Will Kenya Airways go for a strategic partner?

With Kenya’s national flag carrier Kenya Airways (KQ) having plunged deeply into debt, authorities in Nairobi may have no option but to bring in a strategic partner with the financial muscle and capacity to finance both the company’s long-term obligations and its 10-year strategic plan.
The airline on Thursday a xlink:type=”simple” xlink:href=”http:www.theeastafrican.co.kebusinessKenya-Airways-reports-record-net-loss-25602813840-n073gz-index.html”announced it had made a loss of $251.1 million, which it attributed to competition from Middle East carriers, hedging losses and high operating costs. Last year, KQ posted $28.9 million in losses.
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Airline industry experts now suggest that, considering the financial health of the global airline industry, the best prospect for Kenya is likely to be a partnership with the rich Gulf airlines — Emirates, Qatar Airlines or Etihad — keen to establish a foothold in East Africa’s most profitable transport hub and the lucrative connections and links it has with other transport hubs in Asia.
Last week’s announcement by the airline of the largest corporate loss in the country’s history, and the reality that the company is plummeting towards insolvency, has undoubtedly put the Kenyan government in crisis mode.
The snag, however, is that the preferred model for Gulf airlines is a completely integrated outfit where an airline not only owns hotels, car hire companies, catering services and pilot training simulators, but also controls the airport.
The big question, therefore, is whether the Kenyan government will agree to cede some of the functions of the state-owned Kenya Airports Authority to permit a partnership as broad as allowing the proposed Gulf partner to put in new investment in runways, airport bridges and new cargo facilities, thus bringing Jomo Kenyatta International Airport to world class standards.
During a meeting in Nairobi to release the results, a shareholder, businessman Chris Kirubi, called for an end to the partnership between KQ and Dutch airline KLM, which has been blamed for some of the national carrier’s woes. The KLM owns a 29.7 per cent stake in Kenya Airways in a deal struck in 1995.
However, Kenya’s Transport Cabinet Secretary James Macharia said the partnership with KLM is necessary but the government will review it to ensure it is mutually beneficial for both parties.
“It’s necessary to continue with KLM because it’s very difficult for Kenya Airways to survive on its own. In the airlines industry, mergers and partnerships is the way to go, but we have to protect our interests,” Mr Macharia said.
Technically insolvent
KLM spokeswoman Lisette Ebeling Koning declined to comment on the review but said that Kenya Airways had a solid turnaround strategy.
“KLM fully supports this turnaround plan as laid out by the management team of Kenya Airways. We believe that we will extend further our support through our joint venture with Kenya Airways,” Ms Koning said.
Kenya Airways has also chosen Cairo-based African Export-Import Bank (Afrexim) to aise it on debt restructuring and capital raising. The airline hopes that by having Afrexim bank as its financial aisors it will get a capital injection to pay off some of its debts and also organise for a long-term capital injection.
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KQ chief executive Mbuvi Ngunze said, “We are currently engaged in a balance sheet restructuring. We are pleased to announce that we have signed an agreement with a financial aisor who will help us raise capital and also restructure our debt,” said Mr Ngunze. “We are happy that they have agreed to extend a $200 million bridging loan.”
Mr Macharia revealed that the bridge capital with Afrexim Bank was arranged through the support of the Kenyan government, showing the keen interest the latter has in the airline.
Kenya Airways also has a negative equity position, which means that without the $200 million financing deal, the airline is technically insolvent and will not be able to meet its financial obligations.
Mercyline Gatebi, an equity analyst with Genghis Capital, said that the airline needs to support its working capital and this short-term facility would help in running short term needs.
“Getting the bridge capital is positive news because it will give them support and at the same time offset some of the debts they have with local commercial banks,” Ms Gatebi said.
The airline will be receiving $100 million in the next week, with the remainder coming in six weeks.
The deal with Afrexim Bank, being a short-term facility, will force Kenya Airways into a short repayment period, a position analysts feel won’t work for the airline.
Negative cash flow
Daniel Kuyoh a financial analysts with Kingdom Securities, said that the airline’s negative cash flow position could bring in the challenge of paying back this money in less than two years, leading to higher financial costs.
“The cash flow for Kenya Airways in 2015 stood at $31.1 million, compared with $107.2 billion last year. This shows a net erosion of $76.1 million. The bank will have to extend that facility for more than two years for the airline to comfortably pay back the debt. Kenya Airways will also have to come to the market through an equity position to look for more money,” Mr Kuyoh said.
Mr Ngunze declined to reveal the terms of the financing including the interest rates and the repayment period, citing a confidentiality clause.
“We will use the bridge facility to finance our business and Afrexim will help us organise long term capital,” Mr Gunze said.
Last year, the airline received $41 million from the Kenyan government and an undisclosed amount from KLM. The airline has also disclosed that it is expecting $100 million from the sale of its aircraft and its land in Embakasi, money that will be used in reducing its debt obligations.
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Alex Mbugua, the airline’s finance director said that a huge portion of the loss was due to one-off slips that will not recur.
“If you look at this figure, there is quite a huge amount for one-offs, including $54.6 million for impairment, $19.5 million accelerated depreciation related to assets we will have to sell and the hedging adjustments, which is unrealised at $56.6 million, bringing the total to $131.7 million,” Mr Mbugua said.
Mr Kuyoh said that moving impairment losses of planes sold into the reserves is the reason for the drop in shareholder equity from $275.3 million in 2014 to $57.8 million in 2015.
The financial result also shows that Kenya Airways didn’t retain any capital, thereby putting the reserves in a negative position.
Ms Gatebi said that the shrinking in shareholder equity is as a result of the company depleting its retained earnings.
“The retained earnings have been cut off because of the consistency in loss reporting in the past three years. The airline has spent all its retained earnings and chalked up debt. That has pulled the equity line further down,” said Ms Gatebi.
The airline said that it was renegotiating its hedging, ground handling and hotel contracts in a bid to reduce its operating costs which stood at $732.5 million.