3 August 2015

Kenya Airways Needs Urgent Government Bailout

Photo: Capital FM
Kenya Airways
analysis

Kenya Airways (KQ) is in dire financial straits having posted a record Sh25.7 billion ($251 million) loss after tax for the year ending March 2015.

One can almost feel the pain of the chief executive Mbuvi Ngunze as he tries to figure out how to bring the airline back to profitability.

The financial woes at KQ became evident in 2013 when the national carrier posted a loss of Sh7.86 billion ($76.76 million) - which was reduced to Sh4.8 billion ($46.88 million) in 2014.

With a negative equity of Sh6 billion ($56.60 million), the question on everyone's mind is whether the airline is totally insolvent and beyond any redemption or a quick rescue package can be put on the table to resuscitate it in the short run.

Although there is good reason to believe Mr Ngunze's remark that with patience all will be well, it is apparent that a massive capital injection is required.

KQ has brought on board the Afrexim Bank to assist in raising a capital injection of Sh20 billion ($195 million).

The airline expects to realise an additional Sh10.2 billion ($99.62 million) from the sale of land and some aircraft.

The Kenyan government has already pumped in Sh4.2 billion ($41 million) to help the airline meet its running costs.

The airline's current proposals appear long term because the sale of land and aircraft may not be completed promptly and it may take a while before Afrexim Bank brings in the much-needed capital.

In the short term the survival of KQ appears to rest with its principal shareholder - the government - which must of necessity pump in additional capital to keep the airline afloat.

In addition, public servants in both the national and county governments must be compelled to fly with the national carrier.

The recently introduced promotion by the airline of giving hefty discounts on forward buying of tickets is primarily intended to rake in revenue in the short run to keep the airline afloat.

Once a stop gap rescue package is worked out, a two-pronged long term strategy should be instituted to restructure the company and bring in more shareholders or to dispose of the airline as a going concern.

After all, the reasons for countries to retain national airline for prestige or security reasons have long been overtaken by events. In fact, quite a number of countries no longer have national carriers.

Besides, it must be appreciated that it is normal for airlines to be sold or even be put under receivership should the future be assessed to be bleak or the financial woes are beyond redemption.

The proposal by businessman Chris Kirubi that we probably should be thinking of an East Africa Community airline is another option in the long run, because it is only a matter of time before a few other national airlines in the region suffer a similar predicament.

Notwithstanding the shocking underperformance, a proper strategy can keep the airline afloat.

One is reminded of Uchumi Supermarket which was technically insolvent and placed under receivership by its financiers.A rescue package and patience did the magic.

There are reasons to believe that all is not lost at KQ in the medium term so long as a quick financier comes forth.

Beyond KQ, it is perhaps time Kenyans went back to the drawing board on issues related to the performance of corporate entities where the government is a principal shareholder.

Mumias Sugar Company, a principal sugar miller in the country, is not yet out of the woods and will most likely be pleading with the government for additional funding even as it undergoes a painful restructuring.

Uchumi is going down the same path that saw it resolutely pulled out of a painful receivership nearly a decade ago.

While it is normal for corporates to face rough financial patches, the consistency with which companies with a government principal shareholding are going under duress is a real cause for worry.

The suspicion is that the top management teams in these entities engage in not-well-thought-out expansion with the full comfort that the National Treasury will come to their rescue.

It is also a little worrying that exits of long term serving executives, often touted as turn-around strategists, precedes imminent decline in the fortunes of these companies.

Perhaps the government needs to hasten divestiture from commercial enterprises. The longer it stays in them, the higher the levels of financial injections that the National Treasury must be prepared to dish out, much to the chagrin of the investing public and tax-payers.

With the troubled enterprises being listed companies, the first proposal for cash injections has always been a rights issue.

Mr. Maina is an Economist and a Development Consultant with Sembast Development and Policy Institute.

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