This is not to say that the government is not incurring liability. Indeed, the transaction has introduced a huge contingent liability in the government’s books.
The guarantees route was clearly the more expedient route to take for the Jubilee administration.
Our ambition to become the pre-eminent aviation hub of the region will also depend on the success of the national carrier.
This is how I read the Kenya Airways bailout plan. Strictly speaking, it is designed in a way that will not involve any injection of cash from the Exchequer at this stage.
Instead of pouring in taxpayers cash into the deal, the government is just giving a $750 million (Sh77 billion) guarantee to international lenders and lessors so as to commit them into agreeing to giving Kenya Airways #ticker:KQ softer and longer repayment terms - and most significantly, to commit KLM to agree to pump in new equity into the company. Apparently, KLM is putting $100 million (Sh10 billion) on the table.
This is not to say that the government is not incurring liability. Indeed, the transaction has introduced a huge contingent liability in the government’s books.
The saving grace is that since the facilities are either secured or asset-backed by aircraft, the guarantees the government has given are not likely to be recalled.
In the context of dwindling revenue collections by the Kenya Revenue Authority and huge spending priorities, I can’t see how the government was going to manage to bail out KQ.
The guarantees route was clearly the more expedient route to take for the Jubilee administration. Does the bailout plan make economic sense? The wholly state-owned South African Airways has had to go to their national treasury for financing.
Subsequently, the South African government gave the airline a permanent guarantee, basically a carte blanche allowing it to source credit any time it was under pressure.
In Malaysia, the government injected $1.5 billion to save the national airline. while in Portugal, the national carrier’s $1.2 billion was restructured. $400 million was raised in capital and another $4.5 million raised in liquidity through aircraft sales and leasebacks.
Restructuring KQ’s debts will not be enough. The government needs to take a long-term view on supporting the national carrier. In many countries, parts of airports have been designated as tax-free zones so that taxes are not charged on supplies and materials used by their national airlines.
This is what you will see at the Dubai Airport Free Zone, the Aqaba Special Economic Zone in Jordan, the Mattala Rajapaka International in Sri Lanka and areas around US airports.
We adopted the policy of open skies as if it was dogma while other countries were busy negotiating favourable bilateral agreements on behalf of their national carriers.
Where possible, we should be thinking about how to limit rights granted to other national carriers to protect our routes for KQ.
Just the other day, the government rescinded a decision granting Emirates an additional frequency on the Dubai-Nairobi route, pending a review of the bilateral air services agreement between the UAE and Kenya.
When negotiating such deals, we must first think about national strategic interests.
In the US, India, Kuwait and Abu Dhabi, all government employees must by law fly their national carriers when they travel abroad.
A review of passenger charges should also be considered. Currently, Hong Kong International Airport waives airport taxes for stop-over passengers arriving and stopping on the same day. KQ’s return to good financial health and profitability will be critical to the success of the tourism and horticultural sectors.
Our ambition to become the pre-eminent aviation hub of the region will also depend on the success of the national carrier.
Yet trends show that heavily state-supported Ethiopian Airlines is overtaking us.
Compare the following statistics. While both airlines had similar fleets in 2004, Ethiopian Airlines current fleet is more than twice KQ’s fleet, They have 40 wide body aircraft compared to seven in KQ’s fleet.
While KQ’s revenue growth has stagnated, Ethiopian Airlines revenues have doubled since 2011. While KQ’s performance has deteriorated, Ethiopia Airlines profitability has steadily improved from two per cent operating profits in 2011 to 10 per cent margin in 2015.
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Note: The results are not exact but very close to the actual.
