Why government took over KQs’ restructuring process

Kenya Airways could not come up with a concrete restructuring plan that would fly it back to profitability despite hiring a US-based consultant Seabury Group to help drive the process, it has emerged.

This forced the National Treasury to fully take over the restructuring plan late last year even as it continued giving billions to the financially troubled national airline to meet its key operation costs like servicing debts.

Under the deal with Seabury, the advisory firm was to help the airline to restructure its debt stock, evaluate possible revival options, and cut losses while increasing revenue. The consultancy deal was inked in February 2022 and was to run for six months.

“We allowed KQ to develop a model. But we were very disappointed because we were expecting something. We helped them come up with a model. The short of it is that we need to come up with a Pan-African airline which can also get other airlines when we can form a mega airline,” Treasury Cabinet Secretary Njuguna Ndung’u told the National Assembly’s Public Debt and Privatisation committee.

Strategic investors

After consolidating a Pan-African airline, the government is then expected to court potential strategic investors, possibly from Europe, the US, and China, according to Ndung’u. He further revealed that when the pilots learned about the planned formation of a Pan-African airline, they staged an industrial action, which partly demanded an overhaul of KQ’s top leadership among other issues touching on their welfare.

“We are not limited where we look for one (potential investor) … We presented that model to KQ management and they were very happy. When the pilots saw that model they went on strike,” he said explained. Seabury Consulting took over from McKinsey, another firm that was to oversee Kenya Airway’s cost-cutting measures but after 10 months of advisory, the airline was left at its factory setting of a financial mess.

Kenya Airways, commonly known as KQ, has alternated several turnaround measures in recent years while hiring different advisory firms but these have always ended without showing any sign of serious recovery. After the government’s move to increase its stake in KQ to 48.9 per cent back in 2017 through conversion of debts to shareholding, an attempt to restructure the airline through a Privately Initiated Investment Proposal (PIIP) flopped in 2019.

Then there were plans to re-nationalise the airline by October 2020 but this was also dropped in 2021 following concerns over public participation. The PIIP plan would have allowed KQ’s subsidiary to operate the Jomo Kenyatta International Airport (JKIA) for about 30 years.

KQ has also inked new partnerships and expanding flights and routes to capitalise on revenue growth, with the planned Pan-African airline yet to take shape.

In 2021, it signed common initiatives pact with South African Airways (SAA) to establish an African airline by 2023.

Getting a strategic investor under President William Ruto’s administration will return KQ to private ownership after the initial full nationalisation plan was abandoned. Amid the turnaround plans, the government remains obligated to repay KQ’s loans amounting to $485 million (Sh59.7 billion) that it had guaranteed the carrier, exacerbating the country’s debt servicing burden.

Pending repayment

Towards late last year, US Export-Import Bank issued Kenya with a default notice over pending repayment Sh57.8 billion loan that the government guaranteed KQ. The cost of bailing out KQ while also servicing its debt is a burden the exchequer feels it cannot shoulder anymore.

National Treasury is targeting to stop the bailouts by December 2023 while introducing new reforms.