and give the airline a monopoly over fuel distribution, catering and ground handling services.
The Project Simba team also argues that if the JKIA takeover deal passes, KQ will only run aviation related assets in the airport (runways, terminals, taxiways and car parks) while the rest of the land will remain in KAA’s control.
But Kawu does not think the plan is well-meaning and has sued to block KQ’s proposal. The union argues that the move could be a back-door attempt to privatise JKIA.
The Project Simba team, on the other hand, holds that its turnaround plan, if implemented, will see KQ make at least Sh17 billion in profit by 2022.
SH75.8 PER SEAT
The other option, the team warns, is to sit back and watch the airline fall to competition. “Our only desire is to emulate the success of our competitors, Ethiopian Airlines, Emirates and Qatar Airways which are all strongly protected by their governments,” Mr Mikosz says.
“It is important to note that, among its competitors, Kenya Airways is the only one that is privately owned, listed, and that doesn’t benefit from airport revenues.”
While suggesting how to revive what was once a coveted airline, the document also shows how the government’s neglect over the years has contributed to KQ’s current predicament.
Having already gone through restructuring over the last two years, KQ still owes Sh220 billion — and is not making as much as it should.
“The growing presence of highly subsidised and protected African and Middle Eastern carriers operating into Nairobi has continued to weaken KQ’s ability to improve its revenue earnings,” the document says.
The emerging picture is of an airline literally spending more than it is making. Currently, KQ makes an average of Sh75.8 per seat per kilometre.
It, however, spends an average of Sh77.6 on each seat per kilometre.
The Project Simba document also reveals that KQ has at least Sh2.5 billion trapped in bank accounts held in other African countries, but does not specify why the national carrier is unable to recover the “blocked funds”.
More so, being cash strapped, the airline is unable to enter fuel-hedging contracts — deals which cap the cost of fuel to avoid the effect of global fuel price fluctuations — with suppliers. Last year alone, KQ spent an additional Sh6.1 billion due to the rise in global fuel prices.
At home, KQ is on a level playing field with competitors, but abroad it does not enjoy the same neutrality offered other carriers by the Kenyan regulators.
Ethiopia, Rwanda, Qatar and the United Arab Emirates, for instance, have given tax breaks to their national carriers and given relief to flight bookings done by local agents, which lowers operation costs and, ultimately, ticket prices.
Ethiopian Airlines, KQ’s biggest threat, has taken advantage of its government’s support and bought into national carriers in other countries through strategic deals that have given it an easy time operating outside its own borders.
At the moment, data shows that the Kenyan government gives 90 per cent of its cargo business to foreign freighters since KQ operates only two Boeing 737s.