The Treasury has gone slow on pushing for a strategic investor in Kenya Airways as it seeks other options beyond an equity deal.
Treasury Principal Secretary Chris Kiptoo said they had not “succeeded” in the search for a strategic partner to help in the turnaround of the national carrier.
Now, the government has widened the options to include having a turnaround deal tied to the targeted investor upgrading Jomo Kenyatta International Airport (JKIA).
Kenya abandoned a deal that could have seen India’s Adani Group upgrade JKIA under the public private partnership (PPP) model.
The State is mulling over a scenario where the investor tapped to upgrade and operate JKIA would have Kenya Airways as its “anchor tenant”.
“Now, we are trying to see whether as we restart the discussion around JKIA, that investor can also use KQ as anchor tenant,” said Dr Kiptoo on Wednesday.
“That model like in Dubai (International Airport) where somebody can come and do the airport...it would be good.”
It was not clear on how this arrangement would operate. In the case of Dubai, the major airline, Emirates Airlines, and the airport are both owned by a sole investor: the government.
The two have a symbiotic relationship, with Emirates using the airport as its global hub and operating from Terminal 3, which is also the largest single terminal building in the world.
Emirates also enjoys lower landing costs compared to its competitors, raising concerns about unfair competition.
Turning around the fortunes of Kenya Airways has been a major headache for the Treasury, which had promised the International Monetary Fund (IMF) to find a strategic investor to pump money into the national carrier.
The initial hint that the search for Kenya Airways’ strategic investor might have stalled came last month after the government froze approval of the hiring of a consultant to help identify the equity partner amid speculation the State was reconsidering the turnaround plan.
Kenya Airways planned to announce a strategic investor this year to support capitalisation of the company and boost its efforts to reduce debt and expand operations.
Failure to turn around the airline is one of the unmet conditionalities in the programme Kenya had with the Washington-based IMF.
Kenya Airways appeared to suggest it was in the dark over the search for the strategic investor.
“We are still waiting for the principal shareholder to give us a nod on the appointment of the financial adviser. It has taken some time but there are many considerations I believe they are working on,” said Kenya Airways chief executive officer Allan Kilavuka.
“Unfortunately, we don’t have an update in that regard because we are still waiting for the approval from the principal shareholder.”
Dr Kiptoo noted that besides its legacy debts, Kenya Airways was doing well, having cruised into profitability.
The strengthening of the shilling against the dollar and the decision by the Treasury to take the dollar-denominated loans helped to lift the national carrier to its first full-year profit since 2012, booking a record Sh5.4 billion in net earnings last year.
The airline reversed a loss of Sh22.6 billion in 2023 to record a profit after it realised Sh1.2 billion in foreign currency exchange gains from a loss of Sh9 billion in the prior year.
Ever since Kenya Airways’ financial fortunes tanked due to its aborted initiative of buying aircraft, it has relied on State support.
But with Kenya under pressure to improve its fiscal position, the IMF pressured the State to find a strategic investor that would take over the airline’s financial burden from the government.
At the start of this month, the Treasury was forced to pay eight commercial banks Sh19.3 billion ($149.9 million) in full for unpaid loans to Kenya Airways, even as they rejected an offer to recover the defaulted debt through a 6.5-year bond.
The lenders, including Equity Bank, NCBA Bank, Co-operative Bank, slapped the Treasury with a default notice after the national carrier indicated it had no cash to settle the debt.
The Treasury, which had guaranteed the loan, had to settle the debt in cash by August or issue the lenders an acceptable government security instrument or a bond, prompting them to issue a call-up.
KQ, whose shares recently returned to being traded on the Nairobi Securities Exchange (NSE), has been banking on its top shareholders to back the conversion of the loans to shares in fresh efforts to smoothen the path for entry of a strategic investor.
The National Treasury is KQ’s largest shareholder with a 48.9 percent stake
The government previously informed the IMF that the preparation of proposals for Cabinet approval of strategic options for restructuring KQ would be complete by the end of November last year after moving the initial deadline from April.
The IMF sees the injection of new capital into Kenya Airways as critical to the sustainability of the company despite the airline flying back into profitability in the six months to June.
“KQ has announced net profit in its latest six-month report ending in June 2024 for the first time in over a decade. But its indebtedness remains very high. As of the end-December 2023, KQ had total outstanding liabilities of Sh206.8 billion, including outstanding claims on KQ by the government on account of its past and ongoing support, of which Sh171.4 billion was long-term liabilities,” the IMF said in a January report.
Now, KQ’s leadership wants the State and the banks to accept more shares in favour of lowering debt, testing the lenders resolve in the turnaround of the airline.
In 2017, the government and 11 top banks including KCB, Equity, Cooperative Bank and NCBA converted part of billions owed to them into equity in an effort to return the carrier to profitability.
The swap deal, which cut debt and eased the pressure on cash flow, increased the government’s shares to 48.9 percent from 29.8 percent while banks got a 38.1 percent stake, through a special vehicle.
Air France KLM’s 26.7 percent stake was diluted to 7.8 percent.
