Companies

Kenya Airways picks British firm for turnaround plans

KQ

A Kenya Airways plane at the JKIA in Nairobi. FILE PHOTO | NMG

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Summary

  • Steer Group is expected to review and propose options with the least cost and which are most effective in steering Kenya Airways back to sound financial footing.
  • Crafting a viable turnaround strategy for KQ was one of the conditions for the Sh255 billion IMF loan to Kenya.
  • Kenya Airways was privatised 24 years ago but sank into debt and losses in 2014 after a failed expansion drive, costly purchase of aircraft, and a slump in travellers after a major terror attack.

National carrier Kenya Airways has picked a UK consultancy firm, Steer Group, to guide it on the most viable turnaround strategy options in the face of deepening financial losses and depressed passenger numbers.

KQ chief executive officer Allan Kilavuka said the London-based firm took up the assignment in May and will be retained for three months.

“Kenya Airways has come up with short, medium, and long-term strategies to help in realising two main objectives.

The first is to survive the current depressed market, and the second is to implement strategies that will make the business more sustainable in the long term. Steer Group is to validate these strategies and recommend any additional supportive, or different strategies to help achieve the goals,” he told Business Daily.

Crafting a viable turnaround strategy for KQ was one of the conditions for the Sh255 billion loan to the Kenya government from the International Monetary Fund(IMF) in March.

In the loan deal, Kenya committed to audit and reform the operations of nine key State-Owned Enterprises (SOEs) to ensure their viability.

These include Kenya Airways, Kenya Airports Authority, Kenya Railways Corporation, Kenya Power and Lighting Company #ticker:KPLC, Kenya Electricity Generating Company #ticker:KEGN, Kenya Ports Authority, and three of the largest universities. For Kenya Airways, the government committed to hiring an independent consultant to audit the airline and find the cheapest way of restructuring it.

“We can confirm that the government is progressing well with the implementation of their staged approach to assess, monitor, and address vulnerabilities in the State-Owned Enterprises. Given the special circumstances and uncertainty facing the global airline industry, Kenya Airways has retained an international aviation expert to assist in defining a set of strategies for its future”, an IMF spokesperson told the Business Daily.

KQ’s net loss nearly tripled to Sh36.2 billion in the year ended December 2020, the worst ever in the history of the airline in the wake of the economic fallout of the Covid-19 pandemic—extending a chain of losses for close to a decade.

Steer Group is expected to review and propose options with the least cost and which are most effective in steering Kenya Airways back to sound financial footing.

The group’s mandate also includes advising on a supportive framework, structure, and operational setup which will support the airline’s recovery.

Steer Group beat eight other firms in the race for the job. “The final evaluation stage had four bidders, which included Knighthood, Sabre, Seabury, and Steer Group. Steer Group scored highest during the evaluation because of exhibiting best understanding of the task and the group’s previous experience in the regional and also the financial proposal”, Mr Kilavuka said.

He declined to reveal the cost of the consultancy, citing confidentiality. In the IMF loan deal, the Treasury disclosed that Kenya will spend Sh36 billion to bail out key parastatals that have sunk into losses as a result of Covid-19 economic fallout -- including KQ, Kenya Power, and several universities after their revenues dropped sharply.

KQ already took an Sh11 billion loan from the government in the year ended December to fund its operations at a time the Covid-19 pandemic had hurt its cash flows. The airline took the debt in two tranches of Sh5 billion followed by Sh6 billion.

“The first loan of Sh5 billion was to facilitate E-190 aircraft fleet engine overhauls that were due in 2020,” the carrier says in its latest annual report.

Apart from KQ, another key State enterprise Kenya Power remains in distress after its half-year net profit declined 80 percent to Sh138 million in December 2020 from Sh692 million in 2019 on higher financing costs as a result of unrealised foreign exchange losses occasioned by the depreciation of the shilling against major foreign currencies.

It, however, posted a net loss of Sh939 million for the year ending June 2020 after getting a Sh6.1 billion tax credit, lifting the company from a pre-tax loss of Sh7 billion.

Chinese-built standard gauge railway also posted a combined operating loss of Sh21.68 billion in the three years to May last year, straddling Kenya Railways with huge losses.

In another attempt to save KQ from collapse, the government targets to take over the airline, hoping to emulate the success of State-owned Ethiopian Airlines, sub-Saharan Africa’s biggest airline.

Kenya Airways was privatised 24 years ago but sank into debt and losses in 2014 after a failed expansion drive, costly purchase of aircraft, and a slump in travellers after a major terror attack.

The Kenya Aviation Management, Bill 2020, seeks to nationalise KQ and make it one of the subsidiaries of a holding company to be known as the Kenya Aviation Investment Corporation.

The others will be Kenya Airports Authority, which will operate all the country’s airports, including Jomo Kenyatta International Airport (JKIA) in Nairobi, under an investment arm dubbed Aviation Investment Corporation.

The Bill underwent the First Reading in Parliament on June 30, 2020, but has since run into headwinds over claims of inadequate public participation.