KQ withholds deductions from salaries to aid cashflow

The depth of Kenya Airways’ financial challenges continued to emerge with Monday’s revelation that the airline has not remitted to banks money it deducted from employees’ monthly salaries to service loans.

The delay in loan payments has left hundreds of the carrier’s employees in a difficult position after the banks wrote warning letters to the debtors.

The pilots have since written to the Kenya Airways management warning that failure to remit the deducted funds was damaging their credit-worthiness.

“It has come to our attention that our members are beginning to receive communication from banks indicating that their loans are falling into arrears for up to two months,” Ronald Karauri, the chief executive of the Kenya Airline Pilots Association (Kalpa), said in a letter to Kenya Airways CEO Mbuvi Ngunze.

“Meanwhile their pay slips continue to indicate that the money is being deducted by the employer. Kindly have this rectified as soon as possible.”

Kenya Airways said it had alerted its staff of the delay in making the March payments to banks because of the ‘serious cash flow constraints’ that have forced it to prioritise payables.

“It is true that this month, March, the remittances based on deductions from staff were delayed. This one-off occurrence was notified to the staff and banks,” Mr Ngunze told the Business Daily.

“In November last year the airline announced a plan to initiate the process of refinancing the company’s balance sheet. This means that in the current context of a weak operating environment, the airline has had to prioritise its payables, including payments for staff-related deductions.”

The revelation comes just days after Mr Ngunze said the airline, which posted a Sh10.45 billion loss for the six months to September, is now paying its workforce of approximately 4,000 employees through debt.

KQ’s total current liabilities stood at Sh70 billion by end of September last year, a situation that forced the airline to hire a financial adviser to help restructure its debt.

READ: KQ reports record Sh10.5bn half-year loss after tax

The airline’s unprecedented action of deliberately delaying its workers loan repayments as part of the effort to re-calibrate its finances is a rare pointer to a company navigating a highly turbulent period.

While KQ insists the failure to remit the monies happened this month alone, Kalpa insists that the loan funds for some employees had not been sent since February, terming it “a serious breach of trust.”

Mr Karauri further states that one pilot had had his credit card suspended since his bank now considers him a risk.

Mr Karuri wrote the letter to Mr Ngunze on March 20 stating that a number of the association’s members had received communication from banks notifying them of the defaults.

The association states in the letter that the airline, despite not remitting the money to the banks, had proceeded to deduct the same from the workers’ salaries.

The 450 members of the association, a majority of them Kenya Airways employees, now say that the airline’s action has damaged the credit-worthiness of the borrowers and exposed them to hefty penalties.

Kalpa’s letter was also copied to two Cabinet secretaries, Kazungu Kambi and Michael Kamau, who were in charge of Labour and Transport respectively before they were suspended last week, and Alban Mwendar, KQ’s human resources director.

Senior pilots at the airline are said to earn at least Sh1.5 million per month, meaning that it is well within their financial ability to take out huge loans and service them from their monthly pay.

When replicated across the entire workforce of 4,000, the company could be holding onto hundreds of millions of shillings in unremitted loan repayments it may be using to finance other urgent obligations.

Poor earnings

The Nairobi Securities Exchange (NSE)-listed carrier in November announced a profit warning for the year ending March 2015, meaning it expects to close the period with a loss of more than Sh4.3 billion.

KQ’s management explained that the poor earnings were as a result of dampened growth in passenger numbers following the suspension of flights to Ebola-hit Sierra Leone and Liberia and insecurity at the Kenyan Coast.

READ: Broke Kenya Airways sinks deeper into debt to pay staff

The drop in earnings came despite the huge investments the airline has made in new aircraft and which has helped grow the passenger numbers to 2.1 million, an 8.2 per cent increase from 1.94 million the previous year.

KQ’s total current liabilities of Sh70 billion is made up of Sh40.7 billion in short-term loans, Sh16 billion owed to suppliers and Sh11.4 billion in cash due in advance of carriage (pre-payments).

The airline has long-term loans worth Sh95 billion or 94 per cent of the total non-current liabilities.

The need to improve this financial position saw KQ hire a financial adviser to evaluate its balance sheet with emphasis on renegotiating the maturity of loans to reduce the strain that repayment of short-term obligations is causing on cash-flows.

KQ’s need for cash has even seen it put up a 30-acre prime piece of land in Embakasi, Nairobi, for sale in a real estate transaction that could see it book a gain of as much as Sh3 billion.

“The airline continues to endeavour to meet its liabilities as they fall due, and to reduce them according to the business needs,” Mr Ngunze said yesterday.

“The current operating environment is challenging and as an airline measures have been put in place to rationalise costs, including the option to hire some of the support services through third parties and retire staff.”

KQ’s revenue for the six months to September increased 4.5 per cent to Sh56.8 billion from Sh54.3 billion during a similar period in 2013, while direct operating costs increased 13 per cent to Sh42.1 billion.

Total seat capacity went up 17.3 per cent to 6,967 but despite this, the cabin factor — a measure of capacity utilisation — decreased from 70.1 per cent to 64 per cent this year.

The airline last year retired seven planes as part of its fleet modernisation plan, a move that subsequently saw them send home 10 pilots who are over 62 years old.

The move saw the carrier get into trouble with Kalpa as KQ maintained it was retiring the pilots according to provisions of the collective bargaining agreement (CBA) it signed with the union.

KQ has moved to cut its wage bill in recent years to improve its financial health that has suffered from a faster acceleration of costs relative to revenue.

The firm spent Sh15.3 billion on its staff in the year ended March 2014, a record high, and an 18.3 per cent jump from Sh12.9 billion the year before.