It’s make or break year for KQ as State takeover set for take-off

Kenya Airways was firs t privatised in a 1996 deal where Dutch carrier KLM was brought on board a strategic partner. [Edward Kiplimo, Standard]

Nationalisation of key entities has been tested, tried and found wanting. This will, however, not deter the government from taking over Kenya Airways (KQ), whose re-nationalisation is almost a done deal.

It is only awaiting formal procedures.

Nationalising the national carrier is part of a proposal to remodel the aviation industry as the State tries to make the airline and the entire aviation sector competitive after a major beating from Ethiopia.

Other than the government taking over the airline, it will also take away Jomo Kenyatta International Airport (JKIA) from Kenya Airports Authority (KAA), making the airport a standalone firm.

KAA will manage other smaller airports and take over the Herculean task of setting up airstrips in all counties to be used for security and other emergencies.

The nationalisation plot was hatched after a proposal by the airline to take over the running of Kenya’s main airport flopped.

The airline had made a privately initiated investment proposal (PIIP) to run JKIA, but was fought on several fronts, with some arguing that JKIA was State-owned while KQ is a semi-private entity.

Viable option

MPs rejected the partnership with the airport and instead proposed the nationalisation of KQ, as well as the formation of a holding company that will own all aviation entities, including the airline and KAA.

This mirrors other jurisdictions such as Ethiopia, where the national carrier, Ethiopian Airline, is reportedly thriving on account of this arrangement.

KQ Chairman Michael Joseph said the board had in the past said nationalisation is not “what we want, but what we need”.

After an inquiry into the state of KQ and the aviation industry, including scrutiny of the JKIA investment proposal, the National Assembly’s transport committee recommended the nationalisation of the airline. The MPs, however, rejected PIIP, noting that it did not present a viable option not just for KQ, but also in restoring the country as an aviation hub.

“Taking into account KQ’s current financial status and the lack of competitiveness of Kenya’s aviation industry, the government and Kenyans stand to lose the most in the event the trend is left to continue,” the committee said in its report.

“Appreciating the policy adopted by the Cabinet about the consolidation of the country’s aviation assets and re-establishing Nairobi as a competitive international aviation hub, the Committee recommends that Kenya Airways be nationalised.”

It also called for the government to “establish an Aviation Holding Company with four wholly-owned subsidiaries” for the nationalisation process to work. The subsidiaries would include KQ as the national carrier and a “JKIA Company” (that would manage JKIA as an international hub, as well as offer ground handling and catering services).

KAA would also be part of the group but without the privilege of managing JKIA, which is the best-performing airports in the country. KAA will have a revised mandate of managing the other airports and airstrips.

It will also be tasked with setting up “at least one serviceable airstrip in each county for purposes of security, health and other emergencies”, according to the recommendations of the committee.

The aviation group will also own a centralised Aviation Services College, with analysts noting that it is normal for governments to offer national carriers a lifeline.

“Airlines periodically need government support. However, if nationalisation is the way forward, then the government, which is a majority shareholder, will need to make the decision, particularly if it feels the airline serves national interests that are not aligned with private shareholders,” said EFG Hermes, an investment bank.

Ownership reverting to the government will mark the end of the airline’s 24-year stint in private hands, which has been marked by more lows than highs and regrets. It would also end the long-running pact between KQ and KLM.

KQ was privatised in a 1996 deal that saw the Dutch carrier brought on board as a strategic partner, in addition to listing at the Nairobi Securities Exchange (NSE).

The deal has over time been criticised, with KLM seen to have usurped control from the government, following a deal skewed in the carrier’s favour.

The Dutch airline has since then dominated KQ, with a heavy presence on its management and board. This has over time strained relations, with Kenyans feeling they were short-changed.

KLM’s stake in 2016 came down to 7.8 per cent from 26.7 per cent, following a financial restructuring. Its presence has also reduced. In a departure from the past, there are no expatriates seconded by the Dutch carrier on KQ’s management team.

KLM is currently represented by one member on the board, down from three directors in March 2017.

The radical changes at KQ will, however, be carried out without CEO Sebastian Mikosz, who left the airline at the end of December ahead of the expiry of his three-year contract that was to end mid-2020.

He is, however, optimistic that the airline is on a recovery path.

In an October interview with The Standard, Mr Mikosz said the airline can lay claim to its ‘Pride of Africa’ tagline if it continues with what he had begun.

Critical to this plan will be going through with the nationalisation process for the airline to successfully fly out of the turbulence it finds itself in.

“The airline needs to continue with what we have started. There is also a need to make a political decision to change the mandate of the airline. There is no one secret door that you open and find miracles. It is a process, which we have already embarked on,” said Mikosz.

He said he was not leaving KQ a bitter man. His resignation, he insisted, was on personal grounds, though politics may have got in the way of his running the airline.

“It came at an extremely high personal cost. It was much higher than I thought. The restructuring of an airline like this is also an energy killer. It sucks all the energy. There were very difficult moments, but I have chosen to judge the experience as extremely positive for my family and myself,” he said.

“I was not hired to attract political attention, but I ended up doing it. With time, my mandate changed from restructuring the airline to making a case for the change of the airline’s mandate. I was hired to restructure the airline but ended up showing that the airline cannot be restructured if we do not change the environment.”

He continued: “Then, of course, you will find people who have made the company toxic when they start attacking you and not your decisions. Maybe I should have been tougher, but I believe I was tough.”

The airline reported a net loss of Sh8.56 billion for the six months to June 2019, compared with Sh4 billion in 2018.

In the full year to December 2019, the airline’s losses are expected to be worse after it issued a profit warning.

Mikosz’s biggest achievement at KQ was launching direct flights to New York in October last year. The route will be critical in feeding KQ’s network to the region.

He also cited a change in the attitude of employees at the airline, who previously believed that the airline was dying.

Industry players

KQ has also managed to deal with frequent industrial action, which has in the past halted operations.

While the threats and strikes are still there, there are fewer and far between, thanks to Mikosz and Mr Joseph, a self-styled corporate dictator.

Bringing the aviation industry players under one roof will also happen without former KAA chief executive Jonny Anderson, who resigned in September last year, two months before the expiry of his tenure.

Mr Anderson was not a fan of the proposal to have KQ run JKIA. Appearing before Parliament’s transport committee, he opposed the airline managing the key airport.

His team told MPs that KQ should look for other turnaround alternatives, adding that the national carrier was the biggest defaulter of airport fees - having Sh5.4 billion in arrears as of March last year.

While it may have had its share of ups and downs, the local airline industry is still held in high regard in the continent.

A recent report by the International Air Transport Association (IATA) listed Kenya among the six aviation African markets that will drive growth in the coming years.

“Kenya is among the top three aviation markets in Africa where growth is forecast to be the strongest over the next two decades,” it said.