By The EastAfrican

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The Kenya government’s decision to hand over running of the country’s largest airport to Kenya Airways is expected to reset regional geopolitics and economic relations.

The move comes as the Jomo Kenyatta International Airport (JKIA) undergoes final reviews by aviation authorities for the start of direct flights from Kenya to the United States in October.

Predictions are that revenue will grow to about $2.96 billion annually, with profitability at $177.3 million.

In the past three years, the East African aviation market has experienced heightened competition, with Ethiopia and Rwanda expanding their national carriers.

Tanzania and Uganda are also considering reviving their national airlines. Dar es Salaam has purchased two Boeing Dreamliners, and Rwanda is said to be eyeing direct flights to New York.

Ethiopian, currently the biggest airline in Africa, and RwandAir do not view their national carriers as just commercial enterprises but also as avenues to attract tourism and foreign investment.

Ethiopian, Rwandair and Gulf carriers have been protected by their governments from the troubles that have beset aviation companies across the world.

Commercial headwinds

However, NSE-listed Kenya Airways has been buffeted by commercial headwinds with little protection from the government.

Kenya Airways could be used to promote economic development and geopolitical presence given the country’s position as a trade and business hub for East and Central Africa.

This would require creation of a Kenya aviation holding company, to put all major airline assets in the country under a larger legal entity.

The proposal, already approved by the Cabinet, requires the new company to guarantee that the national carrier will not require further financial assistance from the state.

Last year, MPs approved a $750 million loan guarantee to support the airline’s restructuring.

Under the scheme, the government converted its existing loans into equity, thus increasing its stake, and became the guarantor for the loan.

The airline owes the United States Export-Import Bank $525 million and several local banks $225 million.

The restructuring allowed KQ to continue operating through access to additional liquidity.

However, a delay in completing the restructuring, combined with KLM not contributing an expected $100 million and the downturn of the economy caused by an extended electioneering period resulted in depletion of KQ’s cash reserves.

KQ currently has insufficient cash as KLM pumped in less than $25 million, way short of the $100 million it had committed to.

Those behind the proposal say the airline needs liquidity to avoid disruption of its operations and prevent triggering the sovereign guarantee to the US Exim Bank and local banks.

Market situation

Kenya Airways is the only big carrier that is treated at its hub like a foreign airline, yet whenever it lands at other hubs the fees it pays go towards subsiding their costs.

“The market situation has created a need for a different restructuring — not only Kenya Airways but the whole of Kenyan civil aviation. There is an urgent need for a solution that will change the mandate of KQ and allow the company to become the biggest African carrier,” an official privy to the new strategy said.

KQ operates in an attractive and rapidly expanding airline market. The International Air Transport Association says that total airline revenues stand at $1.26 billion, and are projected to grow by five per cent per year.

KQ’s direct flight to New York — whose maiden trip will be in October — is expected to open up the country to the mature US market and increase the potential for growth, spurred by an expected increased trade in goods and services and tourism.

Every year, KQ brings to JKIA — in terms of arrivals and in-transit — 4.5 million passengers and 60,000 tonnes of cargo.

Once the proposal for the Kenya aviation holding company is implemented, there will be a buy-out of the shareholders, changes to laws and to collective bargaining agreements, and an injection of cash.

Special economic zone

The legislative changes would result in the establishment of the Jomo Kenyatta International Airport as an airline-oriented Special Economic Zone.

The zone would be a conducive environment for specialised businesses that operate at JKIA like warehousing, logistics, hotels and accommodation for passengers in transit, ground handling, flying schools, catering, and maintenance and repair of aircraft.

Strategists say the new company should not be treated as an ordinary parastatal, subject to bureaucracy as this would hamper their growth.

“This may be the boldest and most difficult to accept and implement but we believe that this move is essential. Although Kenya Aviation Holding will be wholly owned by the state, it will operate, for all intents and purposes, as a private company,” said an official privy to the conversations about the proposals.

The company’s revenues would come from passengers, cargo, JKIA operations, ground handling, maintenance services, fuel distribution, catering and the Special Economic Zone.