The national carrier, Kenya Airways (KQ), has been boxed into a corner in its attempt to cut costs after its aircraft lessors demanded that it first clears all arrears it owes them to enjoy permanent discounts on leasing costs, a key step to fitting into conditions set by the International Monetary Fund (IMF).
To meet the IMF conditions of restructuring into a fit-for-purpose airline, KQ has for at least three months engaged international firms from which it has leased aircraft to reduce leasing charges by 35 per cent.
But after what the carrier termed “extremely difficult and low” negotiations, it was afforded a 19 per cent reduction, albeit with conditions.
“We do have lessors that we owe a lot of money in terms of arrears and we had made negotiations earlier on to defer some of the payments. There is a significant amount of money that we owe the lessors.
“We wanted to have discounts on arrears and then permanent reductions in rental going forward. We were targeting a 35 per cent reduction in costs going forward, but the negotiations were extremely difficult and low.
“What we have been able to achieve so far is a 19 per cent reduction in rental costs overall going forward. That comes with a condition that we pay the arrears we owe the lessors,” said KQ Managing Director Allan Kilavuka, during an investor briefing on Wednesday.
No agreement
Mr Kilavuka noted that while the requirement of a permanent reduction in costs was one of the conditions from the Treasury as part of the restructuring plan, its lessors could neither agree to cut the costs by its request of 35 per cent nor take anything less than full clearance of arrears, before issuing it the discounts.
The airline, however, admits that “obviously, at the moment we don’t have money and so we will be waiting for disbursements from National Treasury so that we can make those conditional payments.”
This leaves it boxed into a corner and rushing against time to meet the IMF’s loan conditions under the current extended credit facility and extended fund facility.
This also means that for the carrier to shed off about Sh2 billion in aircraft leasing costs annually, taxpayers will first have to bleed out billions of shillings to settle arrears KQ owes its lessors.
Aircraft leasing costs for the airline in the half year to June 2022 were Sh5.3 billion.
The 19 per cent reduction KQ negotiated, therefore, translates to a drop of Sh1 billion in the costs in half a year, or Sh2 billion annually.
Had the airline pursued negotiation of a 35 per cent reduction in the costs sailed through, it would save about Sh3.7 billion annually.
“These costs are the most difficult to renegotiate and we now believe we have been able to conclude the discussions and we believe we will be able to take out about 19 per cent of the cost on a permanent basis going forward effective next year,” he said.
The airline, however, could not disclose the amount it owes its lessors, citing non-disclosure clauses in contracts it has signed with them.
“We’ve explained to the National Treasury the reasons why we were not able to achieve the 35 per cent cost cuts with lessors. We targeted to reduce the costs by 35 per cent because when we looked at the market in 2020 following Covid-19, the market prices of leases had dropped significantly.
“Unfortunately, over the last few months, the market is picking up again because of the return of traffic. They are very difficult negotiations, it has taken us way over three months to negotiate this, with concessions given here and there,” the MD said.
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