When the government privatised Kenya Airways (KQ) in 1996, it was seen as a major turning point for its divestiture programme. It was also seen as the launching pad for commercial success of KQ, as the national carrier is known by its international code. KQ’s privatisation was hailed as a model. The airline had been fully State-owned previously, but commercially, it was doing poorly.
From government records, it had made losses totalling over Sh3 billion in the five years preceding its privatisation. It also held a further Sh3 billion in debt it owed to the government that had been bailing out its operations. As a business, its customer service was inadequate.
In line with the existing privatisation credo, the government instituted a privatisation programme for the airline, ostensibly to inject private sector capital and management, as well as a commercial orientation in its operations.
After the privatisation, the ownership structure of the airline was drastically altered in favour of private ownership. The ownership was held by KLM at 26 per cent as a strategic investor, the public held the majority share at 52 per cent, and the government was left with a 22 per cent minority share. Treasury received $70 million (Sh7 billion at today’s exchange rates) as proceeds of privatisation from this transaction.
Initially, privatisation of KQ looked like a resounding success. The airline posted profits year after year. It initiated and implemented a plan of renewal of aircraft. Accolades from all over the world kept ringing in the ears of the government and partners in privatisation of Kenya Airways. Then, unexpectedly, the airline hit turbulence. It has made huge losses three years in a row.
In 2016, it made a record Sh26.2 billion in losses, only surpassing the Sh25.7 billion loss it made a year earlier. From that point on, it was all the way downhill. Its commercial viability all but collapsed. Its financial data became an accountant’s nightmare. According to its financial reports.
Kenya Airways has loans totalling Sh113.2 billion which include Sh24.3 billion owed to the government and Sh23.2 billion that is owed to 11 domestic commercial banks. A string of bad business decisions over the years seemed to be behind the woes of the airline.
Privatisation was supposed to cure the airline of poor decision making by injecting private sector rigour and ethos in its operations. Kenya Airways was staring at collapse. Desperate to forestall the collapse of the airline, the government went back to the same old habits that Kenyans thought had been buried by privatisation. It started pumping in taxpayers money to keep the carrier in the air, and keep creditors at bay.
In July 2016, the government advanced to Kenya Airways Sh10 billion it had borrowed on its behalf from African Export–Import Bank, also referred to as Afreximbank, an International financial institution, headquartered in Cairo, Egypt.
In May last year, the government advanced KQ a Sh4.2 billion shareholder loan. By this time all financial benefits that the government had received from the airline had long been wiped out, and was experiencing negative equity.
The big question in the last one year has revolved around how to make Kenya Airways viable again. Its huge debt portfolio meant that it was not going to survive for certain, as creditors begun circling. Desperate sales of any asset that could attract a buyer, from buildings, planes, land, airport slots did little to sort out the grave financial situation the airline found itself in.
The final solution that was agreed upon was restructuring of the balance sheet of the airline to enable it generate and retain cash flows that would finance its operations and, hopefully, work its way out of a deep dive. The government, therefore, converted all its loans to the airline to equity. The coterie of domestic banks followed suit.
What this did was to effectively result in the renationalisation of Kenya Airways as it diluted all the other shareholders. After this financial restructuring, the government is now the dominant shareholder holding 48.9 per cent of the airline’s equity, a further 38 per cent held by lenders, while KLM, previously a strategic partner, has been diluted to 7.8 per cent.
The most severe cut has been directed at the public, whose shareholding has dropped to a catastrophic 5.2 per cent. Further, the government has guaranteed Sh77 billion debt that KQ had taken from US Eximbank, another old bad habit that privatisation was supposed to cure.
Cynics might opine that the government could probably have spent less taxpayers funds up to now and probably done a much better job than that which has happened under a privatised regime. Kaara can be reached at [email protected]