Intangible assets: A glimmer of hope in KQ’s mayday

The Covid-19 pandemic has dealt a major blow on all businesses across the globe, the airline industry being no exception.

With what appears to be a containment of the spread of the virus, coupled with the desire to revive their economies, most governments have over time eased the lockdown measures and allowed limited movement of people both locally and internationally.

This has also seen the resumption of international travel across countries.

The resumption notwithstanding, all airlines made untold losses due to the lockdown measures. National carrier, Kenya Airways (KQ), is no exception. However, KQ’s woes did not start with the Covid-19 pandemic.

The Covid-19 pandemic was just one of the last straws on the back of the already hemorrhaging industry where KQ operates. In mid-2019, the Treasury took a Sh 20 billion loan in a bid to bail out KQ from a loan it owed African Export-Import Bank (Afrexim). Other measures have been proposed to succor the airline, but their efficacy remains uncertain.

One is left to wonder whether KQ has some underutilized assets which could be used to raise some funds to offset the debts.

Can KQ learn from sister airlines for instance, United Airlines, which is planning to raise $5 billion by borrowing against its frequent flier programme?

The Frequent flier programme is one of the intangible, yet valuable assets owned by United Airlines. Can't KQ exploit similar avenues? Its membership to the Sky Team alongside KLM and Delta Air gives it a competitive edge coupled with the fact that it is the only African airline belonging to the prestigious group of sky giants.

Additionally, it also runs the ‘Flying Blue Loyalty Program’ together with KLM, Air France, Transavia and others. These are valuable intangible assets that can boost KQ’s net worth if applied appropriately.

The major challenge, however, is that banks and financial institutions are not open to the idea of intangible assets yet. They do not see the value in intangible assets and are reluctant to advance loans on their strength.

As Elon Musk puts it, “All bankers did was copy what everyone else did. If everyone else ran off a bloody cliff, they’d run off a cliff with them. If there was giant pile of gold sitting in the middle of a room and nobody was picking it up, they wouldn’t pick it up, either.” For banks, if an item is not captured in the financial statements as an asset, it is not worth thinking about.

Think about the following scenario. When Company A invests Sh. 10 million in research and development (R&D) to manufacture cutting edge technology say for tractors it will have in its financial statements a deficit of Sh 10 million captured either as expenses or costs.

On the other hand, Company B investing Sh 10 million in buying new tractors that use the technology developed by Company A will have the tractors reflected in its financial statements as assets valued at Sh 10 million.

This accounting system is skewed as it does not reflect the exact position of company A which could be owning copyrights, patents, technical know-how, trademarks, design rights, or even trade secrets (all of which are valuable intangible assets) in the technology it has developed. Such accounting systems do not consider the unique nature of intangible assets.

It is therefore high time accounting systems were revised to capture all assets. Banks and other financial institutions also ought to start recognizing that intangible assets are also assets which can be used as collateral.

After all, the Kenyan Moveable Property Security Rights Act No. 13 of 2017 recognizes intangible assets including Intellectual Property Rights (IPRs) as assets against which loans can be advanced.