Kenya Airways (KQ) bought two planes at Sh2 billion from KLM Dutch Airlines, its largest shareholder, and later sold them off at Sh210 million.
A forensic audit done by Deloitte Consulting Ltd shows the national carrier bought the two planes, Boeing B737-300 aircraft from Koninklijke Luchtvaart Maatschappij (KLM), under a conditional sales agreement.
The first sales agreement was executed on July 2, 2010 for the first aircraft registered as 5Y-KYM. A similar sales agreement dated September 14, 2010 was executed for the second aircraft registered as 5Y-KYN. The purchase price of each aircraft was stated at $10,260,000 (Sh1 billion at current exchange rates).
Auditors say the planes could have fetched at least Sh600 million, but the airline instead went ahead and disposed them for a song, The auditors describe the move to sell off the two aircraft “as a costly strategic decision made by the Board”.
“We determined that the two aircraft had been purchased at USD20.52 million in 2010 from KLM and later sold at a combined price of USD2.1 million in 2015 to Engage Aviation LLC. Prior to the sale in 2015, an independent review of the potential value of the two aircraft was stated at USD6 million,” Deloitte says in its Draft Factual Findings Report, dated August 2016.
To finalise the sale of the two aircraft in 2015, KQ made a lump-sum payment of Sh900 million ($9 million) to KLM in compliance with the agreed terms at the time of purchase. The purchase from KLM was also rushed, the audit says, despite not being in line with the fleet development strategy.
“It is possible that the decision made to purchase these aircraft was a result of undue pressure by the KQ management,” the report reads. The first aircraft was delivered prior to inspection by the Kenya Civil Aviation Authority. The fleet director told the auditors that in his opinion, the purchase process was a rushed decision.
According to the report, the airline lost Sh1.8 billion in the sales process, which is the difference between the total purchase price and the total sales price.
Further, before the aircraft were sold, KQ had paid hundreds of millions of shillings in expenses on the aircraft.
KQ had to make 48 instalments of Sh12 million ($120,000) per month. This translated to Sh576 million in two years. The airline was also to pay an engine compensation fee of Sh180 million (Sh90 million per engine) on the scheduled delivery date. The firm was to pay Sh450 million at the end of the 48th month.
“Our review of the letter dated 2 July 2010 revealed that Mr Naikuni, Ms Kiboi, Mr Mbugua, Francis Musila, Ground Services Director, Ms Felicita Kagwanja, Insurance Services Manager, and Mr Allan Fullilove, former KQ Technical Director, had endorsed and confirmed the suitability of the terms and conditions of the agreement,” the report notes.
The following was first published in The Standard Newspapers.