Search for new investors stalls Kenya Airways-SAA deal

As Kenya Airways (KQ) goes in search of a new investor, negotiation terms, an evaluation of the airline, and the amount of capital needed to prop up the airline are all factors that could delay the previously proposed KQ-South Africa Airlines (SAA) consolidation plan.

Discussions around the collaboration began in 2021 and were initially set for completion as early as next year. But finalisation of the deal depends on how quickly KQ and SSA make a breakthrough into profitability.

KQ’s net loss more than doubled between December 2021 and December 2022, reaching KSh38.26bn ($29.4m). The airline believes that it will enter profitability by the end of 2024.

SAA closed the first three quarters of FY2022/23 with R50m ($2.75m) net loss.

While the first phase involved increasing corporation, KQ and SAA are in phase two of the partnership framework, which entails code sharing and protection from anti-competitive behaviour in the run-up to a merger. The third and final stage will legalise the partnership.

“Plans to create a pan-African airline with SAA will also need to be reassessed,” says Githae Mwaniki, an aviation information consultant.

“[We need to make sure] that the structure will create genuine mutual benefit,” he says.

Turnaround measures

KQ hopes to find a private investor as early as this year to provide a cash injection to support the ailing carrier. The deal is hoped to avoid government intervention and a state-directed financial bailout.

In 2012, KQ acquired huge debt via two special purpose vehicle leasing contracts facilitated by Tsavo and Samburu, which delivered 17 aircraft at a combined cost of $1.234bn.

There was no return on investment as the airline slipped into successive yearly losses, with the treasury refusing a state bailout earlier this year.

KQ has tried several turnaround measures, alternating between partnerships, expanding some flights and routes, and then scrapping the plans altogether with nothing forthcoming.

“The process of identifying investors should be completed by the end of this year,” said Kenya Airways CEO Allan Kilavuka during the AGM last month.

“Interest in the deal is very high because, fundamentally, KQ revenue is very strong,” he said. “We have formalised the processes and very soon we will be announcing the lead who will help us to give a proposal to potential investors.”

In the financial year ending December 2022, KQ’s total income rose from $540.16m to $898.36m.

KQ maintains there is immense interest from the international market, especially by investors from China, the Middle East, and the US.

“Discussions are ongoing with the government, but we haven’t come to a conclusion yet on how we will finance the legacy funding costs that we have,” says Kilavuka, adding that KQ needs to first “sound off the appetite of the market”.

Debt issues

The scramble for investors comes at a time when creditors – including US-based lenders JPMorgan Chase and Citibank and other Kenyan banks – have issued default notices, pilling pressure on the airline to re-think its plans.

KQ’s recapitalisation and debt levels – which stood at $1.34bn as of 31 May – will be a top concern to potential investors. A big chunk of the amount dates back to 2012 during the first phase of the aircraft acquisition through Tsavo and Samburu contracts.

“The reality is with the current level of indebtedness, it will be difficult for KQ to find new investors,” says Githae Mwaniki, an aviation information consultant.

“The debt situation has to be handled where they [KQ and the government] will re-negotiate for part of the stake from the KQ current lenders to be sold. They have to structure a deal that leaves the government, KQ lenders, and the strategic investor with a stake,” says Mwaniki.

Being a national asset, the government cannot relinquish its entire stake; however, banks are likely to push a debt takeover if they are offloading all their existing shares. Some creditors might still opt to have a new debt-to-equity conversation.

As of April 2023, the loss-making airline had identified a total of 141 cost-cutting initiatives valued at $136m, out of which $120m will be delivered by 2024.

There is also a diversification plan targeting $6.6m in revenue to be delivered over the next 18 months.

Kilavuka revealed recently that from 2021, KQ management has achieved an 18% reduction in aircraft leasing, reflecting about $2m per month and a reduction of $21m in outstanding lease deferrals.

“We have to be quite careful. We need to have the confidence of investors. We want to make sure those we talk to are the right persons,” says KQ chairman Michael Joseph.

Shareholder changes

Onboarding a new investor will, however, shake up the current shareholding structure, and the government of Kenya will have to offload a portion of its current 48.9% stake in the airline.

The national carrier is a strategic asset to Kenya. However, the erratic policy where the State privatises KQ and then later buys a controlling stake could be a red flag to investors who might feel a similar fate will ensue once the airline is back to profitability.

“It will not be very easy because of its ownership mix between the government and the private sector. A lot of new companies will definitely shy away from joining such an airline,” says Colonel Waithaka, aviation expert and former Kenya air force officer.

“Investors will definitely want to dig deeper into it. Remember KQ was initially there as a fully privatised company. Investors will see that we are going back to privatisation and that will be a worry.”

Others argue that some of the banks that are shareholders might be required to relinquish a stake should the strategic investor demand a bigger cut.

Ten local banks took a debt-to-stake switch in 2017 that left them with a combined 38.1% of KQ shares while KLM Royal Dutch Airline has 7.8%. Employees are in possession of a 2.4% stake and another 2.8% cut is left with other shareholders.