Kenya Airways shareholders’ long wait for soft landing

Kenya Airways planes at Jomo Kenyatta International Airport (JKIA), Nairobi [Boniface Okendo, Standard]

The classic investment philosophy is to invest in companies that are beaten down but with the hope that they will bounce back.

That was the thinking of investors who between March 25, 1996 and April 1996 agreed to buy into Kenya Airways (KQ) when the government sought to sell a 51 per cent stake.

The 59-paged prospectus, issued on March 22, 1996—exactly 26 years ago today— valued each of KQ’s shares at Sh11.25. The offer price put KQ’s worth at Sh5.19 billion.

Today, the share is suspended from the Nairobi Securities Exchange (NSE). And it will remain so until January 5 next year. It was valued at Sh3.83 per share when it last traded on July 2, 2020.

It is a case of trapped investors as the airline’s strategy takes twists and turns, sometimes opting to grow by shrinking and other times by expanding.   

In between the shifting strategic direction are bulging losses, debts and empty pockets for shareholders amid State bailouts reminiscent of the 1994 and 1995 events that preceded the national carrier’s listing on the Nairobi bourse.

From increasing flights and routes to trimming them down, and now from privatisation to planning nationalisation and then dropping the plan, KQ’s strategy has not been pointing anywhere in particular. It has been a losing streak all through. 

For investors who in 1996 walked into Citibank Kenya, Barclays Bank (now Absa), Commercial Bank of Africa, Co-operative Bank of Kenya, KCB, National Bank, Standard Chartered Bank of Kenya and the now-defunct Trust Bank to borrow money to buy KQ shares, they can only look back with regret.

Trading of shares on the NSE started in June 1996 with 113,000 shareholders, making KQ the firm with the largest number of shareholders in a publicly quoted company in East Africa at the time.

In 1997, a year after listing, the shareholders toasted to their decision to buy into a national carrier by receiving Sh346 million as dividends from an airline that had previously been in losses and, therefore, not paying any dividends.

Between 1997 and 2012, KQ was always paying dividends, save for 1999. This was music to investors’ ears. They just did not know the deejay would soon put on unfamiliar music. In 2013, they were thrust into the 1999 moment when there was no dividend. And they have been there ever since.

To make it worse, KQ shares are suspended from trading. They are trapped. The counter will remain shut at least until January next year, marking over 18 months without trading. Reason?

“The company’s operational and corporate restructure is still ongoing, and the government is expected to give a clear direction on its buy-out or bail-out,” said NSE on the suspension.

Now thousands of minority shareholders who were hoping to be bought out by the government and rescue themselves from a firm that has not paid dividends for almost a decade are trapped.

KQ’s official data shows 77,037 local individual shareholders are stuck. Their fate is now unknown. They had a chance to jump out—and some did—but many stated on after the government’s privatisation plan sent the share rallying, offering investors hope of fetching a decent price.

From March 2, 2020 to July 3, 2020 when trading of its shares was first suspended as the now aborted nationalisation process entered a crucial stage, KQ shares had gained by 78.14 per cent to trade at Sh3.83.

The price rally was the highest at the NSE at the time, helping its valuation to rise by Sh9.54 billion to Sh21.76 billion.

But the optimism would soon fade away after Treasury, which had promised to reverse its 1996 privatisation decision by buying back its stake that has changed hands over the years, quietly informed the International Monetary Fund (IMF) that it had dropped the plan.

It now wants to take over $827 million (Sh93.5 billion) of KQ’s debt and offer the airline $473 million (Sh53.5 billion) as direct budgetary support to clear overdue payment obligations and cover the upfront costs of restructuring. The process adds to the years of bailouts that have failed to rescue the airline from a loss position.

But first, Treasury is lining up a Sh20 billion bailout to help the airline start the process. But for shareholders, their quest for a return remains elusive.

This is all but a familiar script—the very background that defines the genesis of KQ.

In January 1994, Kenya struck a deal with several donor countries, christened the Paris Club, to reschedule certain debts, including those of parastatals for which the government had guaranteed. The financing of KQ’s purchase of two airlines in the late 1980s was included in the deal. 

Defaulted on loans

Both KQ and the Kenyan government had defaulted on repayments under loan and guarantee arrangements for the aircraft because of the devaluation of the shilling and recession, according to the information in the 1996 prospectus.

“The situation threatened to cause the collapse of the company. However, it was considered important to the national interest that KQ continue to operate,” notes the prospectus.

The Paris Club agreed to restructure debts and agreed to release KQ from its obligations incurred up to the end of 1993. In return, the government assumed responsibility as a primary debtor for KQ’s foreign debts then valued at Sh4.29 billion.

The State also converted into shares Sh1.61 billion of debts owed to it by KQ. It was a rebirth for the national carrier.

Apart from debts, another major restructuring followed, including cutting fleet size, reviewing routes and reducing staff numbers by 10 per cent through a voluntary severance programme.

On December 15, 1995, KLM Royal Dutch Airlines, which had been flying to Kenya since 1969, purchased a 26 per cent stake in KQ for $26 million (then an equivalent of Sh1.37 billion) and agreed to provide technical and service facilities.

The deal gave KLM the power to nominate future candidates for the positions of managing director and finance director.

At that time, KQ was operating passenger and cargo flights to 24 international destinations with 45 flights a week. It had 2,354 employees in 1995. This year offers hope that Treasury could finally find a way to steady the airline, which has already seen radical business surgeries before.

KQ Chief Executive Mr Allan Kilavuka in December said it was not possible to reinstate full salaries to workers as the airline struggles to get out of Covid-19 disruptions.

He likened the airline’s situation to a patient who is showing signs of moving from intensive care unit (ICU) to high dependency unit (HDU) and must not be rushed “to go exercising.”

“We need to survive. We need to get out of the ICU. Now is not the time to go exercising. It is time to ensure we are being treated to move out of ICU to HDU. To do that, we need to conserve cash,” said Mr Kilavuka.