KQ: Privatisation fruits turn bitter, airline flies back

Wednesday, September 18th, 2019 00:00 |
Team picked to renationalise loss-making national carrier.


Established from the debris of the collapsed East African Airways in 1977, Kenya Airways was just another African airline.

The national carrier was notorious for all the wrong reasons – delayed flights, poor services, run on political whims, and a perennial loss maker.

By 1990s, it had become clear to the Government that if Kenya Airways was to make any impact on the country’s economy, it could not continue in the same vein.

It decided that the airline had to be privatised. To oversee the new direction, the Government appointed the late Philip Ndegwa, a former Central Bank Governor with extensive business interests, as chairman of the board. 

It then appointed Speedwing Consulting, a branch of British Airways, to advise on restructuring of the airline to prepare it for privatisation. 

Speedwing undertook a study of the airline, and their report became the basis for restructuring. In 1992, the airline appointed Brian Davis as managing director.

He was a part of the consultant team that Speedwing had deployed to KQ as Kenya Airways is known by its international code.

From then on, things began to move pretty rapidly. In 1993, Kenya Airways broke its loss-making streak and made a profit of Sh450 million, its first in 17 years. This signalled the beginning of the glory days of the airline.

In August 1994, the board announced the commencement of the privatisation of Kenya Airways.  The Government appointed the International Finance Corporation  as advisors for the transaction. 

External auditors

To clear the way for investors to put their money in the airline, its debt was restructured, with the Government taking over the Sh4.6 billion the airline owed to external creditors, then converting Sh1.6 billion owed to it by the airline into equity, while leaving Sh4 billion to be serviced by the soon to be private company.

Privatisation of KQ was structured to start with investment by a strategic investor, followed by an initial public offering (IPO) on the Nairobi Securities Exchange (NSE). Bids for a strategic investor were invited in October 1995.

In December of that year, Kenya Airways and Royal Dutch Airlines (KLM) announced a partnership, where the latter would take a 26 per cent stake in the privatised entity. 

The deal was signed in January 1996, with KLM paying Sh1.4 billion for the stake. The Government then floated 51 per cent of Kenya Airways, amounting to 235 million shares, to the public on the NSE.

The shares were offered at Sh11.25, a specially constructed price to enable as many Kenyans as possible to acquire shares of the airline. It was the largest IPO in the history of the NSE then.

An enthusiastic public snapped up the shares, and the issue was oversubscribed by four times. This was how Kenya Airways ended up becoming one of the most successful privatisation stories, not only in Kenya but throughout the continent. 

It was much heralded, especially because it was the first successful privatisation of an airline in Africa, and won award after award. The privatised entity now had a new ownership structure. 

The Government was now a minority shareholder holding a 23 per cent stake, KLM held 26 per cent, while the balance of 51 per cent was in the hands of private investors both individuals and corporates. 

Even the speed of the transaction was almost breathtaking, given the size and complexity of the transaction.

After the restructuring, the Government today owns 48.9 per cent of KQ, up from 23 per cent, and KLM owns a mere 7.8 per cent, having been diluted from 26.7 per cent.

Banks that were owed by KQ came together under one umbrella known as KQ Lenders Company Ltd, and now hold 38.1 per cent of the airline, having converted their debt into equity. 

Private investors, once proud owners of 51 per cent of KQ, now hold a misely 5.2 per cent.

And that is how KQ, released to fly high by privatisation, came crashing down to earth, back into the embrace of Government control for the foreseeable future – a failed divestiture.

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