Kenya Airways has agreed to inject $10 million into Tanzania’s Precision Air in a bailout plan, raising hopes that the country’s biggest private carrier will continue its operations.

The capital injection will keep Precision Air’s turnaround strategy on course, given that it could only raise half of its target in an initial public offering (IPO).

“Kenya Airways’ decision to inject $10 million into Precision Air is subject to approval by various regulatory bodies,” Precision Air chief executive Sauda Rajab told The EastAfrican.

“Kenya Airways now owns 41.15 per cent of Precision Air.

“If concluded, that will increase KQ’s stake to 49 per cent, making it the majority shareholder.”

However, the funding still falls short of the $33 million that Precision Air had indicated it needed to shore up its cash position and settle outstanding debts to creditors, including the Tanzanian government.

Ms Rajab said KQ agreed to the injection on condition that the airline would sell or lease back five of its remaining nine aircraft, retrench more than a fifth of its staff, outsource some functions and draw up a plan to reduce debts while improving cash flow.

The Kenyan national carrier had not responded to our enquiries by press time.

Airlines normally sell their aircraft and immediately lease them back as a way of freeing up cash, in a transaction known as a sale-lease back.

Precision Air was founded by Michael Shirima with just one aeroplane in 1993. It now employs close to 700 people and is negotiating with the government to swap $9.6 million in unpaid landing fees and other taxes for equity.

“Our ongoing turnaround efforts will give us relief and enable the company to pay off its longstanding debts,” Ms Rajab said. “Our staff had to give up some allowances and pilots of 737s who could not operate ATRs had to be retrenched after the flights were stopped.”

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Precision Air will introduce new routes and terminate loss-making ones while two 737 jets that were losing money were suspended and the aircraft returned, she added.

The airline has already cancelled its Dar es Salaam-Johannesburg, Dar-Mombasa, Dar-Lubumbashi-Lusaka and Dar-Mbeya routes, which were making losses.

The plan will see the airline’s fleet reduce from 11 to nine but the Dar-Kilimanjaro route, which remains one of its most profitable, will be maintained. The statement further shows that the airline made an operating loss of some $10.8 million in 2013 but reported an operating profit this year.

According the company’s financial reports, the changes helped Precision Air reduce direct expenditure from Tsh147 billion ($88.4 million) to Tsh99 billion ($59.5 million) and indirect expenditure from Tsh44.4 billion ($26.7 million) to Tsh38.9 billion ($23.4 million).

Precision Air has struggled to remain afloat, weighed down by huge debts incurred after a botched expansion plan eroded the company’s cash position.

Ernst and Young, the company’s auditors, warned in the airline’s 2013 annual report that it risked being grounded as liabilities exceeded assets by $53 million.

“These conditions indicate the existence of a material uncertainty that may cast significant doubt on the company’s ability to continue as a going concern,” said Ernst and Young.

The airline has approached the Tanzanian government as well as international financiers for injection of capital. The government last year turned down a request by the carrier to inject $32 million in the company in return for shareholding, but Ms Rajab said discussions were ongoing.

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Manzi Rwegasira, an investment banker and independent board director at Precision Air, said the challenge ahead was how to deal with the financing costs to make sure the airline is fully profitable again.

“The company needs to be cautious of fuel costs, which account for a significant amount of all airlines’ operating expenses,” Mr Rwegasira said. “Fuel prices have been rising on global markets amid rising tensions in the Middle East and market speculation.

“The outlook is, nonetheless, positive.”

Tensions in the Middle East could push fuel prices higher in the near term, he said.

Ms Rajab downplayed fears that the entry of Fastjet would affect Precision Air’s business, saying the two targeted different market segments.

“We are a network carrier, not a low-budget airline whose target is to get people to fly for the first time,” she said.

Fastjet recently released a financial report showing it suffered a $80 million loss in 2013. The previous year, it incurred $50 million in losses.

Shareholders injected £15 million ($25.6 million) into the low-budget airline in April and May this year to stave off bankruptcy.

Fastjet is listed in the UK, in the AIM segment of the London Stock Exchange. Its shares are currently trading at £0.016 ($0.027) per share — down by more than nine per cent in the past two years.

On July 1 this year, the airline’s chief financial officer, Angus Saunders, stepped down.

In November 2013, Lonrho, then the largest shareholder in Fastjet with an 11 per cent stake, decided to sell its entire stake in the company for $2.4 million.