BusinessPeople Daily

KQ caught between rock and hard place

Things started going south for airline due to dwindling global economies, dip in the number of travellers in target markets and a poorly executed expansionist strategy

Fred Aminga @faminga

Kenya Airways fate is hanging in the balance as the national carrier, also known as KQ by its international code, comes to term with failed attempts to resuscitate  it.

But first, where did the rain start beating KQ? Things started going south when dwindling global economies, dip in the number of travellers in target markets and a poorly executed expansionist strategy conspired to bring down the Pride of Africa.

Hoping to rule the African airways, KQ banked on an ambitious 10-year strategy dubbed Project Mawingu to position Nairobi’s Jomo Kenyatta International Airport (JKIA) as the hub for flights from the East, particularly India and China faced headwinds.

The deal was meant to ensure passengers would be dropped off at JKIA from where KQ and her Sky Alliance partners such as KLM would pick up fares to the rest of Africa and Europe. But things never worked out.

Senate committee

Consulting firm Deloitte accounts to a Senate select committee shows they had warned KQ to change tact immediately a 2010 International Air Transport Association’s (IATA) deal known as “open sky policy” was announced.

It told the committee that the open sky policy which eliminated the use of government oversight in commercial air services would trouble Project Mawingu.

This came at a time when KQ had already planned to acquire additional aircraft to service the new routes in line with her expansionist plans, for which Deloitte also claims to have warned the then KQ management, saying given the extent of competition that would come with the open air policy, acquisition of those aircraft was a bad idea.

Deloitte also told the Senate that they even warned KQ that passengers on routes targeted had dipped significantly, and Africa being the key route for KQ, bigger airlines would come in and gobble up its market share. This was informed by a growing shift from the West to the Middle East- based airlines such as Qatar Airways and Emirates.

The bad news is that all these came to pass as KQ’s performance continued to nose-dive year-on-year, compounded by the fact that planes were delivered some four years later.

Five years after the onset of Project Mawingu, the remaining optimism was swept away by the announcement of the 2014/2015 earnings which saw KQ post a Sh25.7 billion loss, which the airline blamed on travel advisories and ongoing renovations which led to closure of runways for the poor show.

Parliament and most analysts, however, pointed out that KQ’s financial headwinds were as a result of poor management decisions, operational inefficiencies and failure to counter competition.

The airline hired New York-based Seabury to advise on the restructuring of its operations as the management struggled to turn around the airline.

McKinsey was later hired and came up with a 24-item strategy including review of prices, revenue management, sales, cost reduction and cash and financial optimisation among other elements as cost reduction, revenue growth, financial structuring and network improvement took centre stage.

Financial woes

Unfortunately nothing much came out of these attempts and KQ’s financial woes worsened as the company defaulted on loans amounting to Sh16.7 billion granted by 11 local banks before a fierce protest by lenders led to them accepting a 38.1 per cent stake in the  airline in November 2017.

Treasury was forced to move and guarantee $750 million (about Sh77.3 billion) long-term loans that the airline owed the US Exim Bank ($525 million) and local lenders ($225 million) in exchange for material concessions including an extension of debt tenors hoping to improve KQ’s repayment obligations.

In the arrangement, the government converted its existing loans in Kenya Airways amounting $243 million debt plus accrued interest into equity. Analysts now say that after the bailout which paid off loans owed by KQ, the company now has very few options left on its wings.

The low-hanging fruit which has already led to protests from a cross section of workers, targets taking over the management of JKIA through a special purpose vehicle (SPV) specifically dedicated to operating, managing and developing JKIA through a 30-year concession.

Dubbed “Project Simba”, the deal intends to re-align KQ’s operations to similar modules as its main rivals among them Ethiopian Airlines, Qatar Airways and the Emirates which are making economic sense by leveraging hubs that they have full control of.

In the deal which KQ Managing Director Sebastian Mikosz calls an “aviation industry proposal to government”, the airline says it wants to ensure KQ and JKIA goes in one direction in a model which is structured along a service concession model with no transfer of assets to KQ.

In a policy intent seeking to consolidate key aviation assets, the proponents intends to realise significant operation efficiencies and synergies with the potential to make JKIA regain regional status hub and support KQ’s turnaround bids. Mikosz says if the Project Simba fails, there are still a number of options left and it is not all gloom as some people think.

“The other option would be going back to the government and banks for restructuring. It will be complicated but it will give us balance sheet since we have negative equity,” he told People Daily by phone, adding that the noise should now calm down.

“It would help if there were less emotions and accusations it  is not about KQ but changing the aviation industry in Kenya,” he said.

Quick fix

Sahil Shah, a consultant calls the merger a quick fix of KQ’s financial situation saying it does not address the structural issues that caused financial distress.

“Therefore, stating that the merger could help revive KQ and turn it into a profitable airline competing with rivals such as Ethiopian Airlines is short sighted,” he warns.

He also says increasing Government’s stake in the carrier augmented exposure of the company to Government and political risks.

“We must remove any romanticised, normative ideal and pride of a flag carrier from the assessment of KQ and focus purely on the internal issues and whether or not these can be actually fixed through the proposed merger.”

Sahil says there still remains an option to fully dispose of KQ in a similar manner to what is being proposed of Malaysian Airlines but given the current political economy around KQ., the nonstarter condition of privatisations in the country and the KLM stake in the carrier, it is highly unlikely that a full disposal of KQ would happen.

Show More

Related Articles