Kenya Airways to be split into subsidiaries in latest turnaround plan

By Herald Aloo
Posted on Thursday, 27 October 2022 13:19

A Kenya Airways passenger Embraer 190 plane, May 28, 2022. REUTERS

The number of restructuring strategies for the ailing Kenya Airways (KQ) continues to pile under different regimes, but finding a lasting cure remains a puzzle. The latest move involves plans to split the national carrier into various subsidiaries.

Kipchumba Murkomen, the cabinet secretary for roads, transport and public works, told parliamentarians that the move will see KQ’s passenger and cargo business units separated.

New lines of operation, such as drone services, could also be introduced, owing to the implementation of Civil Aviation Regulations 2020, which came into force early last year to govern the importation and charges of local use of drones in Kenya.

“We need to have a passenger airline, cargo airline and charter airline. We might also need KQ to have other businesses on the side like drone services and surveying services,” Murkomen told the parliament this month.

According to Murkomen, President William Ruto is engaging KQ, its shareholders, and other players in the plan.

KQ Chairman Michael Joseph confirmed that the national carrier is indeed in talks with the new administration regarding its structural outlook going forward.

This type of structure is currently being used in the banking sector to great success.

“I can only state that we are in continuous discussion with GoK [Government of Kenya] about the future structure of KQ, but no firm decisions have been taken yet,” Joseph tells The Africa Report, without giving further details.

Game changer?

Even though details are still scanty on the implementation timeframe and how it would ideally lift the airline out of financial abyss, analysts are touting it as a possible game changer that would allow KQ to operate like a holding company.

“This type of structure is currently being used in the banking sector to great success. It will allow each KQ’s subsidiary to perfect its own business model, given that the passenger business is quite different from the cargo business,” says Ken Gichinga, chief economist at Mentoria Economics.

Since plunging into back-to-back losses for a decade now, KQ has tried numerous turnaround efforts while surviving on government bailout. In the current 2022/23 fiscal year, it has been allocated Ksh30bn ($247.2m) to support initiatives, including debt service.

A restructuring plan almost similar to Murkomen’s recommendation was first attempted in 2019 through a Privately Initiated Investment Proposal (PIIP). It would have allowed the airline to have a subsidiary that is specifically operating at the Jomo Kenyatta International Airport (JKIA) for a concession period of 30 years.

The PIIP later flopped on parliament’s concern over its constitutionality. Should the government adopt this new plan, it will end the previous plan of nationalising KQ that was proposed by the former Jubilee regime.

A law to pave the way for KQ’s nationalisation is still before the parliament, awaiting the new regime’s decision on its fate. Nationalisation of KQ meant that the government would have increased its stake beyond the current 50% mark through conversion of bailout cash or debt to shares.

This is a direction that the current administration is against, having previously cited the need to boost private sector investment and ease pressure on the exchequer.

Beleaguered airline

As it stands, KQ, whose shares trading on the Nairobi Securities Exchange (NSE) ceased in July 2020, remains stuck in a pool of troubles amid competition. Its main business segments, cargo, passenger, and handling services are all in losses.

Fuel hedging – an international best practice where airlines agree to purchase oil in the future at a predetermined earlier price – was also suspended in 2016, meaning the airline’s coffers are strained further by the hiked fuel prices.

KQ’s executives say the pretax loss would have been Ksh3.328bn ($27.4m), instead of Ksh9.86bn by June 2022 if it were not for this year’s surge in fuel costs.

The airline managing director and CEO, Allan Kilavuka, earlier told The Africa Report that KQ was doing cost-benefit analysis to determine whether it would activate its fuel hedging policy.

Worse still, pilots are threatening an industrial strike from next month, citing leadership grievances and non-adherence to Collective Bargaining Agreements (CBAs), among other things. Their last strike was in November 2016.

If not resolved, the strike could cripple operations of the national carrier at a time when the aviation industry is anticipating recovery following economic effects of Covid-19. This could also see the airline miss an opportunity to cash in on the expected travel peak often witnessed in the last quarter of the year.

Kilavuka maintains the airline has not recorded any disagreement with the pilots as per the previous consultative meetings.

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