Proposed KQ merger plan now flies into huge

turbulence: The Standard

standardmedia.co.ke/article/2001380090/proposed-kq-merger-plan-now-flies-into-huge-turbulence

President Uhuru Kenyatta’s plan to secure the loss-making Kenya Airways

through a proposed legislation in the National Assembly is already facing
opposition from sector players. Industry players, who have engaged the
Transport Committee, have warned that the planned merger of KQ (above)
with profit-making Kenya Airports Authority (KAA) as subsidiaries to a
holding company is a ‘suicide mission.’

In the plan, KQ and KAA would merge to form Kenya Aviation Corporation
(KAC). Industry players have poked holes in the contentious National Aviation
Management Bill, 2020, that seeks to make KQ a parastatal. The Bill, which is
up for public participation, also proposes the formation of an Aviation
Investment Corporation, which will own aviation schools, offer maintenance
and repair services, flight catering and other ancillary services. It will have an
initial share capital of Sh1 million. The President seeks to grow earnings from
the sector to Sh200 billion and double passenger numbers to eight million in
five years. He is proposed to chair the powerful National Civil Aviation
Council.

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Critics question why the composition of the council is structured in almost a
similar manner as the National Security Council with the President as the
chairperson with membership that includes the Attorney General and Kenya
Air Force Commander. Taking into account the fact that KQ is facing
turbulence, recording losses over the years despite more than Sh100 billion
government bailouts, the situation has been complicated further by the
impact of the Covid-19 pandemic. “The proposed merger is about the balance
sheet. It’s to offset KQ loans. Why kill two institutions, the bailout can be done
without drawing resources from KAA kitty,” warned a legislator. The
corporation – known as the group - will be run by a chief executive officer and
its initial capital is proposed to be Sh7.5 billion.

Likewise, KAA’s initial capital is set at Sh66 billion while that of the
Investment Corporation – a special purpose vehicle - will be Sh1 million
divided into 50,000 ordinary shares. Critics have faulted the move,
questioning how an operator and regulator can be merged, as this will
compromise the aviation sector and change the stakes for key stakeholders,
including a consortium of local banks and sky team partners, Royal Dutch
Airlines and Air France. Pilots had opposed the move citing skies safety and
standards and being in breach of aviation protocols which go against
international best practice. Ironically, KAA which was opposed to it,
backtracked. The National Assembly Transport Committee chairperson Pokot
South MP David Pkosing had in a previous interview said the proposed law
will create jobs as there will be more flights, hence more ground handlers,
more hotels and more crew. Transport Cabinet Secretary James Macharia
early this year told MPs that the government would consider offsetting what
the airline owes several banks before making it a public company.

Macharia told MPs to look at the bigger picture and see KQ as a national
entity that flies the country’s flag abroad. “If you view Kenya Airways as just
another corporate you lose the point. This is a company that carries our
national flag. KQ is our country ... it goes beyond the balance sheet which
most people look at,” he said. The Cabinet secretaries for Transport, Interior,
National Treasury as well as the Attorney General Kariuki Kihara and the
Kenya Air Force Commander, are the proposed members of the council. The
AG is reported to have opposed its drafting. Efforts to get response from the
AG did not yield fruits as his communication team promised to get back but
did not by time of going to the press. “The AG declined to draft the Bill as he
was not comfortable with the content. It was drafted by a senior official within
the Presidency. This directly points to a foul play if the official government
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advisory didn’t take part,” disclosed a senior government official. “This is a
national matter. World all over, governments privatise entities. It’s absurd
that the government wants to nationalise a private entity, which is making
losses and use another entity making profits to shoulder the financial stress.”
A document by aviation experts obtained by Sunday Standard questions the
inclusion of the AG and Air Force Commander in the council. Also, it says, the
Bill does not repeal or amend provisions of the Civil Aviation Act, 2013, which
establishes the Kenya Civil Aviation Authority.

“We note that the composition of the council is structured in almost a similar
manner as the National Security Council with the President as the
chairperson. We may seek further clarification on the need for the
establishment of the same and the high level representation that includes the
Attorney General and the Kenya Air Force Commander,” observes the
document. The President will appoint the board chairperson of the proposed
corporation. The AG is also proposed alongside the CSs National Treasury and
Transport, corporation CEO, managing directors of KQ and KAA and four
independent non-executive appointees of the Transport CS, to be members of
the corporation board. KQ is funded by a consortium of banks holding shares
as KQ Lenders Company, entities which charge the airline 11 per cent interest
in dollars. The banks hold 38.1 per cent shares in the company. The
government has 48 per cent, Dutch airline KLM 7.8 per cent, minority
shareholders 2.8 per cent, and KQ employees 2.4 per cent. If the Bill passes as
it is, the Kenya Airports Authority Act will be repealed, meaning KAA and KQ
board members’ terms will lapse. The aviation holding company has been
exempt from certain laws that tied it down due to bureaucracy that many
State-owned entities have to grapple with. Another MP argued that
governments are not known to be efficient in managing institutions and when
it comes to nationalisation of an airline, it should borrow lessons from
Mauritius Airline.

“With the challenges the aviation sector has faced lately, this venture will sink
taxpayers’ money as there will be no returns,” another official warned.
According to the Bill, which was tabled in the National Assembly last month
by former Majority Leader Adan Duale, the managing directors of KQ, KAA,
and Aviation Investment Corporation will report to the group CEO. The
corporation will run aviation training schools, handle maintenance and
repairs, aircraft handling, flight catering, aviation medical services, tour and
holiday management services. Outstanding debts Though the Bill aims to
give effect to the recommendations of the parliamentary report on the inquiry
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into the KQ Privately Initiated Investment Proposal to the KAA, the net effect
could be to offset outstanding debts of the troubled airline. If MPs pass the
Bill, the new KQ will be wholly owned by the government after it acquires 100
per cent of the equity interest in Kenya Airways PLC. “The registrar of
companies will, on the vesting date, enter Kenya Airways into the register of
companies and issue a certificate of registration noting its status as a state
owned entity,” reads the Bill. The registrar is also expected to register KAA
and the Aviation Investment Corporation as freshly-created entities. “The
CEO will hold office for four years and shall be eligible for re–appointment for
one further term subject to satisfactory performance,” states the Bill. A
corporation secretary will be appointed by the board to arrange the business
of the board and committee meetings, but reporting to the CEO. It also
proposes the establishment of a Kenya Aviation Corporation Fund to be
administered by the board, and presided over by the CEO. The fund will
receive passenger service charges, monies appropriated by Parliament, state
grants and loans, donations, and surplus income earned by KQ, KAA and AIC.
Kenya Airways will be a carrier of air passengers, cargo, mail, and goods in
Kenya; and also undertake other businesses related to air transport. It will
also acquire, hire, sell and lease aircraft.

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