At last, there are strong signs that the government is getting serious about sorting out the financial troubles of our national flag carrier, Kenya Airways. The first signals were the pronouncements made by Treasury Cabinet Secretary Henry Rotich, in his recent Budget speech.
Briefly, the Cabinet secretary revealed the following: First, that the government is working with stakeholders to restructure the balance sheet of the company. Secondly, a pledge that the government will play a critical role in providing the necessary support and in bringing other stakeholders together to achieve a successful turnaround.
On the surface, these pronouncements do not amount to much. Yet what I have gathered from sources with knowledge on what is going on behind the scenes is that the government is in the advanced stages of rolling out a complex financial engineering plan to clean the balance sheet.
The details are still scanty, but from the intelligence I gather, it is a plan that is likely to entail complex arrangements, including debt-to-equity conversions, sovereign guarantees, capital calls, even a deal with local banks that could see local creditors getting representation on the board of the airline through a special vehicle.
Clearly, it is going to require massive political will on the part of the government, especially because some parts of the deal may need parliamentary approval.
The arrangement being contemplated with local banks and creditors will also need the support and approval of the Central Bank of Kenya.
What explains the new mood of optimism? I think a major factor is the apparent success in negotiations with major international creditors, including the lessors, who have shown readiness to accommodate KQ.
I think improved relations with its partner, KLM, have also helped. In retrospect, that antagonistic and undiplomatic line taken by top government officials against KLM last year was completely unhelpful. Granted, the criticism that aspects of the agreement between KQ and KLM were lop-sided was not altogether without merit.
However, seeing the trends in the global competitive environment and the nature of new partnerships being struck by airlines, achieving a workable turnaround for KQ was going to be difficult without the support of this important stakeholder.
And, from what I gather, KLM may play a key role in the planned balance sheet restructuring plan for the company. I also think that the decision by the newly appointed chairman, Mr Michael Joseph, to extend the stay of the CEO, Mr Mbuvi Ngunze, was a good one.
Having led the first phase of the recovery plan, which was conceived with the support of consultant firm Mckinsey —which was retained to advise on corporate restructuring — and PJT of London — on debt restructuring — it was going to be foolhardy to part company with Mr Ngunze just because a politically influential section of the board did not like his guts.
Indeed, the first phase of the turnaround plan that entailed sale of aircraft, sale of land, sale of the London slots and staff-downsizing had to be painstakingly crafted to render the plans bankable and acceptable to the institutional lenders.
His experience, knowledge and past engagements with lenders and creditors was going to be critical in the negotiations with the stakeholders. We must all pray that the much-vaunted balance sheet restructuring plan will put the airline on a recovery path.
I don’t buy the argument that KQ should be allowed to go bankrupt because the government has no business being in business.
Only recently, South Africa supported its national airline’s long-term turnaround strategy by giving permanent financial guarantees amounting to an equivalent of Sh99 billion. When Malaysia Air fell into trouble, the government eliminated private interests in the firm by injecting massive fresh capital into its balance sheet.
Ethiopian Airlines receives massive subsidies, including tight controls on access rights in its skies. And, we all know that most successful airlines in the world, namely Emirates, Etihad, and Qatar, benefit directly and indirectly from massive State support, principally through aircraft orders and investments in home airport hubs.
We cannot allow the Ethiopians to surpass us because our airline is still the de facto national airline for more than 15 African countries.
With 58 point-to-point connections in Africa, Kenya Airways can claim to be the airline with the most such connections in Africa, surpassing Ethiopia, which has 40, and South African Airlines, with 26.
When I look at Kenya Airways, I do not just see its balance sheet, but it’s potential of the company to the national economy. It needs state support.