Government will nationalise Kenya Airways

Officials say buying out shareholders could take 18 months.

Kenya Airways jets at airport in Nairobi
Kenya's parliament has voted to nationalise Kenya Airways, the country's main airline and one of sub-Saharan Africa's largest [Thomas Mukoya/Reuters]

Kenya will take at least 21 months to resume full control of its national carrier Kenya Airways, buying out minority shareholders and converting shares held by banks into Treasury bonds, a lawmaker briefed on the transaction said.

The loss-making airline, which is 48.9 percent government owned and 7.8 percent held by Air France-KLM, was privatised 23 years ago but sank into debt and losses in 2014. Lawmakers voted to re-nationalise it this week.

“The [transportation] ministry needs three months to think through and then give us a proposal on the aviation shareholding company and the entire structure,” David Pkosing, the chairman of the Kenyan parliament’s transport committee, told Reuters.

He estimated buying out shareholders would take 18 months.

A failed expansion drive and a slump in air travel forced the airline to restructure $2bn of debt in 2017. But Kenya Airways still needed cash for fleet and route expansion amid growing competition from Ethiopian and Emirates airlines.

Minority shareholders, who hold about three percent of shares, will be bought out for about 800 million shillings ($7.71 mn), Pkosing said.

A consortium of local lenders, who acquired 38 percent of the company’s equity during the 2017 restructuring, could be paid through government debt, possibly 10-year Treasury bonds, Pkosing said.

Lenders’ representatives on the airline’s board were not immediately available for comment.

The banks hold their stake through a joint, special purpose vehicle. They are likely to accept the deal given the airline’s losses, said Eric Musau, head of research at Standard Investment Bank in Nairobi.

“If you look at the lenders, they have no interest in owning the airline other than getting back the amount that they lent,” Musau said.

Air France-KLM, which declined to comment, will have the option of selling its stake to the government and staying on as a technical partner for the airline, sources said.

Holding company

Kenya wants to emulate countries like Ethiopia – which runs air transport assets, from airports to fuelling operations – under a single company, using funds from the more profitable parts to support the less lucrative ones.

Under the model approved by lawmakers, Kenya Airways will become one of four subsidiaries in an aviation holding company.

The others will be an aviation college; Jomo Kenyatta International Airport (JKIA), the country’s biggest airport; and Kenya Airports Authority, which will operate all the nation’s other airports.

“The balance sheet of the aviation holding company will be healthier than Kenya Airways alone,” Pkosing said.

Kenya Airways could renegotiate its aircraft leases based on its reduced risk profile, he said, noting the airline needs more than its 40 planes.

JKIA alone has annual revenues of 12bn shillings ($115.7m), half of which is profit, lawmakers said. The airport’s authority owns thousands of acres of land that would shore up the new group’s balance sheet.

Nationalisation will exempt Kenya Airways from taxes on engines, maintenance and fuel, allowing it to sell cheaper tickets, Pkosing said.

The airline charges more than competitors, forcing price-sensitive passengers through hubs like Addis Ababa and Kigali.

“The model we are proposing is not new: it is being used by Emirates, Morocco, Egyptian, [and] Ethiopian [airlines],” Pkosing said. “Most successful airlines operate in the same model.”

Government officials said the airline is vital to encourage investment and bring in tourists.

But some said the government failed to manage the airline properly in the past.

“Leasing the aircraft is shrouded in secrecy. When you look at the staffing, the payroll, it’s very high,” said Mohammed Hersi, Chairman of Kenya Tourism Federation.

“In Kenya, we think any parastatal [state-own organisation] is a home for employing people,” Hersi said. “We forget productivity. But when it comes to business out there, we will be eaten alive.”

Source: Reuters