Kenya Airways
Kenya Airways flight

Troubled carrier KQ defaults on $841m aircraft acquisition loan

Kenya Airways has defaulted on a $841.6 million loan from the American Exim Bank for purchase of aircraft, the National Treasury has said.

In its latest Annual Debt Management Report (2021/2022 fiscal year) that the loss-making national carrier secured the loan with a security from the national government but failed to repay.

Of the 841.6 million, the government guaranteed $525 million.

“Kenya Airways defaulted on both the guaranteed portion of the loan amount as well as the non-guaranteed portion,” the National Treasury says.

“The National Government is in the process of novating the debt to be finalised during 2022/2023 fiscal year.”

Original contract extinguished

Novation is the process by which an original contract is extinguished and replaced with another, under which a third party takes up rights and obligations duplicating those of one of the parties to the original contract. This means that the original party transfers both the benefits and burdens under the contract.

KQ’s loan from the Exim Bank of USA was meant to purchase seven aircraft and one engine.

“The Covid-19 pandemic containment measures adversely affected the airline business globally including KQ. Government intervention included, among other financial support, the settlement of the guaranteed debt extended to KQ,” National Treasury’s director in charge of debt management, Dr Haron Sirma told The EastAfrican.

KQ chief executive Allan Kilavuka however disputed the Treasury figure when reached by The EastAfrican.

“The value you quote for the US Exim facility is not correct; $485 million is what relates to the US Exim guaranteed debt. I don’t have the context… maybe they have included other guarantees, not just the US Exim facility,” he said.

Negotiated moratoria

He said that due to Covid-19, when it reduced operations, KQ negotiated moratoria.

“The airline is yet to get back to full operations and has requested GOK (Government of Kenya) to support on the guaranteed loan to avert the possibility of the loan going into default.”

Treasury says it will closely monitor contingent liabilities arising from state-owned enterprises, as they pose major fiscal risks to the economy.

KQ is 48.9 per cent owned by the government and a group of 10 local banks which own 38.1 per cent of the shares.

Other shareholders include KLM Royal Dutch Airline (7.8 percent), employees (2.4 percent) and other shareholders at 2.8 per cent.

Push for restructuring

The government has been pushing for the restructuring of the airline on the back of state bailout plan.

Under the plan the airline is required to reduce its network, operate a smaller fleet and possibly reduce its workforce further.

As a result the airline has focused on restructuring its fleet including selling planes and sub-leasing to other airlines in an attempt to return to profitability.

Data from the airline shows that the national carrier’s fleet size narrowed in the last nine months to 41 aircraft from 43 in December 31 2021 after two leased aircraft (Embraer 190) were returned to the lessor following the expiry of their leases.

Of the 41 aircraft, 18 are owned/financed by the airline itself while 23 are on lease arrangement.

Its fleet size dropped to 39 in the year 2017 from a high of 52 in 2015, before rising to 43 in 2021.

Renegotiating lease contracts

The airline is renegotiating aircraft lease contracts with the lessors as part of a string of austerity measures to reduce operating costs.

Other measures rescue measures include engagement with principal shareholders (government) for financial support, engagement with key suppliers and financiers for moratoria, freeze on non-critical spending and implementation of temporary salary cuts for staff.

KQ has also increased focus on cargo business and has already converted two passenger aircraft to cargo freighters.

Source: The EastAfrican