Repeat a lie often enough and it becomes the truth-Joseph Goebbels
Economist Pei Ying Chua talks of the illusory truth effect. She describes it as the tendency to believe in false information after hearing it repeatedly. This was a tool Nazi propagandist Goebbels used to spread disinformation.
To the vast preponderance of Kenyans sold on a lie, Kenya Airways (KQ) is under capture. They believe patent falsehoods about the ownership of the airline. They can hardly be persuaded that the indebtedness of the airline is not deliberate.
To disabuse Kenyans of the notion of impropriety at Kenya Airways, particularly regarding the acquisition, ownership and current indebtedness of the company, an understanding of Project Mawingu is needful. Mawingu was an ambitious project in the year 2013 to cement KQ’s reputation as a leading carrier on the continent. It was also intended to leverage on Jomo Kenyatta International Airport’s (JKIA) strategic location as a hub from which spokes would emanate to destinations within the continent and beyond.
In aviation circles, size is everything. Small is considered ugly while the converse is true. A hub needs a carrier that has extensive reach hence big being beautiful. Further, airlines that increase their fleets in numbers reap hugely from economies of scale benefits when it comes to the purchase price of equipment, maintenance of the same and training of both ground and air crew.
Mawingu was to be executed over a 10-year period. It had a target of three new destinations every year. Core to this was the fleet type. Embraer E190s were to be used for both underserved markets and markets that could be stimulated for growth. Boeing 737s were intended for mature markets with higher load factors and demand for cargo.
The 787s were to do most of KQ’s long-haul flights from the hub to destinations in Europe, the Middle and Far East. This was predicated on traffic channelled to the hub from spokes by the Embraer and 737 fleet.
Several things went wrong. First, there was a two-year delay in bringing in the 787 Dreamliners. On account of that delay, the airline went in for the much bigger B777-300ER. It turned out to be too big for the network at a 400-seater capacity. Then Kenya Airways got its instruments against fuel and forex wrong.
The Westgate terrorist attack in 2013 led to the issuance of travel advisories against Kenya as a destination. This led to weakened demand from Europe, a continent that was already struggling to push passengers since the global financial crisis of 2007. Consequently, KQ cut capacity to Europe and suspended flights to some destinations in the Middle East.
The Ebola crisis caused a suspension of KQ’s lucrative West African routes. Coupled with that was the fire at JKIA which led to constraints at the hub that lay at the heart of KQ’s expansion plans. In addition, the wage bill had doubled from $70 million in 2007 to $ 157 million in 2011 on the backbone of massive recruitment to support the expansion and union pressure.
From the foregoing, it is clear that Project Mawingu was a big contributor to the declining fortunes of KQ. In 2013, it recorded a Ksh.7.9 billion loss. In 2015, because of the disastrous fuel-hedging policy, a further Ksh 26 billion loss was recorded. Efforts to bail out the airline over the years, borrowing from local lenders and from the government, have seen the company accumulate a debt of Ksh. 105 billion.
According to the 2021 Annual Report, Kenya Airways’ ownership structure is as follows: 48.9 per cent is held by the Government of Kenya. 38.1 per cent KQ lenders Company, 7.8 per cent KLM, Employees 2.4 per cent and other shareholders who bought stocks from the Nairobi Securities Exchange 2.8 per cent. It is important to deconstruct the lies regarding some groups in this ownership structure.
There have been allegations to the effect that powerful families behind local banks lend to KQ at ridiculous rates. This is with the sole intent of making it expensive for the airline to pay back so that they can eventually buy it (the airline) on the cheap. Nothing could be further from the truth. KQ Lenders Company is a group of local banks that had severally lent the airline operating capital. When KQ ran into headwinds, a debt-equity swap was arranged as part of the airline’s restructuring efforts. The banks reluctantly acquiesced to this.
The original 11 banks were KCB Group, Commercial Bank of Africa, Cooperative Bank, Equity, I & M Bank, Jamii Bora, NIC Bank, Ecobank, National Bank, Diamond Trust Bank, and Chase Bank. After the CBA and NIC merger, and following the takeover of Jamii Bora by Cooperative Bank, 9 banks now hold shares in KQ through KQ Lenders (2017) Limited.
Talking of special purpose vehicles (SPVs), an understanding of their essence is needful. When an airline needs to expand its fleet, a suitable manufacturer is identified through a rigorous process. An order is then placed for the equipment. Since aircraft manufacturers do not finance aeroplanes, a financier is sought. Typically, depending on the size of the fleet a syndicated loan is sought from a group of international lenders.
Once the loan is approved, having gone through the motions, the planes are released to the airline whilst the titles are held by the lenders. Because there may be a number of them, the lenders then form an SPV in whose name the titles of the planes are held. To avoid double taxation, SPVs are registered in tax havens. The titles are eventually released to the airline when it repays its loan. This arrangement is referred to as a finance lease.
Kenya Airways has a number of finance leases. And they are given African names for ease of reference preferable to numbers. Some of the finance leases include Samburu and Tsavo. Samburu was used to finance the Embraer E190s. The banks behind Samburu are Africa Exports Imports Bank, Standard Chartered, Nedbank, Trade Development Bank and China Development Bank.
Tsavo, on the other hand, was used to finance the Boeing 787s, one 777-300-ER and one GE 90 spare engine. This lease is guaranteed by the US Export-Import Bank. The lender is the Private Export Funding Corporation as well as JP Morgan and CITI Bank (both based in the US). In addition, it is backed by a Government of Kenya guarantee. Loan details can be found under Note 25 of KQ’s 2021 annual report.
Due to the effects of Covid-19, when KQ suspended all flights for close to one and a half years, the airline approached the Government of Kenya with a proposal for support in payment of the guaranteed loan and on-lend the same to KQ payable over a longer period.
This article concludes that it does not make sense to imagine that international lenders of repute like the US Exim Bank, Citibank, Nedbank, and others, could possibly pad up their numbers for purposes of suborning politically connected individuals in Kenya. Whilst it is true that the airline is heavily indebted, no merit is found in claims of malfeasance in the acquisition of the KQ fleet.
Part 3 of this series looks at the Kenya Airline Pilots Association (KALPA) CBA.
