National carrier Kenya Airways is set to borrow Sh4.2 billion from the government as it continues to battle financial troubles arising from the heavy load of debt it has been carrying in a tough operating environment.
The bailout plan, which is contained in the supplementary budget that was tabled in Parliament on Wednesday, comes as the airline navigates strong operational headwinds that have left it with record losses in the past couple of years.
“Kenya Airways is facing challenges because their revenues have gone down due to the Ebola epidemic and the slump in tourism, therefore the Carrier has been given a loan of Sh4.2 billion through the supplementary estimates,” says the Treasury in budget documents. The bailout is to be disbursed in the form of a loan, although the terms are yet to be made public.
The bailout should spare the airline the pain of taking in more expensive commercial loans that would put a strain on its cash flows. KQ’s liabilities already stand at Sh70 billion.
The airline recently said it was relying on debt to pay its workforce, exposing the extent of the financial difficulties it has been going through.
News of the planned government boost comes two weeks after the Health ministry lifted the ban on visitors from Ebola-struck Liberia, giving KQ a window to start recovering revenues it lost from its West African operations since last year’s outbreak.
KQ managing director Mbuvi Ngunze, in an opinion piece carried in the Business Daily last week, said that the airline had been under the weather due to a combination of factors, including fuel price volatility, intense competition and more recently the threat of terrorism and epidemics that have adversely impacted global travel.
“KQ from 2002 to 2011 grew from a turnover of Sh25 billion to over Sh100 billion, in the same period. It only made a loss in 2009. Against this backdrop, the board embarked on a second phase of growth and renewal with mixed results thus far,” Mr Ngunze said.
“Operationally, we have seen significant improvements over the last two years both on time performance and service. In the last month though, we have had significant disruptions to our schedule integrity which has regrettably impacted our loyal customers.”
Mr Ngunze said the change of schedule due to nighttime runway closure at Jomo Kenyatta International Airport in Nairobi and labour relations had affected performance.
KQ made a net loss of Sh10.5 billion in the half year ended September, reversing a net a profit of Sh384 million a year earlier.
The national carrier’s earnings were affected by slow growth in passenger numbers in the wake of heavy investment in new aircraft. It handled 2.1 million passengers over the period — an 8.2 per cent increase from 1.94 million last year.
KQ is yet to release its full year to March 2015 results, but a profit warning issued in November 2014 means it is expected to report a loss of at least Sh4.3 billion.
Last year, the airline hired a financial adviser to help restructure its debt with the specific brief to renegotiate maturity periods of loans to cut the short-term obligation strain on cash flows.
KQ has also sought to address its financial problems through other means, including cutting costs and selling off some fixed assets.
The airline in January put a 30-acre prime piece of land in Embakasi, Nairobi up for sale, hoping to rake in as much as Sh3 billion.
The airline invited bids for two parcels of land opposite its training school — a 24.71 acre piece of land that was previously a warehouse yard and another 5.56 acres of land which is undeveloped.
The two adjacent plots are situated opposite the national carrier’s training school in Embakasi in an area where the market price of an acre of land is between Sh80 million and Sh100 million.
The airline also changed the purchase plans for the remaining three Boeing 787 Dreamliners, instead opting to lease them from an Ireland firm, a move that is expected to boost cash flow.
The aircraft —the first of which has already been delivered — will be bought by AWAS Aviation Trading Limited, which will shoulder the burden of financing their purchases. The remaining two are set to be received in June and July this year.
KQ had already taken possession of six other Dreamliners out of the nine that were to be purchased under its Project Mawingu expansion plan.