Kenya Airways (KQ) and Tanzania’s Precision Air are in talks over a deal that could see the Nairobi-based carrier raise its stake in the latter, by injecting up to $30 million into it.

The move comes after similar discussions between the Tanzanian government and Precision Air, in which the former was expected to inject $30 million into the struggling company, flopped.

READ: Dar govt pushes for Precision Air shares’ valuation before investing

Precision chairman Michael Shirima told The EastAfrican that his airline had approached KQ, which owns 41.23 per cent of the airline, for financing, as the Dar es Salaam-based airline seeks ways to shore up its eroded cash position.

“KQ was waiting for the government’s decision…. when the government gave us its final decision on the matter, KQ came up with the idea to increase its stake, over which we are still in discussion. Our aim is it get between $20 million and $30 million through equity,” said Mr Shirima.

Late last year, Ernst and Young, Precision’s auditors, raised concerns over the viability of the airline in the light of surging debts, saying it must move fast to secure financing if it is to remain afloat.

The company’s audit report painted a gloomy picture of the loss-making firm, saying its liabilities had exceeded its assets by Tsh83.14 billion ($53 million).

READ: Precision may not last long in the air, auditors now warn

Also, for several years, it has not remitted its statutory deductions and indirect taxes to the government, amounting to Tsh19 billion ($12 million) as of March 2013, notes the report prepared by Ernst & Young, and tabled at the annual general meeting last November.

“These conditions cast significant doubt on the company’s ability to forge ahead,” said the auditors.

The airline has been facing cash flow challenges occasioned by an overambitious expansion plan that saw it add new aircraft. This has hurt its competitiveness, especially as it struggled to stave off competition from budget airline Fastjet, whose relatively affordable fares have had a big impact on the local market.

In 2011, KQ reduced its ownership in Precision from 49 per cent to 41.23 per cent through an initial public offerings (IPO) on the Dar es Salaam Securities Exchange.

Over the past few years, a mix of fleet expansion and loss-making also affected KQ’s cash flow, and though the carrier raised Ksh14.6 billion ($169 million) through a rights issue, it is expected it will use a good proportion of it as down payment for the new 787 Dreamliners that it is expecting starting March and into 2016.

“KQ experienced problems last year, but currently it has a healthy cash flow, and so we are optimistic it will clinch the deal,” said Mr Shirima.

Additional investors
Precision Air said apart from KQ, it was also talking to other investors, including other airlines, keen on taking up a stake in the airline.

“We are currently in talks with three firms whose identity I cannot disclose; the arrangement is for them to expand equity, and once we get it, we are going to consider selling our aircraft and leasing them back,” said Mr Shirima.

The company announced a Tsh30 billion ($18.2 million) loss during the first half of this year, and is seeking over Tsh51 billion ($30.9 million) to enable it to get back on its feet. Mr Shirima, who owns 42.91 per cent of Precision is the airline’s majority shareholder, followed by KQ.

The remaining Precision shares were sold on the Dar es Salaam Stock Exchange in the IPO that failed to raise the intended capital meant to finance the airline’s expansion drive.

Tanzania’s biggest airline had sought to raise about Tsh28 billion ($16.5 million) but managed to collect just Tsh11.84 billion.

Industry observers believe that it was during this time that the airline started experiencing difficulties.

“They wouldn’t have needed a government bailout or a KQ injection of capital had the IPO gone according to plan,” said the source.

The company’s CEO, Sauda Rajab, said they were currently finalising budget plans for this year, and expected to have everything in perspective by next month.

“This year’s plans include the code sharing partnership between Precision Air and Air Uganda. The agreement is for both the airlines to work together on the Dar es Salaam-Entebbe and Kilimanjaro-Entebbe routes,” said Ms Rajab.

She said that the two airlines would both sell tickets and increase passenger numbers of either airline, while offering travellers an increased choice of flights between the two cities.

Additional reporting by Peterson Thiong’o