Tuesday, 5 June 2018

KENYA: Kenya Airways May Merge With Kenya Airports Authority

Kenya Airways may merge with the Kenya Airports Authority (KAA) as part of a grand plan to deepen the airline’s recovery and maintain Nairobi’s status as a regional transport hub.

A policy paper which got the Cabinet’s approval on Tuesday, says the aim is to reposition KQ in a similar fashion as its main rivals, including Ethiopian Airlines and Emirates Group, which have relied on government backing to expand their reach.

The move also appears to be in reaction to the financial difficulties the carrier has continued to experience even after last year’s completion of a major financial reengineering drive, causing concern that it may not be able to withstand competition in the very near future.

Should matters remain in the current state, KQ, the biggest revenue driver for JKIA - Jomo Kenyatta International Airport, may collapse or significantly reduce operations within the next year.

JKIA will downgrade and eventually be relegated to the status of a regional airport as no foreign carrier will develop JKIA for the benefit of Kenya, KQ and the KAA said in a proposal document to the Cabinet.

The policy document named Project Simba notes that the carrier’s recent financial restructuring to the tune of Ksh75 billion ($750 million) was insufficient to resolve its challenges.

Project Simba says that the airline’s fortunes must now be hooked to a comprehensive national aviation policy.

Through a public-private partnership (PPP) that could be signed by September, Kenya Airways will take over all the staff and operations of the KAA in a move that will at once expand the range of its services to include ground handling, maintenance, catering, warehousing and cargo.

It is also envisaged that a special economic zone will emerge around the country’s main aviation hub, JKIA.

The government is further expected to support the joint venture by exempting it from certain taxes and allowing it to retain several levies as part of the plan to stop financial haemorrhage at Kenya Airways and bolster JKIA’s status as an East African aviation hub.

KQ chairman Michael Joseph, who helped craft the plan said finer details, including the new entity’s corporate structure and its implications on the airline’s shareholders, will be worked out in due time.

It is still early days. All the pending issues will be discussed, Mr Joseph said.

Michael Joseph said the government needs to stop looking at KQ as a profit centre on its own but should use it as a tool to deliver wider economic benefits, including attracting foreign tourists and multinationals seeking to establish regional headquarters in Nairobi.

While JKIA is fully owned by the government through the KAA, KQ’s ownership includes private investors whose interests will be addressed through the appointment of transaction advisers and the refinement of the project details.

The government’s stake in the airlines stands at 48.9 per cent, followed by 10 local banks (38.1 per cent). The rest of the KQ shares are held by local and foreign institutional and individual investors.

In contrast, KQ’s rivals such as Emirates, Ethiopian Airways, Qatar Airways and RwandAir are fully owned by their respective governments in what makes it easy to build synergies between the carriers and their home airports.

The proposed project is expected to help KQ add a minimum of 23 aircraft and more than 20 new international destinations over the next five years.

This, in turn, is projected to lift annual passenger numbers to 6.9 million from the current 4.1 million.

Fundamentally, the joint assets will result in synergies, boosting airline-related revenues, increasing exports of goods and creating 25,000 to 30,000 jobs in the future, the parties said.

It is envisaged that the PPP will have the KAA as the contracting authority and KQ as the private party.

The concession, which will run for a minimum of 30 years, will be held by a special purpose vehicle (SPV) that will be fully owned by the national carrier.

The concession will have variable and fixed fees, with the latter earmarked to settle the KAA’s current liabilities that amount to Ksh5.1 billion ($51 million) per annum.

The government is ready to tweak tax laws to afford the project the necessary fiscal space to implement the ambitious plans.

These include exempting the SPV from valued added tax and exempting KQ from paying the Railway Development Levy and import declaration fees on aircraft, parts and utilities.

Kenya Airways is on track to solvency and is banking on route expansion, cost optimisation and improvement of service after posting a $60.4 million loss.

During the year the carrier restructured its balance sheet and reduced its annual debt payment obligations, allowing it room to revamp its operations.

In his first year as chief executive, Sebastian Mikosz has seen the airline’s loan repayments drop significantly to $91 million, from $250 million in the year to March 2017.

As at December 2017, the airline’s total debt stood at $1.39 billion, with total assets of $1.4 billion. Its operating profit stood at $13 million, from $8.97 million the previous year.

The results are an improvement from last year, when it posted an after-tax loss of $99.6 million. The airline is now seeking partnerships, new routes and cost optimisation to complete its path to recovery by 2020.

We will next month seek the board’s approval to add more than 20 new destinations in Africa, Europe and Asia over the next five years.

We plan to use the five aircraft Kenya Airways sub-leased to other carriers to build capacity and carry additional passengers, Mr Mikotz says.

The airline will this year take back two Boeing Dreamliners sub-leased to Oman Air, with one of them expected in the country by September, which it plans to use to ply its New York route starting October and is expected to boost KQ’s revenues by between eight and 10 per cent.

The other Dreamliner and the three Boeing 777-300 aircraft leased to Turkish Airlines will be returned to the airline by end of next year.

We are looking at at least one European and one Asian route on top of the African network. We might announce two to three new routes to start operating next year, Mr Mikotz said.

Airline chairman Michael Joseph also said they plan to partner with other airlines.

We are discussing with South African Airways to join forces on aircraft repairs, route sharing and other issues. For instance, we fly to similar destinations in Africa, so why not share these? Mr Joseph said.

This year the airline also changed its financial reporting date from March to December in-sync with other aviation players such as travel agents, financiers and lessors.

Right now, we are restructuring the business, finding ways to increase revenues and keep costs manageable, Mr Joseph added.

The $60.4 million loss, the airline said was due to the 14 per cent increase in fuel costs mirroring global fuel prices, and a 20 per cent drop in customer numbers.

Last year the carrier airlifted 3.4 million passengers during the nine months to December earning $808 million, but its operating costs consumed $795 million.

This was a drop from 4.2 million carried in the previous year, which the airline blamed on the prolonged electioneering, which saw passengers change their transit points from Nairobi to other African airports.

KQ’s equity stood at $4.17 million in the period under review compared with negative $450 million in the year to March 2017.

The change in fortunes stems from a complex restructuring late last year, during which its main creditors, including 10 local commercial banks and the government converted $442 million loans into equity.

This saved it from downfall as part of a $2 billion debt restructuring programme.

Tourism Observer

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