Treasury eyes strategic investor for Kenya Airways by June

Kenya Airways (KQ) is likely to close a deal with a strategic investor by June, even as the government continues to explore the option of privatising the national carrier.

The new investor will be expected to pump cash into the loss-making airline, disclosures by the Treasury to the International Monetary Fund (IMF), with the government keen to wean it off frequent bailouts.

“The government directed KQ (Kenya Airways) to onboard a consultant to support the onboarding of an equity investor who can inject capital into the business. The procurement of the consultant is in the final stage and should be completed by the end of December 2023 with the aim of closing the deal by the end of June 2024,” the Treasury told the IMF.

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The report released by IMF last Wednesday showed that the government is pursuing the two options — engaging a potential equity investor through a consultant procured in December and exploring the possibility of privatisation through merging of KQ with other target companies and setting up a fund to manage them.

The government aims to close either deal by the end of June.

“In a parallel measure, the government is also exploring a privatisation mechanism where some target companies are consolidated, and a fund set up to manage them. Such a model has sufficiently worked in Romania, and we are engaging the consultants who delivered the model to advise on the same,” the Treasury wrote to the IMF.

“The model of the fund is meant to package both profitmaking and loss-making entities hence sharing interest in the unattractive companies in pursuit of the attractive ones by investors. A decision on the same shall be made by the end of June 2024.”

Since 2020 when Covid-19 struck global economies, KQ has incurred cumulative losses totalling Sh112 billion (by June 2023), a fifth of which was incurred in the first six months of 2023. The airline incurred a net loss of Sh36.2 billion in 2020, Sh15.8 billion in 2021 and Sh38.26 billion in 2022 — the largest annual loss ever recorded by a Kenyan company.

Despite its losses, the airline is seen as a critical national asset, bringing in tourists and bolstering Kenya’s position as a regional transport and business hub. To stem fiscal risks emanating from investments in KQ, the government has also taken over loans it had guaranteed the airline, currently valued Sh58 billion which the Treasury continues to service.

The latter proposal has striking resemblance with the shelved National Aviation Management Bill, 2020 that had proposed a merger of KQ with the Kenya Airports Authority (KAA) and have them managed by a holding company.

The government hopes to wean KQ off its budgetary support, having spent billions of shillings in bailouts for the airline every year. In November 2022, the Ministry of Roads and Transport and the Treasury were directed to review restructuring strategies for KQ and recommend the optimal strategy with the least fiscal impact on the government. A draft memorandum with strategic options and recommendations was submitted to the Cabinet in May last year.

“It is expected that a decision will be ready by end-April 2024. Once the government gives direction on the way forward, a new plan will be implemented, and financial resources committed to the same if needed with an understanding that it will have to be accommodated within the fiscal consolidation path consistent with reducing Kenya’s PV (present value) of overall debt to GDP to 55 percent by 2029,” the Treasury told the IMF.

The government’s financial support to KQ in 2023 was limited to the payments under the guaranteed senior external debt, said the IMF report.

KQ’s poor financial health has been characterised by huge costs that water down the billions of shillings the airline makes in revenues, mainly fuel costs, costs to repay loans and fleet maintenance costs.

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During the release of the half-year results for 2023, the airline’s management remained optimistic, noting that at the operational level, KQ had become profitable.

“Operational results show that the company is viable. For the first time in six years we have made an operating profit, which is clearly a testament of the hard work we put in, to turn around this business,” KQ managing director Allan Kilavuka said in August.

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