Troubled national carrier Kenya Airways #ticker:KQ could soon merge with the Kenya Airports Authority (KAA) as part of a grand plan to deepen the airline’s recovery and cement Nairobi’s status as a regional transport hub.
A policy paper seen by the Business Daily and which got the Cabinet’s approval on Tuesday, says the aim is to reposition KQ in a similar fashion as its main rivals, including Ethiopian Airlines and Emirates Group, which have relied on government backing to expand their reach.
The move also appears to be in reaction to the financial difficulties the carrier has continued to experience even after last year’s completion of a major financial reengineering drive, causing concern that it may not be able to withstand competition in the very near future.
“Should matters remain in the current state, KQ, the biggest revenue driver for JKIA [Jomo Kenyatta International Airport], 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 the KAA said in a proposal document to the Cabinet.
The policy document dubbed Project Simba notes that the carrier’s recent financial restructuring to the tune of $750 million (Sh75 billion) was insufficient to resolve its challenges, adding that the airline’s fortunes must now be hooked to a comprehensive national aviation policy.
Through a public-private partnership (PPP) that could be signed by September, Kenya Airways will take over all the staff and operations of the KAA in a move that will at once expand the range of its services to include ground handling, maintenance, catering, warehousing and cargo. It is also envisaged that a special economic zone will emerge around the country’s main aviation hub, JKIA.
The government is further expected to support the joint venture by exempting it from certain taxes and allowing it to retain several levies as part of the plan to stop financial haemorrhage at Kenya Airways and bolster JKIA’s status as an East African aviation hub. KQ chairman Michael Joseph, who helped craft the plan, told the Business Daily that finer details, including the new entity’s corporate structure and its implications on the airline’s shareholders, will be worked out in due time.
“It is still early days. All the pending issues will be discussed,” Mr Joseph said.
Wider economic benefits
He added that the government needs to stop looking at KQ as a profit centre on its own but should use it as a tool to deliver wider economic benefits, including attracting foreign tourists and multinationals seeking to establish regional headquarters in Nairobi.
While JKIA is fully owned by the government through the KAA, KQ’s ownership includes private investors whose interests will be addressed through the appointment of transaction advisers and the refinement of the project details.
The government’s stake in the airlines stands at 48.9 per cent, followed by 10 local banks (38.1 per cent). The rest of the KQ shares are held by local and foreign institutional and individual investors.
In contrast, KQ’s rivals such as Emirates, Ethiopian Airways, Qatar Airways and RwandAir are fully owned by their respective governments in what makes it easy to build synergies between the carriers and their home airports.
The proposed project is expected to help KQ add a minimum of 23 aircraft and more than 20 new international destinations over the next five years. This, in turn, is projected to lift annual passenger numbers to 6.9 million from the current 4.1 million.
“Fundamentally, the joint assets will result in synergies, boosting airline-related revenues, increasing exports of goods and creating 25,000 to 30,000 jobs in the future,” the parties said.
It is envisaged that the PPP will have the KAA as the contracting authority and KQ as the private party. The concession, which will run for a minimum of 30 years, will be held by a special purpose vehicle (SPV) that will be fully owned by the national carrier.
The concession will have variable and fixed fees, with the latter earmarked to settle the KAA’s current liabilities that amount to $51 million (Sh5.1 billion) per annum.
The government is ready to tweak tax laws to afford the project the necessary fiscal space to implement the ambitious plans.
These include exempting the SPV from valued added tax and exempting KQ from paying the Railway Development Levy and import declaration fees on aircraft, parts and utilities.