KQ: Bottomless pit that threatens to swallow Sh147b of taxpayer cash

The Sh26.6 billion that KQ will get this financial year will not be the last that the Treasury pumps into the carrier. [Edward Kiplimo, Standard]

“The more things change, the more they remain the same.” The words attributed to French writer Jean Baptiste Alphonse Karr perhaps capture the state of affairs at Kenya Airways (KQ).

Over the years, the government has handed the national carrier numerous lifelines; KQ has gobbled up the billions of shillings but its turnaround has remained elusive.

The airline has also sought turnaround experts from globally acclaimed consultancies but the efforts appear to have yielded little. This is despite a feeling within the organisation that its employees and local stakeholders hold the answer to the questions that KQ searches for from global aviation experts.

This year is no different, with more billions of shillings in bailout money and consultancies planned for KQ.

The National Treasury last week said it would advance Sh26.6 billion to the airline to support its ongoing restructuring as recommended by the International Monetary Fund. 

This is in addition to the Sh35 billion that the government had extended to KQ in the period between 2016 and 2020, bringing the total state loans to Sh61.6 billion.

Further, if the Sh85.2 billion State guarantees for loans taken by the loss-making airline by end of June 2020 are added, then taxpayers are struggling with a liability of Sh146.8 billion that they risk shouldering should KQ default.

And last week, KQ confirmed that it had hired American firm Seabury Group to help its restructuring programme. 

While it is yet to be seen how radically different Seabury’s restructuring proposals will be, KQ is not short of such and over the last few years it has received recommendations from various consultancies.

They have had McKinsey and Company, Deloitte and a team of Polish expatriates (referred to as the Polish Five on KQ’s corridors) that came with former chief executive Sebastian Mikosz.

The airline also hired Steer Group in March last year and was expected to guide the turnaround as well as survival during the Covid-19 pandemic.

But all have not succeeded in helping the airline move out of turbulence.

The consultancies are in addition to what industry players have termed solid recommendations in a report by the Senate Committee on Transport during the previous parliament that was chaired by Anyang’ Nyong’o, now Kisumu governor.

The government last week announced it would advance Sh26.6 billion to KQ, but said the carrier would need to adhere to certain conditions, perhaps an indication of how much the government wants to see the airline take off on its own again.

“The government’s financial support is contingent on KQ adhering to agreed reforms, including permanent cost reduction measures, increased productivity and improved operational efficiencies,” said Transport and Infrastructure Cabinet Secretary James Macharia in a statement on Friday.

“It is also conditional on the support of all stakeholders including suppliers, capital providers, aircraft financiers and employees.”

He said the financial support will help Kenya Airways to strengthen cash flow and speed up the much-needed reforms in the airline, including in its network, fleet and operations.

“After successfully implementing these reforms, the airline will be in a better financial position to achieve long term success.”

KQ Chief Executive Allan Kilavuka echoed the sentiments by the CS on the restructuring as well as getting all stakeholders on board.

He downplayed the impact that the process will have in terms of layoffs, noting that the airline has already shed quite a number of staff.

KQ Chief Executive Allan Kilavuka. [Jonah Onyango, Standard]

“While the good news is that we have already taken some actions, including staff rationalisation and cost containment measures, we need to up the momentum for the next phase to ensure that the future of our airline is guaranteed,” said Kilavuka in a memo to staff Friday.

Mr Kilavuka also confirmed the hiring of Seabury to guide the restructuring process.

“Seabury will conduct a comprehensive assessment of all aspects of the business, support leadership in developing a comprehensive restructuring plan covering the network, fleet and required resources and implement the restructuring plan,” he said.

The chairman of the National Assembly’s Transport Committee David Pkosing also backed the bailout, saying it will help the airline recover from the pandemic.

“It will help as we come out of Covid-19 effects,” he told Financial Standard yesterday.

In 2020, the government gave KQ a shareholder loan of Sh11 billion, of which Sh5 billion was used to service the engines of its Embraer E190 fleet that were due for overhaul. Another Sh6 billion was used to support the airline’s operations after Covid-19 hit its business.

The government had in 2017 advanced the carrier a loan of Sh20 billion and another Sh4.2 billion in 2016, which were converted into equity during the 2017 restructuring that saw its stake in the carrier increase to 48.9 per cent from 29.8 per cent.

The State also guaranteed the airline’s loans of $750 million (Sh85.2 billion at current exchange rate) during the restructuring in 2017.

This is more than half the guaranteed loans given to State-owned firms such as Kenya Railways Corporation, Kenya Ports Authority and KenGen.

The planned restructuring, with the help of Seabury Group, will likely claim some jobs at the airline. It is coming after a similar exercise in 2020 where the carrier let go over 1,123 employees - 24 per cent of its workforce.

But according to the Kenya Airline Pilots Association (Kalpa), the problem lies with the KQ leadership, both at management and board levels.

“You cannot grow by shrinking and the airline’s history of restructuring has shown this,” Kalpa Secretary-General Murithi Nyagah told Financial Standard.

“We have had restructuring at KQ several times and every time the employees are affected, and this has not solved KQ’s problems. The problem is not the employees but the leadership.”

He added that in hiring Seabury Group, KQ is adding to numerous consultancies that it has undertaken that have yielded little and at a huge cost to the airline.

“Every time they bring in such consultancies, the airline ends up paying heavily and the recommendations are not implemented,” Captain Nyagah said.

“Steer Group was hired last year and they have not even handed in the report, and KQ has now hired Seabury.”

One of the controversial consultancies was that of Mckinsey, which was reportedly paid Sh2.3 billion in 10 months. It is reported that the carrier also paid over Sh1 billion to the Polish team of consultants, who were expected to steer the process of nationalising the carrier.

This is the second time Seabury Group is consulting for Kenya Airways after spearheading a 2015 revival strategy for the airline.

“There are all these reports and they are expensive. Since 2015, these may have cost the airline in the region of Sh6 billion. We would want to see how much KQ has paid to these consultants over the years,” Nyagah said.

“In all these instances, rarely are KQ’s employees and other stakeholders consulted…we are paying so much money yet solutions are right here.”

KQ plane taking off at the JKIA. [Edward Kiplimo,Standard]

Kalpa is of the view that the company’s board of directors should be made up of professionals from industries that work directly with KQ, or are affected when the carrier’s operations are down.

In a proposed structure that the pilots’ lobby unveiled recently, it said board members should be drawn from players in the aviation industry itself, horticulture, travel and tourism.

The sectors work directly with KQ, and according to the pilots, hiccups in the airline’s operations greatly affect them.

KQ has in the past said there is a procedure on selecting board members, which dictates that the board must comprise members with diverse skills and competencies.

The airline’s leadership has been the subject of the different reports.

In 2015, a Senate report noted that while government bailout then was key for KQ to remain afloat, infusion of capital would be on condition of reconstitution of the board as well as restructuring and putting into place a management team with sufficient skills and experience in the aviation industry.

Despite being at possibly its lowest, there are opportunities for KQ to stage a comeback. Some of these, Nyagah said, require slight tweaking of operations while others require the government to take a stand with the carrier and ensure that KQ ferries government officials and cargo in and out of the country.

“A good chunk of the Covid-19 vaccines imported into the country are brought in by other airlines and not KQ. Why do you want to bail out the airline instead of giving it business and let it earn its keep?” he posed.

He claimed that one of the Dreamliners has been packed for six months now owing to lack of spare parts.

“Geographically, we are strategically located as a country. This is not cliché. Additionally, South African Airways has been experiencing major challenges and is in no shape to compete,” Nyagah said.

“So we have a huge pool of passengers who we can convert to customers for KQ to take to the rest of Africa as well as enable from the rest of Africa to other parts of the world, especially Asia, Middle East and Europe.”

Gerrishon Ikiara, a former Transport permanent secretary and KQ board member, said the airline’s health influences other sectors and as such it should be supported.

“If there was no KQ on the scene, that is when you start missing it,” said Dr Ikiara, though pointing out that in the last three to four years, the management of KQ has not been the best.

The Sh26.6 billion that KQ will get this financial year will not be the last that Treasury pumps into the carrier, with the IMF saying the carrier needs at least $1 billion (Sh113 billion) to restructure its operations.

The State has in the recent past said it will not pursue nationalisation of the carrier and even withdrew the National Aviation Management Bill - which was set to guide the process – from Parliament citing need for further consultation.

Instead, it said it would roll out a Sh147 billion ($1.3 billion) multi-year restructuring programme that includes taking over debts.

In a report last December, the IMF said Treasury had said it no longer planned to nationalise KQ and was instead evaluating mechanisms to protect the exchequer’s financial interests during the restructuring process.