Renationalization unlikely to fly Kenya Airways back to profit

Omar Mohammed

NAIROBI (Reuters) – By taking back full control of Kenya Airways, lawmakers are banking on Kenya’s ability to replicate the profitable example of Ethiopia’s state-owned flag carrier Ethiopian Airlines.

The global precedents are not reassuring.

Government takeovers rarely transform loss-making airlines, analysts say. And Kenya Airways faces two major hurdles: competition from regional rivals and potential government interference.

Parliament voted last week to renationalize the loss-making airline, which is laboring under a mountain of debt and has had three changes of chief executive in the past five years as it struggles to compete with regional rivals.

Kenya plans to form an aviation holding company with a healthier balance sheet by combining the airline with a planned national aviation college and profit-making assets such as the main international airport and airports authority.

But some experts believe such a move may only compound the airline’s problems, opening it up to political interference without a clear strategic direction – although the government says it will allow the airline to be run like a private company.

“The future risk is government micro-management of the airline, which never works,” said airline consultant Nick Fadugba, chief executive of African Aviation Services, an organization that promotes development of the sector in Africa.

The Kenyan carrier, which is 48.9% government-owned and 7.8% held by Air France-KLM (AIRF.PA), was once held up as a model of successful privatization.

It sank into losses in 2014 after making costly aircraft purchases, which coincided with a slump in tourists and business travel to Kenya blamed on a spate of attacks by Somalia-based Islamist militants.

“They didn’t really expand with sufficient capital; that really put them into a bit of trouble,” said Eric Musau, head of research at Standard Investment Bank in Nairobi.

LONG-TERM STRATEGY

Debt restructuring narrowed its pretax losses for last year to 7.59 billion shillings from 9.44 billion, but did not pull the company back into the black.

The airline’s frequent change of CEO has hobbled its ability to form a long-term strategy. In May, current boss Sebastian Mikosz said he would leave at the end of the year, citing personal reasons.

Kenyan Airways is operating in a tough market. The International Air Transport Association projects African airlines will post a combined $100 million loss in 2019, even as the global industry generates a profit of $28 billion.

“The Kenyan government has sort of run out of options,” said Phil Seymour, chief executive of IBA Group, a Surrey-based aviation consultancy. “Kenya Airways’ fortunes have declined both on business traffic and tourists.”

Renationalization, Seymour said, is a “last resort type of move”.

The airline faces stiff competition, not just from major players like Emirates and Turkish Airlines (THYAO.IS). Both Uganda and Tanzania have poured cash into their flag carriers in the past three years, joining countries such as Rwanda and Togo which have also ramped up investment.

Ethiopian Airlines is the biggest regional threat. Sub-Saharan Africa’s only major profitable state-owned airline has been snapping up stakes in smaller carriers around the continent in a bid to become the dominant pan-African airline.

It now flies to more than 120 destinations, compared with Kenya Airways’ 56. It has grown about 25% a year since 2010 and made a net $233 million in the 2017-18 fiscal year.

“It’s not who owns the airline that determines the success or failure of an African airline. It’s how they are run,” said Zemedeneh Negatu, chairman of the U.S.-based investment firm Fairfax, which focuses on Africa.

The Kenyan carrier will need to decide whether to focus its strategy on growth within Africa or on long-haul routes, analysts said.

Zemedeneh, whose firm has advised Uganda and Rwanda on their national carriers, said Kenya Airways should partner with its Ethiopian rival to take on big international carriers that control at least 80% of traffic in and out of the continent.

One of Kenya’s main competitors on these routes is Dutch carrier KLM, which is also an equity partner, Fadugba said. What that relationship will look like in future remains to be seen.

“We’ll have to see what happens and what form the nationalization takes. We don’t exactly know yet whether it will happen through a new share issue or a more direct operation,” Air France-KLM Finance Director Frederic Gagey said.

“As far as Air France-KLM is concerned, we continue to consider Kenya Airways as an important partner, particularly on those routes between the group’s two hubs and East Africa,” Gagey added.

HUGE LOSSES

Renationalizing a failing airline has had mixed results depending in part on the level of government interference.

“Over the last 20 to 25 years, for most national airlines the move has been to privatization and not nationalization,” Seymour said. “Governments are moving away from nationalization, as national airlines tend to be inefficient.”

Before Kenyan Airways was privatized in 1996, it made huge losses and needed annual cash injections from the government. Senior officials running late for international flights would sometimes delay take-off by hours.

The government now intends to run the airline like a private business, said Esther Koimett, principal secretary at Kenya’s transport ministry.

“If we can put in place a proper governance structure that ensures that it can be managed independently and professionally, then we should be able to make it work,” she said.

But some analysts are not convinced.

Kwame Owino, chief executive of the Institute of Economic Affairs in Kenya, pointed to the poor track record of state-owned entities such as the Kerio Valley Development Authority and Kenya Pipeline Co – both of whose heads are facing corruption charges.

“I doubt that they will turn the airline around,” Owino said.

Additional reporting by Walter Bianchi in Buenos Aires, Jamie Freed in Singapore, Tim Hepher and Laurence Frost in Paris, and Duncan Miriri in Nairobi; Writing by Katharine Houreld; Editing by Alexandra Zavis and David Holmes