Kenya Airways is down but definitely not out

October 9, 2020 / Comments (0)

A video clip on Kenya’s national carrier, Kenya Airways (KQ) has been doing the rounds. Ominously titled, ‘Fall of The Pride’, it has created a frisson of excitement in some and visceral fear in others. Tapping into the anger that is already palpable on account of a tanking economy, the creator of the clip has masterfully channeled it towards KQ as though the airline was a metonym for the entire country and all that is wrong with it.

Unfortunately, stoking emotions clouds the reasoning of many and precludes cogent discussion over the future of the airline. For instance, it cements systemic biases against industry outsiders in top management positions making them look like they do not belong. Yet evidence clearly shows that industry pundits do not always make the best managers. Titus Naikuni, in his early years at KQ, steered it to profitability. He was an outsider. On the other hand, Sebastian Mikosz, with vast experience in the aviation industry, sunk KQ into a deeper hole before his untimely and expensive departure. The Polish aviation consultants, so called “the turn-around experts” were not a good idea.

Then again, it is difficult to convince despondent Kenyans that, contrary to public sentiment, KQ procured its aircraft sans kickbacks to the politically correct people. No one wants to peruse the data in the public domain that reveals the special purpose vehicles (SPVs) used to purchase most of the airline fleet are in fact, owned by international financial institutions. It is easier to believe that these SPVs are run by shadowy politicians with the sole purpose of defrauding the airline. Nothing could be further from the truth!

It is standard practice in the aviation and maritime industries for fleet operators to take syndicated loans for large-scale purchases of equipment. Lenders then incorporate SPVs to reduce their risks as they would rather have an independent legal personality as a borrower, free from any financial distress that may be experienced by an airline company. The borrower (SPV) then enters into a finance lease with the airline until the loan is repaid thereafter which the title to the vessel is handed over to the airline.

Successive airlines like Turkish Airlines have used this option to increase their fleet. Through an SPV called Balthazar, owned by PNB Paribas, they recently bought five Airbus 321 NEO aircraft. KQ, in the 90s, purchased four Boeing 737-300 aircraft with the support of the Export Import Bank of America. The SPV then was Simba Finance Limited. The titles to these aircraft were transferred to KQ after the repayment of the loan. It follows therefore that there is nothing sinister about the acquisition of planes through SPVs like Samburu, Tsavo and Amboseli Limited. Ownership can be traced to international lenders of repute like JP Morgan, City Bank, Standard Chartered, Ned Bank, among others.

KQ has performed rather badly over the past few years due to errors of omission, commission and outright bad luck. Under the ambitious Project Mawingu, it expanded too fast and acquired a huge fleet without capacity. It also failed to anticipate aggression from Middle Eastern carriers. These rolled out a more superior product, taking a significant chunk of the African market that the airline had been reliant on. Among the factors beyond the control of KQ were the Douala crash, the Ebola outbreak in West Africa, the fire that burnt Jomo Kenyatta International Airport, the airline’s hub, and the Westgate massacre.

At the moment, the airline is faced with an existential crisis and must make one of two decisions. One, is to nationalise the airline. This would entail the government buying back shares from others, giving it full control. It would then continue to subsidise the airline as its own asset with bigger objectives than profitability and dividends. The long view would be to use KQ as a strategic national asset, spurring exports like horticultural produce, driving up visitor numbers and facilitating the country as a conference destination. RwandaAir and Qatar Airlines have adopted this model.

The other decision is to wind up the airline. But while this would resolve the intractable demands of powerful unions and unyielding lessors, it would still cost the government Sh76 billion in repayment of debt secured by sovereign guarantees. Restarting afresh would present challenges of creating new routes, traffic, licences and co-bilateral service agreements. One hopes that a sense of proportionality will prevail, and the right decision made. KQ may be down for now but it is certainly not out.

-Khafafa is a public policy analyst Source:

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