MIKOSZ: KQ must take over JKIA or face total collapse in a financial crunch

Sunday March 17 2019

KQ JKIA

The Jomo Kenyatta International Airport (JKIA) in Nairobi. Kenya Airways is seeking to take over the operations of the hub to shore up its finances. PHOTO | JEFF ANGOTE | NMG 

JAMES ANYANZWA
By JAMES ANYANZWA
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NJIRAINI MUCHIRA
By NJIRAINI MUCHIRA
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After being on the job for nearly two years, Sebastian Mikosz, the Polish aviation turnaround expert that the Kenyan government hired to save its national carrier, Kenya Airways, from total collapse, is beginning to come to terms with certain realities. That to do his job he has to be candid. Very candid.

At a press briefing on Wednesday, Mr Mikosz told journalists that to get out of the deep hole that the airline fell into seven years ago, the government will have to push through the controversial plan to have the carrier take over management of the Jomo Kenyatta International Airport.

That nothing short of the takeover will save the airline, East Africa’s oldest, from total collapse. Not even his well-known turnaround credentials.

Mr Mikosz, who spoke amid rising opposition to Kenya Airways’ takeover of JKIA's operations, said if nothing changes, the carrier will, in a span of five years, diminish to the level of its low cost subsidiary Jambojet and lose its prestigious tag of the Pride of Africa.

“There is actually no way KQ can be profitable in its current state. I don’t know how to do that,” Mr Mikosz said.

KQ’s takeover of JKIA has been proposed under Project Simba, a turnaround blueprint that seeks to save it from collapse and anchor the country's aviation industry as a key pillar of the economy through continued investment in key infrastructure.

Frustration

Mr Mikosz, whose two-year contract expires this May, hit out at opponents of the takeover plan as lacking in vision and failing to see what is at stake.

He did not spare the airline’s pilots whom he accused of stalling the recovery with their demands for hefty pay.

“The pilots are overpaid and the workforce bloated, bleeding the airline to death,” he said even as he criticised the government’s failure to protect the carrier from unfair competition.

And in a signal that his term at KQ may not go beyond two years, Mr Mikosz said his frustration with the status quo has reached a point where he is contemplating leaving.

KQ’s minority shareholders also came under heavy criticism for demanding that the carrier pays a dividend when it is technically insolvent.

In Mr Makosz's view, KQ should be delisted from the Nairobi Securities Exchange to facilitate a quieter turnaround away from the noise of minority shareholders.

That KQ should not be reduced to paying dividends but should be anchored as the engine that drives productive sectors such as horticulture and tourism, which make significant contributions to the gross domestic product growth.

“In neighbouring Ethiopia, the aviation industry has set a benchmark of delivering seven per cent impact on GDP,” he said.

Mr Mikosz took a swipe at his predecessors Titus Naikuni and Mbuvi Ngunze, for bringing KQ to its current predicament.

He said the airline’s slide from a profitable and leading airline in Africa to a dying carrier is attributable to the badly thought-out and executed Project Mawingu that did not take competition into consideration.

“Problems were compounded in 2017 when the airline was forced into a bad restructuring programme that put taxpayers in a precarious situation, exposing them to paying creditors a staggering $750 million in case the airline went bust. Taxpayers have the obligation under the terms of a sovereign guarantee that the National Treasury offered the airline’s creditors.

The plan also left the Kenyan government with a 46.53 per cent stake in the national carrier while a group of 10 local banks that converted a total of Ksh23 billion ($230 million) debt into equity have a 35.69 per cent stake.

Dutch airline KLM owns the remaining 13 per cent.

Recovery options

“KQ’s takeover of JKIA is one of the recovery options but if it does not go through the other option is to shrink KQ to Jambojet status, an option that means I will not renew my contract when it expires,” said Mr Mikosz, who was appointed in June 2017.

KQ wholly owns African Cargo Handling Ltd and Jambojet, a low-cost carrier that was started in 2013.

Last October, the liner submitted a privately-initiated investment proposal to the Kenya Airports Authority, the entity that runs all airports and airstrips in Kenya, seeking a 30-year concession to manage and develop JKIA under agreed terms—including payment of an annual concession fee.

KQ has set the annual concession fee at $28 million in 2019, and wants to gradually increase it to $35 million in 2028.

Critics have argued that there is no reason KAA should accept proposal that will deliver revenues way below the $66 million needed to run non-JKIA operations every year.

The proposal has in recent weeks met significant opposition, including from Members of Parliament ostensibly because it appears trapped in a conflict of interest with banks that KQ is indebted to.

Mr Mikosz reckons that KQ’s survival is tied to the proposed concession deal with the KAA.

“All our competitors are subsidised and operate in a consolidated model with airports and a number of service companies,” he said, adding that the perception created that KQ is merging with KAA is wrong because the deal is structured as a concession agreement in which the airline will only take over aviation-related assets in a long term lease while other JKIA properties, including land remain under KAA.

Conflict of interest

Opposition to the deal has partly centred on what many see as a possible conflict of interest arising from its association with President Uhuru Kenyatta’s family business.

Kenya Airways owes Commercial Bank of Africa—which is majority owned by the Kenyatta family and has recently struck a merger deal with NIC Bank—more than Ksh4 billion ($40 million).

Some critics have dismissed the proposed takeover of JKIA as ''a grand debt recovery plan'' but Mr Mikosz insists that Project Simba, whose overriding theme is to open new revenue streams for KQ, is what is needed to reposition Kenya’s premier airport as an aviation hub.

The Project Simba proposal is crafted on a public private partnership model.

In its current state KQ cannot compete with the likes of Ethiopian Airlines, Emirates, Qatar and Etihad that are 100 per cent state-owned and subsidised and are executing aggressive growth strategies with a focus on volume and market share.

Mr Mikosz said that apart from pushing through the JKIA deal, Kenya will also have to protect its national carrier by limiting the number of airlines flying into Nairobi, a strategy Ethiopia and has adopted and which has been instrumental in the growth of its airline.

Kenya has licensed 22 foreign carriers to fly into JKIA compared with five that are allowed into Ethiopia’s Bole International Airport.

“I am shocked when I see the government allowing more airlines to fly into JKIA,” said Mr Mikosz, adding that the Ethiopian government has denied Kenya Airways a licence to any other part of the country outside Addis Ababa.

The limitation has seen Bole Airport handle 12.9 million passengers annually, the majority of them flying Ethiopian Airlines, while KQ must share the 7.2 million passengers using JKIA with numerous airlines.

Mr Mikosz says KQ taking over the management of JKIA should help revamp the airport’s infrastructure and increase the traffic to 11 million passengers per year by 2022 and 30 million by 2049.

More critically, it will ensure that the aviation industry becomes a national treasure that creates an additional 30,000 jobs in airlines and related businesses. The JKIA deal, which was to have been completed by March 31, is however now hanging in the balance.

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