10 February 2019

Kenya: How Moi Commandeered KQ and Flew It Into Financial Turbulence

opinion

Somebody has decided to bequeath Kenya Airways with the multibillion assets of Kenya Airports Authority at Jomo Kenyatta International Airport (JKIA) in the hope that it would turn the airline's losses into profits. How? We don't know.

But if it does, Kenya Airways will be in the business of chasing land grabbers and securing assets that have been stolen over the years from KAA -- besides tackling its own historical mistakes.

Once upon a time, Kenya Airways was the most abused parastatal. Its aircraft could be commandeered by State House -- at times for a week -- and flown to any destination the president wanted until he returned it.

For those days, and President Daniel Moi loved to fly, the plane would be parked on the tarmac.

Flights would be cancelled and passengers, who had booked in advance, would be inconvenienced. As long as President Moi was happy, nobody cared about profits.

PROTOCOL

Once, Parliament was told that some of those ferried, ostensibly as part of presidential retinue, were a bunch of joyriders, court jesters and jokers.

"People who have never seen a classroom (and) who cannot even ask for a cup of tea in the morning in hotels because they have to have interpreters," according to then Ndia MP Kinyua Mbui.

Whether State House paid for these tickets is another story but Moi's presidential delegation would be the entire capacity of an Airbus -- or whichever aircraft was at his disposal.

If you have read Joe Khamisi's book Dash before Dusk, he tells of the challenges that the protocol officers faced when it became apparent that President Moi was flying.

"Our biggest challenge in protocol was in the crafting of delegates' list. Every Tom, Dick and Harry among politicians and government officials scrambled to be on that list.

"Ministers and MPs believed travelling with the President would give them political mileage and afford them private moments with the Head of State."

HUMILIATION

As a result, Khamisi says, "There was a lot of jostling ahead of presidential visits. Names would be included then cancelled, then included, people would call in and claim presidential clearance only for us to find out the claim was false."

Once, Khamisi forced himself between the semi-illiterate Mulu Mutisya and a British MP just in case.

"The idea was for me to intercept any question directed at Mutisya without exposing him to humiliation." And the question indeed came, according to Mr Khamisi.

"Have you been to Britain?" the British MP asked Mutisya who was busy taking soup.

And before Khamisi could intervene, Mutisya had blurted some English words ... "Tomato sup (sic) ... sweet!"

That was the usual entourage aboard Kenya Airways and they all had to be accommodated in five-star hotels for the entire length of the presidential visit.

LOAN

That is how KQ was operating during the Kanu regime and for many years since its birth on January 31, 1977 with two leased planes to replace the East African Airways.

Occasionally, the government would look for loans from a consortium of banks -- and ask Parliament to approve the government guarantee.

That is what it did in 1985 when it took $100 million to purchase two Airbus aircraft from France -- payable over 10 years.

The scandal in that deal was that 0.4 percent of the money was "commitment fee" while another 0.4 percent was listed as "management fee".

It also became the dumping ground of workers. At one point in 1988, the airline had only 11 aircraft and a workforce of 4,000.

It was also making huge losses, was badly run and was not filing any returns. Every year, Parliament would be asked to write-off KQ debts and Treasury would pump more cash into the bottomless hole.

KLM

In 1996, the government stopped pumping money into KQ and decided to sell part of its shareholding to a strategic partner, assumed the debt and converted it to equity.

This was at the time the biggest issue at the Nairobi Stock Exchange (NSE) and comprised of 235.4 million ordinary shares priced at Sh11.25 per share.

It was a surprise that KQ, despite the losses, would attract many buyers meaning that it had a lot of potential.

For instance, the domestic tranche was oversubscribed by 82 per cent while the foreign tranche was oversubscribed by 128 per cent.

But the subsequent deal with KLM, a marriage of convenience, was to turn abusive and has been blamed as part of the woes facing KQ.

In 2016, I had a chat with former KQ chief executive Mbuvi Ngunze who told me that the KLM marriage "like any other marriage has its share of troubles".

Just before the KLM deal was signed, the then minister for Transport and Communication, Wilson Ndolo Ayah had written to Attorney-General Amos Wako wondering why Kenya was entering into such an arrangement.

PARTNER

In his letter dated March 15, 1996, the minister wondered why KLM directors in the Kenya Airways board were given veto powers over certain key resolutions of the board.

This, he lamented, was against a Cabinet decision that had ruled out the granting of such powers and the minister was wondering why the draft Memorandum of Understanding and Articles of Association and the Shareholders Agreement had failed to reflect the Cabinet decision.

Had somebody listened, according to KQ insiders, Kenya Airways would not have flown into today's turbulence.

When the government sought for a strategic partner, it dropped South African Airways because it demanded veto powers on some of the board decisions.

The Cabinet had approved the KLM partnership because it did not ask for veto powers.

VETO POWERS

This was sneaked later on and when Mr Ayah saw the draft, he wrote to then Finance Minister Musalia Mudavadi and to Fares Kuindwa, then Permanent Secretary, Office of the President and Secretary to the Cabinet, asking them to resolve the matter before the final public floatation of the government's 51 percent shareholding at Kenya Airways.

He said: "I propose as a matter of urgency that legal officers from your office, and possibly together with KLM lawyers, meet and amend both the shareholders agreement and the Draft Memorandum and Articles of Association of Kenya Airways so that the Kenya government position as approved by the Cabinet is accurately reflected in these two very important documents."

What Mr Ayah did not know was that by that time an agreement had already been signed between Treasury Permanent Secretary Benjamin Kipkulei and KLM giving them the veto powers.

This still exists in Article 115 of Articles of Association of Kenya Airways Limited and it says in part: "If and for so long as the cooperation agreement shall remain in force, any resolutions relating to any of the following matters shall be deemed not to have been passed if any KLM director (or his alternate) is against the proposed resolution."

APPROVAL

And with that, the government could not sell its shares to any airline entity without authority of KLM and it had no right to hire a managing director and finance director, again, without the approval of KLM.

At best, most of the major decisions were left to KLM directors who could veto the disposal of any aircraft or the size and composition of the company's fleet.

Also, Kenya Airways management was not authorised to make any major strategic decisions without the prior approval of KLM appointed officials.

Kenya Airways -- although it should commercially compete with other airlines -- could only watch as KLM entered its traditional African routes.

It was not also allowed to enter into routes that KLM served. That way, Kenya lost control of its flag carrier to KLM -- and you can take that to the bank.

Initially, the government sold 26 percent of its stake to the Dutch national carrier and although other shareholders were unhappy with the performance of the stock, they openly argued that some of the clauses that the government had signed were akin to giving away KQ to KLM for a song.

REVENUE

From the start, the government also failed to reserve cargo rights to KQ leaving it to compete with other airlines for the lucrative cargo business.

This was a mistake because countries that reserve rights of cargo for their national airlines make superb profits. Ask Ethiopian Airlines.

At the moment, cargo accounts for just about 10 percent of KQ's revenue.

But our Ethiopian neighbour's cargo portfolio allows it to reach more than 30 destinations in Africa, the Middle East, Asia and Europe using six B777 and two B757 freighters thanks to a government policy that shields the airline from incessant competition.

More so, there has been frosty relationship between KQ staff and KLM and this usually leads to exodus of engineers and pilots.

At one point, KLM closed down KQ booking offices abroad and recalled the Kenyan managers who were manning profitable offices such as Zurich, Frankfurt, Tokyo, Hong Kong, Los Angeles and New York City.

TICKETS

Insiders say there is a huge unexplained imbalance on ticket sales. This is because Kenya Airways relies on KLM as its general sales agent (GSA) in Europe while KLM has not reciprocated by appointing KQ as its GSA in Africa.

Because of this imbalance, which is the result of the joint venture, it means that KLM gets more customers booked to its airline than it books on KQ. And that is why KQ, at times, flies with half-full planes.

It also means that KQ tickets cost more because it does not sell directly to customers but relies on third party distributors and also on the much-more expensive Global Distribution System (GDS) which charges hefty fee for each ticket sold.

Ask any frequent flyer and they will tell you that it is expensive to travel KQ and nobody explains why.

But having said that, KQ has come a long way from the days Moi used to commandeer its planes.

However, it has to deal with internal problems before it could get the assets of Kenya Airports Authority and make business that brings in cash.

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