East Africa’s carriers flutter due to huge debts, losses and bad PR

Ethiopian Airlines, the only carrier in the region that is profitable, is also facing bad PR over the Flight ET302 crash in March that killed all 157 passengers and crew on board.

More petitioners have joined a $1 billion compensation suit filed at a US federal court by top American law firms against aeroplane manufacturer Boeing following the crash.

KQ’s half-year loss widened by a staggering 112 per cent to $81.7 million, from $37.2 million posted for the same period in 2018.

Air Tanzania suit

At the same time, on August 22, a court in Gauteng, South Africa, allowed Hermanus Pillipus Steyn to attach one of Air Tanzania’s (ATCL) Airbus A220-300 series over a $33 million claim against the government.

Mr Steyn’s claim is tied to an almost four-decade-old case that arose from Tanzania’s failure to compensate him for property it nationalised in the 1980s. He was expelled from Tanzania in 1983, after the government nationalised his livestock and seed multiplication farms in the Arusha region.

KQ’s reversal of fortunes highlights the market risks Uganda Airlines is flying into while the seizure of the ATCL aircraft brings alive the political risk its planned operations to the Democratic Republic of Congo face if the latter chose to invoke an outstanding $10 billion claim the International Court of Justice awarded it against Uganda for alleged illegal occupation and plundering between the late 1990s and early 2000s.

Uganda Airlines launched operations on August 28, with services to seven destinations within Eastern Africa. It plans to start services to Kinshasa in 2021 after the two Airbus A330Neos it has on order join the fleet.

Monica Ntege Azuba, Uganda's Minister for Works and Transport, however said that there is minimal risk that Uganda Airlines’ assets risk seizure in the DRC.

“I don’t foresee that and even then, the insurance policy we have taken out for the airline covers it against such risks,” she said.

Uganda Airlines code

Jennifer Musiime, the carrier’s commercial director, said although it is trading as Uganda Airlines, the revamped carrier is registered as Uganda National Airline Company Ltd to avoid association with the defunct Uganda Airlines.

Furthermore, the new airline is using UR as its IATA identifier to create further distance between it and the old entity, which used IATA code QU. That, she reasons, shields it from any liabilities left by its predecessor.

James Kalibala, an associate at the Kampala law firm MMAKS Advocates, said the corporate veil that Uganda has created through registering a completely new company protects the airline from historical claims against its predecessor but may not make it immune to claims against the state of Uganda.

“Uganda Airlines and Uganda National Airline Company are separate legal personalities and one cannot be answerable for the sins of the other. To succeed, a claimant would have to lift that veil to prove that the two are one and the same. But I am not sure how matters would play out if the claim is against the state of Uganda as opposed to the airline and it is proved that the state owns the assets whose attachment is sought,” he said.

Uganda Airlines’ first commercial flight to Nairobi carried only eight revenue passengers while the service to Juba on the same day started off with 12 passengers.

In contrast, the service to Mogadishu got off to a robust start on August 29 with 40 revenue passengers on the outbound leg and 33 on the return leg.

In particular, critics fault the airlines project team for projecting a positive cashflow and a profit within the first year of operation.

Though not unusual for a start, the numbers drew attention to KQ, which is still reeling from the impact of an ill-thought growth strategy dating back to 2011, which snowballed into a $260 million loss for the 2015 financial year.

KQ attributes this year’s half-year $81 million loss to the return of two leaded Boeing 787s to lessor Oman Air, investment in expansion into new routes and adoption of the new international financial reporting standards.

KQ nationalisation

Faced with crippling debt and rising costs, Kenya Airways is seeking nationalisation to save it from imminent collapse.

“Nationalisation is not what we want to be, but it is what we need to be in order to be where we want to be,” said chairman Michael Joseph.

He said the airline was hoping the nationalisation process would be concluded as soon as possible, ultimately transferring its liabilities to the government and Kenyan taxpayers who, over the years, have injected billions into the airline in desperate efforts to save it from total collapse.

The Kenyan government through the National Treasury is KQ’s majority owner with a 48.9 per cent stake while 11 commercial banks, which agreed to swap their $225 million debt into equity, control 38.1 per cent.

Air France-KLM own 7.8 per cent, with 5.2 per shareholding being in the hands of small investors through the Nairobi Securities Exchange.

KQ also reckons that nationalisation will help it compete effectively with other state-owned carriers like Ethiopian Airways, RwandAir, Air Tanzania, Emirates, Qatar and Etihad.

Uganda Airlines adds another layer of competition on regional point-to-point services, including Entebbe-Nairobi, which in 2017 was ranked KQ’s second most profitable international route. KQ reckons the rising competition will exert more pressure on the airline which is technically insolvent.

“Revenues will always be under pressure (under current landscape). All these competing airlines are state-owned and their costs are subsidised,” said Mr Joseph, adding that when KQ is nationalised, the airline will not have the same costs while subsidies like tax exemption and not paying fees to the Kenya Airports Authority will ease the pressure on its operating costs and improve its balance sheet.

Though nationalisation is seen as KQ’s last hope for survival after its plan to take over the running of Jomo Kenyatta International Airport failed, analysts have poured cold water on the deal, cautioning the airline will be prone to political interference.

“Nationalisation will not resolve the real sickness within KQ. It will open a Pandora’s box. Profit making will not be important anymore and the taxpayer will always be at hand to suffer and bear the consequences of corruption and mismanagement,” said Prof Luis Franceschi, Strathmore Law School founding dean.

In the nationalisation programme, Kenya plans to form an aviation holding company with a healthier balance sheet by combining the airline with a planned national aviation college and profit-making assets like JKIA and KAA.