KQ future bleak as MPs reject merger with KAA

Members of Parliament have suspended a proposed merger between Kenya Airways (KQ) and the Kenya Airports Authority (KAA), leaving the cash-strapped national carrier facing a bleak future based on its weak financial standing.

The Public Investments Committee (PIC) said the proposed merger would render the profitable aviation regulator, KAA, bankrupt in a turn of events that now threatens to stall a process that was intended to hand the ailing airline a financial lifeline.

A Cabinet paper prepared in May last year had warned that Kenya Airways had less than one year to survive if the merger flopped and the carrier did not get a significant capital injection.

“This committee rules that no final transaction should proceed on this matter until this House concludes its investigations.

"We are directing the Auditor-General to move fast and undertake a forensic audit on this transaction. We will be writing to you to that effect,” Mvita MP Abdulswamad Nassir told KAA managing director Johnny Andersen. Mr Nassir is also the PIC chairman.

Documents tabled in Parliament by Mr Andersen show that the KAA board of directors was apprehensive of the Privately Initiated Investment Proposal (PIIP) tabled by KQ with the backing of the Cabinet.

KAA, which collects Sh7 billion from Jomo Kenyatta International Airport (JKIA) annually, will collect Sh2.9 billion if the KQ deal sails through this year, the KAA board said in confidential minutes of a meeting called to carry out a preliminary evaluation of the deal.

“While comprehensive risk assessment of the proposed transaction will be concluded as part of the detailed due diligence, the Board should take note… if JKIA is concessioned out, the arrangement will deprive KAA significant resources given that the concession fee will not significantly cover the operational and CAPEX costs of the remaining airports, airstrips and head office,” the board minutes say.

Precarious position

A prolonged delay of the merger puts Kenya Airways in a precarious financial position.

The deal was intended to put the national carrier on a stronger financial footing to compete effectively with rivals such as Ethiopian Airlines and Middle East carriers.

The Cabinet memo prepared last year noted that Kenya Airways’ recent financial restructuring to the tune of Sh75 billion ($750 million) was insufficient to resolve its challenges.

The memo says that KQ's fortunes must now be hooked on a comprehensive national aviation policy that includes offering it significant tariff breaks.

“Should matters remain in the current state, KQ, the biggest revenue driver for JKIA, may collapse or significantly reduce operations within the next year and JKIA will downgrade and eventually be relegated to the status of a regional airport as no foreign carrier will develop JKIA for the benefit of Kenya,” KQ and KAA said in a joint paper presented to the Cabinet.

The KAA board minutes show that in KQ’s financial model, annual concession fees have been set at an initial $28 million (Sh2.9 billion) in 2019, rising gradually to $35 million (Sh3.6 billion) in 2028 and peaking at $60 million (Sh6.1 billion) in 2033, 15 years into the concession term. KQ seeks to take over JKIA management from KAA for a period of 30 years.

“In comparison, 2018/19 KAA’s non-JKIA operations are budgeted to cost Sh6.6 billion in recurrent expenditure, a Sh3.7 billion shortfall from the proposed concession fees of Sh2.9 billion.

Inadequate concession fee

The proposed concession fee is therefore inadequate to cover the cost of running KAA’s other facilities,” state the board minutes signed by KAA chairman Isaac Awoundo and Katherine Kisila on November 12, 2018.

“Currently, JKIA accounts for nearly 83 percent of KAA’s revenues and 51 percent of the recurrent expenditure,” says the KAA board.

Mr Andersen on Tuesday told the committee that KAA receives Sh7 billion annually from JKIA, accounting for 85 percent of its annual turnover.

The board resolved that management proceeds to initiate formal due diligence and engagement with KQ on the basis of the Cabinet decision and the PPIP.

The board also observed that KQ’s proposal assumes that KAA will retain all contingent liabilities, including those arising from JKIA’s operation.

“Even though the actual amounts to be paid out after resolution of the Sh32 billion contingent liabilities and disputed claims will be significantly lower, the non-inclusion of these liabilities in the proposed transaction will certainly leave KAA worse off financially,” the board said.

The board said KQ did not propose a definite capital investment programme over the life of the concession, but instead proposed that the minimum investments levels be negotiated for inclusion in the project agreement.

KQ recognised the importance of investments aggregating $1.3 billion to be undertaken within the first five years.

KQ capacity questioned

The KAA board questioned the capacity of KQ to execute the transaction through a special purpose vehicle (SPV), saying it will require careful assessment as part of due diligence.

“KQ has proposed to engage an Airport Advisor… the arrangement which brings KQ, JKIA and the Airport Advisor's employees together need to be carefully examined especially from labour management and governance perspective."

The KQ PIIP envisages a transaction structure that will result in initial secondment and transfer thereafter, at the discretion of the concessionaire, of JKIA staff.

“This policy direction is being led from the highest office in the land,” the minutes quote Transport PS Paul Maringa as telling the board.

After receiving unconvincing responses from Mr Andersen who said KAA did not initiate the process of JKIA takeover, the PIC directed a freeze on the deal pending conclusion of its probe.

Mr Nassir said a transaction advisor hired by KAA through competitive restrictive tendering to advise on the KQ proposal has been paid Sh15 million or 10 percent of the Sh150 million contract fee.

He directed Mr Andersen to table preliminary reports on the advice given by consultancy firm KPMG and legal firms hired to look into the KQ proposal.