Operations of the national flag carrier, Kenya Airways, and the Jomo Kenya International Airport (JKIA) are to be merged in a move that carries far–reaching implications for competition between the national airline and African and Middle East carriers.
The decision was taken at a Cabinet meeting last week.
Two large State-controlled institutions are being brought together under one roof in an audacious effort at consolidating State assets in the aviation industry to mirror the same model practised by Middle East carriers where airlines also own airports.
To avoid long legal issues and procedures, the decision is to be effected through a concession with Kenya Airways as the private party and Kenya Airports Authority as the contracting authority.
Under the new arrangement, JKIA – now under the management of the State-owned KAA, and with estimated annual revenues of Sh7 billion – is to be owned and managed by a holding company that will, in turn, be 100 per cent owned by Kenya Airways under a concession agreement that is to run for 30 years.
KAA, which will continue running the remaining airports, will earn concession fees from Kenya Airways. All JKIA staff will be taken over by the holding company.
The move will have major financial implications for the operations of KAA because almost 90 per cent of its revenues come from the operations of JKIA. Last month, the National Treasury and the Ministry of Transport, Infrastructure and Housing tabled a Cabinet memorandum seeking approval to open negotiations between Kenya Airways and KAA on the merger arrangement.
By last week, a joint brief prepared by both managements of KAA and Kenya Airways had been prepared and presented to President Uhuru Kenyatta. Well-placed sources told the Sunday Nation the changes may be implemented within months. Even though the issue has not come up in the documents, all indications are that the company may be delisted.
Kenya’s aviation sector has been struggling in the last decade manifested in the declining fortunes of the national flag carrier, and loss of business by JKIA to other competing hubs notably, Ethiopia Airways and the Emirates.
In handing over JKIA to Kenya Airways, the government may find itself accused of practising uncompetitive practices by the national flag carrier’s main competitors.
The current wisdom within government is that in the next stage of the new experiment, the national airline will be made to operate more or less like Middle East carriers by being allowed advantage and control over aviation-related businesses such as ground handling, fuel distribution and catering and maintenance repairs and overhaul businesses.
It remains to be seen whether the airline’s competitors will interpret the new move by Kenya as subsidisation of its flag carrier’s operations especially in the context of the 2015 Africa Union’s Declaration on the Establishment of the Single African Air Transport Market – commonly known as SATTAM – that Kenya adopted. Advocates of the new direction adopted by the government counter that Kenya had to take the bold move because the national airline was at a point where it was beginning to be pushed out of the market by the heavily government supported Middle East carriers operating from Nairobi and by Ethiopia Airways.
Currently, more than 50 per cent of flights leaving JKIA are by competing airlines and statistics show the share of Kenya Airways in the hub has significantly dropped in the last three years. Indeed, successive managements and boards of the airline always whined that Kenya Airways was – among its competitors – the only airline that is treated with the same rules as any foreign carrier.
Another usual grouse is that one of its main competitors, Ethiopian Airlines, is highly protected in its own market – that the competition is consistently restrained from expanding operations at their airport – and that it has monopoly over airport services such handling.
Qatar, Emirates and Etihad have recently faced persistent criticism in the US and European Union of receiving subsidies such as favourable treatment when it comes to slot allocations, monopoly of ground handling services, airport charges and monopoly of refuelling which they deny.
But in reality, the reason the government is moving with speed to merge the operations of Kenya Airways and JKIA was mainly because of poor financial health of the airline which had left it facing tough options over the future of its national carrier. Implementing a massive retrenchment programme was going to be politically messy. On paper, returning some of the aircraft to manufacturers and reducing the destinations it flies to — was an option.
But the risk was that reducing the number of destinations was essentially reducing Kenya Airways into to a mere regional player. And, although the option of merging the airline with another player was also an option, the truth of the matter is that the shape of the company’s balance sheet was such that a merger with a stronger player would imply loss of the national brand. Yet the stakes were very high because the financial health of Kenya Airways has implications to the health of JKIA.
If Kenya Airways and JKIA fell into deeper problems, the aviation industry’s contribution to the tourism industry was going to take a major hit. The merger of the operations of Kenya Airways offered the airline the best and most sustainable option of getting the national carrier out of its financial doldrums.
Over the last three years, Kenya Airways has accumulated debts running to $2.2 billion — mainly the result of an ill-timed aircraft acquisition programme that went belly-up. As a result, the company, not able to service its debts, was tottering towards insolvency.
Consequently, it implemented a government-supported financial restructuring exercise in the form of a sovereign guarantee to the company’s main creditors amounting to $750 million. As it turned out, the financial restructuring process only served to keep the company afloat in the short-term.
Cash flow problems remain because the financial restructuring programme did not bring in much cash. KLM that had pledged to pump in $100 million during the restructuring process only managed to fork out $25 million. Under the circumstances, the company struggles to pay its suppliers.
And, with no budget for Capex, the company is unable to engage or execute projects to lower costs, enhance revenues and improve productivity. Whether the merger of the two entities will put Kenya Airways on a profit path remains to be seen. According to documents seen by the Sunday Nation, the assumption is the merged operation is likely to push revenues up from $1 billion in 2018 to $2.9 billion in 2022 – with airport operations being the main contributor of revenues – the rest coming from cargo operations, ground handling, contracted maintenance and overhaul services, fuel distribution in Nairobi, and catering services. What there is no doubt about is that the company is slowly going back to the firm control of the government as a fully-fledged parastatal.
As a result of the recent financial restructuring of the company, the government has become the largest shareholder, its stake moving from 29.8 per cent before the transaction. Indeed, the hand of the government was strengthened when the State took the biggest risk by providing $750 million of sovereign guarantees to 48.9 per cent.
In contrast, the stake held by KLM came down from 26.7 per cent to 7.8 per cent. And, the stake by the public float came down from 43.3 per cent to a mere 2.8 per cent. Among its competitors, Kenya Airways is the only one that is publicly-listed and that doesn’t benefit from airport revenues.