Why KQ won't fly high soon — Sebastian Mikosz

Kenya Airways will not break even and return to its glorious days as the ‘Pride of Africa’ if the shareholding structure remains unchanged.

Outgoing CEO Sebastian Mikosz, in an exclusive interview with the Star yesterday warned that the airline would continue losing its market share if the status quo remains.

Describing it as the ‘enemy within’, the Polish expert singled out the KQ financing structure as the biggest hindrance to the national airline’s growth.

Mikosz spoke just days after the troubled carrier's half-year losses more than doubled to Sh8.56 billion, sinking shareholders into a deeper negative equity position of Sh16.18 billion.

KQ is funded by a consortium of banks holding shares as KQ Lenders Company, entities which Mikosz says charge the airline 11 per cent interest in dollars, making the KQ fleet of aircrafts the most expensive.

The banks hold 38.1 per cent shares in the company; government 48 per cent; KLM (7.8 per cent), minority shareholders (2.8 per cent), and KQ employees (2.4 per cent).

Another bane in the revitalisation effort is the refinancing structure of the Exim Bank loans, a funding framework which is deemed expensive compared with the market rates.

KQ owes CBA group Sh3.1 billion, NIC bank Sh2.1 billion, Equity Bank Sh5.2 billion, National Bank Sh3.5 billion, Co-operative Bank Sh3.3 billion, KCB Sh2.1 billion and a similar amount to DTB.

In May, the Treasury wrote-off Sh24 billion loan it owed the lender, a move that came barely a month after the government secured Sh20 billion to help KQ repay another loan it borrowed from African Export-Import Bank (AfreximBank) two years ago.

An expensive labour force — highly paid captains and crews — has added to KQ cash flow woes. KQ cites an expensive infrastructure and costly tax regimes as part of the problem.

The two cadres of staff gobble half of the airline’s wage bill, with the crews paid at the same rate as Fly Emirates staff.

Mikosz painted a picture of an airline held hostage by a strong worker’s movement which has negotiated for high salaries without reciprocal returns.

Dividends paid to shareholders, he said, have also denied the airline the competitive advantage against its competitors.

“We are competing in a very unequal situation. There is no level playing field as we run against airlines that have completely different financial structures. For a CEO of an airline with such a mandate, it is frustrating to be asked why we are not flying to the 30 cities in Europe.”

To him, if the business was just about paying dividends, then the airline should not grow but reduce to profitable roots and defend the same.

Also of concern is that there is an internal resistance to change, a factor the KQ boss said has frustrated his turnaround strategy.

The existing lease agreement, which is dominated by foreigners, is bleeding the country billions of shillings in earnings which would have gone into local companies.

Mikosz says local investors should consider opening leasing companies so that the country earns from the windfalls that come with the investment.

The condition of Jomo Kenyatta International Airport (JKIA), he said, has made it difficult for Nairobi to regain its initial place in the region’s airspace.

Further to this, Mikosz observed that the landing cost at JKIA has remained exorbitant and, is also a cause of the high costs of operation.

“We have a pending big question about our future; which is about what should be the shareholding structure that KQ will evolve into in the years to come,” he said.

KQ reported a net loss of Sh8.5 billion this year amid concerns the losses may not go away soon if the system remains unchanged.

The DCI has opened investigations into the pervasive losses of about Sh100 billion for the past nine years, with a focus on procurement for engine repair services. 

An attempt to restructure the airline through a Privately Initiated Investment Proposal (PIIP) failed after MPs raised queries.

Parliament has now approved that the airline be wholly owned by the government for ease of funding for it to stay afloat.

It also vouched for the formation of an Aviation Holding Company (AHC) adding that the entity should be guaranteed tax exemptions for it to thrive.

While Mikosz says he cannot resist the plan, his argument is that it would still remain a challenge to turn around the airline financially if the internal issues are not addressed.

“Any future decisions concerning our network, investment in the airport, fleet, and recruitment are all linked to how we will be defined as a company in the next years,” he said.

The expert said that in the face of the business environment changing, with new entrants such as Ugandan Airlines, it will be foolhardy to expect KQ to perform in its current structure.

“My role at the moment is to restructure the airline, cut costs, and pay dividends. This is where there is a hiccup. We should focus on how to grow the GDP without asking for subsidies."

Countries such as Uganda, Tanzania, Ivory Coast, Egypt and the Gulf carriers have no single private airline, the same being the case of Singapore and Turkey.

The KQ boss said the idea is good as it will sort out the doubts which follow whenever the management sought a bailout from the government.

He added that nationalisation will create a sense of ownership since it will raise the country’s expectation and in exchange have players protect it as a key asset.

The KQ boss said compared with the countries which own airlines, the proposal by MPs is no different from what has worked elsewhere, but the solution must start from within the company.

“If you see the importance of having an airline and on connectivity; it is a wise thing to do; consider this as a more global problem. If KQ disappears, it would severely affect the competitiveness of the country,” he said.

Mikosz said his reasons for leaving in December are personal, but the experience at KQ has been a fantastic but exhausting one.

“It is KQ that must change. If we don’t, KQ will continue existing but will lose its market share because the competition is expanding extremely quickly and seizing the market share which will be extremely hard to regain,” Mikosz said.