Kenya Airways goes full circle with nationalisation plan
Nationalisation will exempt Kenya Airways from taxes on engines, maintenance and fuel, allowing it to sell cheaper tickets.
31 July 2019 | Business
In Kenya we think any parastatal is a home for employing people, we forget productivity but when it comes to business out there, we will be eaten alive. - Mohammed Hersi, Chairman: Kenya Tourism Federation
The loss-making airline, which is 48.9% government-owned and 7.8% held by Air France-KLM, was privatised 23 years ago but sank into debt and losses in 2014. Lawmakers voted to re-nationalise it last week.
"The [transport] ministry needs three months to think through and then give us a proposal on the aviation shareholding company and the entire structure," David Pkosing, the chairman of parliament's transport committee, told Reuters.
He estimated buying out shareholders would take 18 months.
A failed expansion drive and a slump in air travel forced the airline to restructure US$2 billion of debt in 2017. But Kenya Airways still needed cash for fleet and route expansion amid growing competition from Ethiopian and Emirates.
Minority shareholders, who hold about 3% of shares, will be bought out for about 800 million shillings (US$7.71 million), Pkosing said.
A consortium of local lenders, who acquired 38% of the company's equity during the 2017 restructuring, could be paid through government debt, possibly 10-year treasury bonds, Pkosing said.
Lenders' representatives on the airlines' board were not immediately available for comment.
The banks hold their stake through a joint, special purpose vehicle. They are likely to accept the deal given the airline's losses, said Eric Musau, head of research at Standard Investment Bank in Nairobi.
"If you look at the lenders, they have no interest in owning the airline other than getting back the amount that they lent," Musau said.
Air-France KLM, which declined to comment, will have the option of selling its stake to the government and staying on as a technical partner for the airline, the lawmaker said.
Kenya wants to emulate countries like Ethiopia, which runs air transport assets - from airports to fuelling operations - under a single company, using funds from the more profitable parts to support others.
Under the model approved by lawmakers, Kenya Airways will become one of four subsidiaries in an Aviation Holding Company.
The others will be Jomo Kenyatta International Airport (JKIA), the country's biggest airport; an aviation college; and Kenya Airports Authority, which will operates all the nation's other airports.
"The balance sheet of the aviation holding company will be healthier than Kenya Airways alone," Pkosing said.
Kenya Airways could renegotiate its aircraft leases based on its reduced risk profile, he said, noting the airline needs more than its 40 planes.
JKIA alone has annual revenues of 12 billion shillings (US$115.6 million), half of which is profit, lawmakers said. The airports authority owns thousands of acres of land that would shore up the new group's balance sheet.
Nationalisation will exempt Kenya Airways from taxes on engines, maintenance and fuel, allowing it to sell cheaper tickets, Pkosing said.
The airline charges more than competitors, forcing price-sensitive passengers through hubs like Addis Ababa and Kigali.
"The model we are proposing is not new, it is being used by Emirates, Morocco, Egyptian, Ethiopian. Most successful airlines operate in the same model," Pkosing said.
Government officials said the airline is vital to encourage investment and bring in tourists.
But some said the government failed to manage the airline properly in the past.
"Leasing the aircraft is shrouded in secrecy. When you look at the staffing, the pay roll, its very high," said Mohammed Hersi, chairman of Kenya Tourism Federation.
"In Kenya we think any parastatal is a home for employing people, we forget productivity but when it comes to business out there, we will be eaten alive." – Nampa/Reuters