July 16, 2020 - Reading Time: 7 minutes - By Abigael Ndanu

It is no longer a question of whether or not Kenya Airways will be nationalized, but rather a matter of when. The wheels to nationalization have been in motion since 2019 and the process is set to conclude in March 2021. However, these timelines were set prior to the Covid-19 pandemic and thus may be extended- only time will tell.

KQ listed at the Nairobi Stock Exchange (NSE) in 1995, and for 20 years it was the continental pride and a success story on how to run an airline. However, this came to a halt six years ago, when it sunk into debt and losses. It has since been bailed out multiple times with the government sinking over Ksh 24billion largely to prevent the domino effect.

On 03d July, 2020 the Nairobi Securities Exchange issued a public notice that the trading of the airline shares had been suspended to pave way for the company’s operational and corporate restructure and Government buy-out vide the publication of the National Management Aviation (NMA) Bill, 2020 on 18th June 2020.

The said suspension was approved and issued by the Capital Markets Authority pursuant to Section 11(3)(w) of the Capital Markets Act and regulation 22 of the Capital Markets (Securities) (Public Offers, Listings and Disclosures) Regulations, 2002.

The suspension of trading shall take effect from 03rd July 2020 and will remain in force for three calendar months.

While there are those that have advocated for a Government bail-out, many in the public domain have called for re-organization and/or dissolution of the national carrier, this largely owing to the record breaking losses reported over the years. Under the NMA Bill, the nationalization of Kenya Airways is a last-ditch emergency measure to rescue the struggling carrier from mounting debts.

At a Parliamentary Committee session in 2019, it had been proposed to have KQ being turned into a low-cost budget airline to reduce this cost.  Owing to its nexus to regional and international trade, transport, tourism, this would have an incredibly adverse impact on the country’s tourism, regional and international trade and the larger economy.

According to a recent report published by the International Air Transport Association (IATA) aviation accounts for 4.6 per cent of Kenya’s GDP and supports 410,000 jobs despite the losses and gloomy picture highlighted in the media.

In the report, over 4.7 million passenger journeys were made to Kenya, with aviation and tourism representing US$3.2 billion in GDP in 2017. Over the next 20 years the Kenyan market could more than double in size, resulting in an additional 11.3 million passenger journeys, over 449,000 more jobs and a US$11.3 billion boost to GDP by 2037.

A walk down memory lane:

Kenya Airways more commonly referred to as KQ began its operations in 1977 following the dissolution of the East African Airways. It was wholly owned by the national government up until 1996 when it was privatized becoming the first African flag carrier to do so.

Long before trouble came and interfered with the airline’s tailwinds, KQ was known as the leading airline in the region flying throughout Africa, Europe and the Indian subcontinent. In fact, by 2005 KQ had won the “African Airline of the Year Award” five times in 7 years. In addition, in that same year, KQ was the first carrier in sub-Saharan Africa to achieve IATA Operational Safety Audit; and in recognition of its brand in 2007, Kenya Airways was welcomed into the Sky Team Associate Airlines, the second largest airline alliance globally at the time.

Growing in leaps and bounds:

By the year 2000, the airline had grown to a staff of 2,780, including 400 engineers, 146 flight crew and 365 cabin crew. By 2008 the airline held 24 aircrafts in its fleet which have doubled over the last 10 years.

In June 2012 the company announced the issuance of rights worth Kes. 20 billion, aimed at increasing capital to support expansion plans. Following the allocation of shares, KLM increased their stake in the company from 26% to 26.73%, while the Kenyan government boosted their participation into the company from 23% to 29.8%, becoming the largest shareholder.

So when did it begin to go south?

All appeared to be smooth sailing until 2014 when the company sank into losses and has since been struggling to return to profitability.

Operational results for fiscal years 2015 and 2016 showed substantial losses. The rapid expansion of the fleet and routes (dubbed “Project Mawingu”) was cited as the primary cause of the downturn. Fuel-price hedging and the 1996 agreement with KLM, considered intrusive in the running of the flag carrier, took secondary blame.

By 2017 things appeared to be turning around when the airline reported a cut in losses after tax by 21 per cent to 3.8 billion. Similarly, in 2018 the company reported a Kshs. 4 billion loss after tax for the first six months being an improvement from the 5.66 billion posted in a similar period the previous year.

This was achieved by selling two Boeing B737-700 and sub-leasing five newer leased airliners to improve cash flow. In addition, stakeholders agreed to convert to convert close to half a billion US dollars in loans to equity, changing the ownership structure. This increased the government’s shareholding to 48.9% from 29.8%; while diluting KLM’s stake from 26.7% to 7.8%. Through a special purpose vehicle made up of 11 Kenyan lenders- including the KCB Group, Equity and Co-operative Bank – dubbed the KQ Lenders Company 2017 Ltd.  ended up with 38.1% which loaned an amount of $225 million guaranteed by the government.

However, owing to failed expansion drive, a slump in air travel and mounting debt, it was clear that a change of course was needed. The company then put together a Private Initiated Investment which was rejected by Parliament on 18th June 2019 which instead recommended nationalization.

As at the end of 2019 the airline reported a KSh 8.85billion loss and a cumulative loss of over KSh 98.15 billion.

What does nationalization mean?

The rationale for nationalizing the airline is that it would make it more competitive, allowing it to challenge players like Ethiopian Airlines, a state-owned airline, among other competitors. Additionally, the move will save the airline from its debt, reduce losses, and provide financial muscle to acquire more fleets.

This will be achieved through the establishment of an Aviation Holding Company to run the country’s aviation sector will be formed and will consist of four subsidiaries including the Kenya Airports Authority (KAA), Kenya Airways (KQ), Jomo Kenyatta International Airport (JKIA), and a centralized aviation college. The company will see the management and operations of Kenya Airways, Kenya Airports Authority, and Aviation Investment Corporation merged.

Still, major ownership of the airline will remain with the government, with the state owning 48.9% of the company. Other owners include Air France KLM with 7.8% and local banks who own 38.1% of the Airline’s stake.

As part of the complex ownership restructuring agreement of 2017, with regards to debtors, it was anticipated that the event of nationalization, the Government would be forced to pay them off.  Some the local lenders include: CBA Group Ksh3.1 billion, Equity Bank Ksh5.2 billion, National Bank Sh3.5 billion, Co-operative Bank Ksh3.3 billion, DTB Bank Ksh3.3 billion and KCB Group Ksh2.1 billion.

However most recently, the Cabinet Secretary for National Treasury announced that the debt owed to the banks will be converted into Treasury Bonds. Details of this transaction, however, are still under discussion.

Whereas this is not the obvious choice for the lenders, nationalization offers the lenders a way out noting also that treasury bonds are risk-free which is a better alternative than waiting to see if Kenya Airways will rebound.

Although the details of the transactions are yet to be out, the 5.2% of shares held by minority shareholders— between other shareholders and a new employee share ownership Plan (ESOP) will be bought by the government at a premium.

Moving forward, the Government is expected to hire an independent valuer to evaluate the company and help determine how much will be paid to individual shareholders. During the valuation of KQ shares in 2017 to restructure the banks’ loans into equity, the shares were trading at around KSh4 per share. The current rate is approximately KSh2 as of 26th June 2020.

Emerging Concerns:

•       Revenue: In the short term, the airline Industry is bound to take a hit due to the restrictions on travel brought on by COVID-19. It is estimated that the global economy will suffer a loss of approx. $1 Trillion to $2 Trillion according to UNCTAD. Following measures adopted by Governments to contain the spread of the virus by closing down boarders and grounding planes, it is estimated that the pandemic will cost the aviation sector upwards of $113 Billion globally- that is one-fifth of last year’s overall revenues and four times higher than IATA estimated in February, when the coronavirus was still believed to be a Chinese problem rather than a global one!

•       Modernization of the aviation sector: Competition from other regional players such as Ethiopian Airlines has forced Kenya to re-look and restructure the industry with promise of increased investments. For instance, the expansion and modernization of JKIA to increase its capacity and expand beyond its current 53 destinations, to match competing airports like Ethiopia’s Bole International airport which currently connects 153 destinations.

•       Perception of high debt levels & continued loss making operations: In August 2019 it was reported that Treasury borrowed Kshs124.9 billion to help cash-strapped Kenya Airways (KQ) settle another maturing loan. With tough economic times ahead, KQ faces a lot of apathy from political leadership and the general public.

•       A suffocating tax regime: the aviation sector has the potential to pay more taxes both in figures and percentages than betting and alcohol companies. Essentially, whilst it is impossible for airlines to be fully exempted from taxes, the government should not tax aviation simply to raise revenue for non-aviation purposes.

•       Linked to discussion on tax regime is uncompetitive rates- Kenyan passengers use foreign airlines more, which pay less taxes than local airlines and therefore are more affordable. The number of taxes levied on airlines and their customers is over the top making KQ uncompetitive.

•       Sustainability: it is no longer a “nice to have” but a necessity in maintaining a positive reputation and improving operations and business outcomes. According to the 2019 Air Transport Action Group report, worldwide, flights produced 915 million tonnes of CO2 in 2019 being 2% if all human-induced CO2 emissions. Accurate reporting on efforts by KQ to green its operations is paramount ranging from alternate sustainable aviation fuels which could reduce carbon footprint by 80% and efforts to improve fuel efficiency.

•       Airline safety operations: Adoption and integration of internationally approved safety and flight operations solutions reduces risk while increasing efficiency.

•       Digital Technology: Companies have an opportunity to embed digital innovations to improve operational efficiency and customer experience. Limited investment on emerging technologies such as augmented reality and virtual reality; blockchain; big data; beacons technology etc. to improve service offerings to guests/ clients/ customers and adverse impact on employment opportunities.

Emerging opportunities:

·       Africa Continental Free Trade Area– leverage on operationalization of free movement of goods and services; and JKIA’s ranking as the second fastest growing cargo airport in the world according to according to the World Airport Traffic Report second to Rockford Airport, USA. 

·       Bilateral trade agreement negotiations between Kenya & UK/ US/ EU/ India among others; AGOA; as well as regional trade partnerships e.g. EAC– Trade between the US & KE for instance is estimated to be $1.1 Billion per year which has spillover effect to the region of up to another $1-2 Billion- how do we safeguard KQ’s space in these discussions and increase our share of the pie?

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