Kenya Airways (KQ, Nairobi Jomo Kenyatta) will get additional state support of KES34.9 billion shillings (USD283.2 million) to help the cash-strapped national carrier meet overdue payments of KES24 billion shillings (USD194 million), including to lessors, operations, and maintenance.
This has emerged from a letter of intent sent on December 7, 2022, to International Monetary Fund Managing Director Kristalina Georgieva by Kenya’s National Treasury & Planning Cabinet Secretary Njuguna Ndung’u and Central Bank of Kenya Governor Patrick Njoroge. The letter is contained in the IMF’s December 2022 status update on Kenya, declaring it had completed its fourth review of extended fund and extended credit facilities for Kenya providing a USD447.39 million disbursement.
From it, it emerges that Kenya Airways remains insolvent with the highest cost base among regional airlines, even as it met 75% of its targeted cost reduction in FY2021/22.
As of November 17, 2022, Kenya Airways’ debt totalled USD835 million. This includes all debts, loans, letters of credit facilities, and convertible equity amounts. Of this amount, USD688 million was guaranteed by the Government of Kenya (GoK). As of end-October 2022, payables amounted to about KES44 billion (USD357 million), out of which KES24 billion (USD194 million) was overdue. These creditors include aircraft lessors, operation, and maintenance costs, landing and rental fees, fuel
cost, rent, navigation, handling charges, and taxes, amongst others, the letter reveals.
The Kenyan authorities say that Kenya Airways and Kenya Power and Lightning Company (KPLC) are the two state-owned entities (SOEs) posing the largest fiscal risks and will continue to require extraordinary support in FY2022/23. Kenya Airways will receive the lion’s share of KES34.9 billion of KES37.3 billion provided for both SOEs in the FY2022/23 supplementary budget. This would include assumed payments for debt service that would be supported by the government for guaranteed and unguaranteed debt, subject to agreements with creditors. KES10 billion (USD81 million) was already disbursed to Kenya Airways in September 2022.
Kenya’s spending priorities continued to be challenged by supporting SOEs, Kenya Airways in particular. To contain this, in FY2021/22, the Treasury introduced and would extend to FY2022/23 budgetary offsets for 50% of extraordinary support to SOEs, including Kenya Airways. After FY2022/23, such offsets would be set at 100% of the extraordinary support.
Despite this, the authorities said commercial performance and restructuring at Kenya Airways positively impacted the carrier’s insolvency. “Kenya Airways recorded an operating loss of KES5 billion (USD40.5 million) for the first six months of 2022, a 31.5% reduction in operating losses as of end-2021.” If it had not been for the higher fuel price, it would have recorded a profit, they said. Currently, the airline was able to cover its operational costs (less financing and legacy
costs) boosted by post-COVID-19 volumes. “Notwithstanding the recent improvements in some of the financial indicators, Kenya Airways still has the highest cost base among all airlines in the sub-Saharan Africa region and a negative equity position,” they acknowledged.
A detailed restructuring action plan prepared in May 2022 is currently being implemented. It included the following:
- Network optimisation: Kenya Airways cut 12 loss-making routes and 16 international destinations;
- Operating lease negotiation: The fleet size was reduced, and some leases were terminated. Select aircraft were repurposed
as freighters to support cargo business. Negotiations with lessors would result in a modest reduction in annual lease costs.
Some of these negotiations reached in-principle agreements in 2022Q3, following which Kenya Airways began settling past
due amounts and the completion of payments, supported by a GoK disbursement of KES10 billion in October 2022. - Staff rationalisation: The strategy recommends the reduction of staff to match the revised network. Salaries, particularly
of pilots, were adjusted to match industry standards. However, other than organisational redesign actions, substantive
reductions in staff costs have yet to be implemented. - Collective bargaining agreements: Several clauses in the collective bargaining agreements (CBA) were onerous to Kenya
Airways pilots and led to low productivity, but minimal progress has been achieved in this regard. - Cost management: The strategy anticipated significant cost reduction aspects relating to operations and maintenance,
distribution costs, ticketing, procurement, and fuel. Target cost reduction was set at USD120 million per annum by 2024,
rising gradually from USD73 million in FY2021/22 to USD93 million in FY2022/23 and further to USD120 million from
FY2023/24. In FY2021/22, Kenya Airways met 75% of the targeted savings. - GoK support: The government would continue to support Kenya Airways financially in FY2022/23 to facilitate
the normalisation of overdue payments to prevent defaults for settlement of operating lessors’ arrears and completion of
payments, as well as other working capital support. A lower disbursement from GoK in FY2021/22 limited realised gains
from negotiations of aircraft leases. - Ancillary business lines and strategic partnerships: Kenya Airways was to grow ancillary and cargo business routes, including drone technology deployment, seat-related ancillaries, maintenance services and strategic partnership pursuits. The airline reported a growth of 20% across all business lines. It also concluded a strategic partnership framework with South African Airways (SA, Johannesburg O.R. Tambo).
According to the authorities, novation of the GoK guaranteed debt was underway but not yet completed. “Under the action plan, Kenya Airways will novate USD485 million guaranteed loans to the government to facilitate better management of risks and avoid any call up of the guarantee. The guarantees are already part of the GoK debt stock and, not likely to cause significant impact, other than an increase in the annual payment obligations from the Consolidated Funds Services (CSF) estimated at KES10 billion per year,” the letter states. “As part of the ongoing discussions, GoK has settled outstanding debt service arrears on the guaranteed loan as of end-September 2022, and additional amounts through end-June 2023 on debt service payments on the guaranteed amount have been included in the Supplementary Budget. All payments paid on behalf of Kenya Airways are deemed shareholder loans and shareholder agreements with an agreed term sheet that is being prepared.”
To ensure that the airline’s restructuring strategy was carried out with the least cost to the Exchequer, the government would implement safeguards monitoring the process. This would include the following:
- Loan agreements: With the completion and adoption of the restructuring action plan in June 2022, the government prepared a loan agreement (for shareholder loans) with clear key performance indicators (KPIs), timelines, reporting obligations, and a disbursement plan as conditions for providing financial support. The signing of loan agreements was delayed due to the political transition and was now expected to happen before end-December 2022.
- Accountability: To ensure the diligent implementation of the action plan, an accountability mechanism was discussed to ensure the restructuring plan was followed by the Kenya Airways board. A tracker was under development to monitor key actions and milestones in the restructuring process (trimming the network; rationalising frequencies and the fleet; and addressing the high-cost structure, including the salary/wage bill with a clear measuring system).
- Progress review and reporting: Progress under the action plan would be reviewed quarterly by National Treasury and shared with the Cabinet.
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