Why KQ, KAA deal is not making any business sense

The proposed acquisition of Kenya Airports Authority (KAA) by Kenya Airways (KQ) #ticker:KQ is a deal that has set many minds spinning as it fails to make business or strategic sense. KAA holds in trust critical strategic national airport infrastructure. KQ is essentially an aviation carrier business. The proponents of the deal have not clearly explained to the Kenyan public what concrete benefits the deal will deliver to the country.

Kenyans have of late become suspicious of any opaque deal that is without clear value addition to the economy or their lives. They are even more suspicious when they see expatriate executives of both KAA and KQ jointly crafting a deal in the name of Kenya. The public are yet to hear a Kenyan leader explain this deal to them.

My judgment is that the KQ/KAA deal is a major experiment laden with potential risks like outright business model failure and loopholes for corruption.

The fact that other Middle East countries have used this business model is no justification for Kenya to copy it. Kenya is by no means in the league of these nations which are backed by huge sovereign funds.

They can afford all shades of economic experimentation without fear or risk of bankrupting their countries. Kenya cannot.

KAA as we have always known it is a custodian, developer and manager of national air transportation infrastructure. Like its counterpart Kenya Ports Authority(KPA), it is a key enabler of many other economic sectors.

KAA success factor is generating sufficient cash to efficiently grow capacity to service the needs of a fast growing Kenyan economy, while expanding airport capacity in all corners of Kenya. Additionally and for security reasons this infrastructure must be in direct or indirect government control.

National flag

KQ is essentially a transportation business competing in the same league as many other national and private airlines.

It is a “nice to have” national flag and brand carrier whose usefulness accrues only when it is viably managed to make an economic return to the nation.

If KQ cannot stand on its own as a business, it becomes an expensive flag carrier and a drain on the exchequer.

The proposed KQ/KAA deal looks like a veiled backdoor attempt to keep KQ financially afloat by using KAA cash flows, which are essentially taxpayer funds. Putting assets of a successful KAA under the ownership and stewardship of a financially weak KQ is not sound judgment. A successful KAA cannot be made subservient to a limping KQ business.

KQ can grow into a giant business without KAA. Kenya has a large enough base-load and nearly captive market demand (passenger and cargo) and efficient airport infrastructure to support KQ growth, but it should firstly try to walk and not be in a hurry to run. It should grow organically by re-engineering its success factors of yester-years, while learning from past business mistakes.

From the ashes of the collapsed East African Airways in 1977, KQ grew and reached the pinnacle of business success during the Kibaki era when it established itself as the key link between East/West/South Africa and Middle East and East Asia.

KQ had survived abuse by the Moi government in 1980/90s when its aircraft were frequently commandeered to ferry President Moi and his Kanu group all over the world. It has also surprisingly survived a dubious deal with KLM whose business purpose not many of us ever understood.

It is bad business and investment decisions by KQ in the past five years that saw the airline cash flows dwindle necessitating a restructure of ownership and financing.

What Kenyans appear to be saying is that KAA should be left out of KQ re-financing plans to avoid diluting and pulling down KAA.

Whereas Kenya can do without a flag carrier, it cannot afford to have non-performing airports.

International aviation business around the globe has become very competitive and tough, with airlines merging for survival and weaker ones folding up. Indeed KQ and its shareholders have difficult business and financing decisions to make. However, in making these decisions, they should leave KAA out of it