Kenya Airways deals that are killing the airline

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By Kenya Confidential Aviation Editor, Nairobi October 9, 2016

KQ management philosophy in life is to plunder mali ya serikali (tuponde mali ya uma). That is the spirit that drives most parastatal and quasi-government bodies in Kenya

Kenya Airways is no longer in the terminal financial intensive care unit (ICU) but clinically dead and only looting cartels are holding onto the body before it it goes up in flames at the crematorium.

The airline’s inept management appears to have turned into bouncers of a funeral parlour denying morticians the opportunity to determine the real causes of the so-called Pride of Africa aviation disaster. The decapitated aviation carcass is still oozing putrid sludge from deep financial wounds inflicted by a callous and merciless band of bungling management allowed to kill it in full view of millions of Kenyan taxpayers now being robbed of its ownership.

BREAKING NEWS:

Kenya Pilots Association has today given Kenya Airways Managing Director Mbuvu Ngunze seven days to pack and go home or they withdraw their services to the airline. The pilot’s move follows clear indications that under Ngunze’s management the airline will die for real.

One cause of the airline demise is obvious. The once flourishing pride of Kenyans has been bled to death by a determined inefficiency of unprofessional management allowed to oversee mechanical equipment fly into a halt instead of the CEOs herding cattle in Maasai savannas or harvesting sand in the plains of Ukambani or organising bull-fighting in Mlembe Nation. Clear cases of square pegs in round holes.

A management that went on a buying spree of multi-billion-shilling aircraft as if they were toys at the equally mismanaged Uchumu Supermarket by directors who never had toys in shapes of aircraft to play with when they were young. That is a management whose philosophy in life is to plunder mali ya serikali (tuponde mali ya uma). That is the spirit that drives most parastatal and quasi-government bodies in Kenya.

The airline board is chaired by Dennis Awori, a man sharing a name with Eric Awori, who attracted mass circulated Daily Nation headlines in 1980s by claiming he could drive in reverse gear all the way from Mombasa to Nairobi. Dennis was last year given a second chance to reverse Kenya Airways from its financial quagmire but shows no signs of towing the national carrier from its collapsed hangar let alone piloting it to the runway. The airline went on auto financial drain nosedive in his first term as chairman. Many wonder whether Kenya is that short of aviation industry brains or it is incapable of outsourcing appropriate brains or has chosen to deliberately perform a Kamikaze feat with the airline.

Awori is a joyrider in the aviation industry. He began his career with Cooper Motor Corporation Holdings Ltd  (where directors led by disgraced Charles Njonjo and Jeremial Kiereini, stole millions of tax-payer’s money by inflating government vehicle prices) as General Sales Manager and then Branch Manager for the West Kenya region. He was appointed Managing Director of Lonrho Motors East Africa (previously named the Motor Mart Group) in 1997. He became Corporate Advisor and Executive Consultant, a post he held until he was appointed the Kenya Ambassador to Japan and Korea in 2004 (motor vehicle, not aviation, giants). Upon his return in April 2009, he was immediately appointed Chairman of Toyota East Africa Ltd and Executive Advisor to Toyota Tsusho Africa (Pty) Ltd

A fundamental question yet to be asked is, if small purchases of government vehicles by CMC Motors could earn directors like Njonjo and Kiereini hundreds of millions of shillings to stash in off-shore accounts, how much worth of multi-billion-shilling Boeing Dream Liners and skewed contracts and purchases did Kenya Airways senior directors make, where are their off-shore accounts? Yet Kenya Airways uses Njonjo, who once vowed never to fly KQ planes flown by African pilots, in its advertisements!

Another interested party and a major investor in the airline Chris Kirubi has a track record of killing public commercial enterprises. He was driving KENATCO, the largest transport firm in East and Central Africa region, when it crashed into insolvency. Most of the company vehicles were disposed of irregularly with many sold privately to Uganda transporters. A sports Mercedes was parked in underground city centre building for many years before its disposal.He later forced the once largest Supermarket chain, Uchumi, down to its knees while private enterprises like Nakumatt, Tuskys and Nivas flourished.

There is no doubt that Kenya Airways is a victim of self-motivated looting. For example, a consultancy firm, McKinsey and Company, demanded and got a contract to be paid billions in advance in order to provide “services” to Kenya Airways in a controversial contract that saw it siphon hundreds of millions of dollars/shillings before it got down to work. According to a secret memorandum the firm would earn at least Ksh1.7 billion in the first 18 months of the contract as standard costs alone.

For the first three months, Kenya Airways (KQ) was to pay a fixed fee of $800,000 (Ksh80 million) a month. This was to be charged fortnightly, an arrangement that saw the airline part with at least Ksh40 million every two weeks. This was to happen between mid-November 2015 until February 2016.

Afterwards, it would fly at a higher altitude of $1,500,000 (Ksh150 million) every month for the next six months beginning March this year. It was then to descend to an altitude of $500,000 (Ksh50 million) a month for another 12 months. That brought the fixed charges to Ksh1.7 billion in the first 18 months.

In that period, there were to be other charges such as performance fees that were not explicitly defined in the contract and which were to be calculated based on other metrics such the value of “initiatives” executed.

“This fee will be charged twice a month at the beginning and mid of each month. These payments are immediately due,” the contract adds.

The contract says that unless Kenya Airways had sufficient cash funds available for the whole time of their programme, the airline was to pay in advance. “All invoices are payable within 15 days of issue. These payment terms apply in case KQ is in stable financial condition; otherwise section ‘cash advances and prepayment’ is applicable,” the contract reads in part. Prepayments are done in advance before a service is rendered.

At the time it was starting its programme, Recovery and Transformation Services (RTS), the contract said the airline was operating with ‘significant negative monthly cash flows and had a negative equity balance.’ Restructure the business The fee structure to be earned by the company took effect mid November 2015. The firm was to perform its work for 26 months until December 2017.
“This means that the terms, conditions and fee structure under this arrangement will stay in place (and fees payable) for the entire period irrespective of our level of on-ground resourcing,” the contract reads in part. The contract was signed by KQ CEO Mbuvi Ngunze and the former Chief Finance Officer (CFO) Alex Mbugua. McKinsey and Company was represented by Max Falckenberg, a senior partner at McKinsey RTS.

Other signatories were McKinsey director Bill Russo and McKinsey principals, Sebastian Gimenez and Hugo Espirito Santo. Initially, the consultancy firm was to deploy a team of between seven and ten members for the first three months of the contract.

Then it was to scale them down to a team only dealing with the management after 18 months. “The programme is designed to support Kenya Airways in their effort to restructure the business and help to overcome the current crisis,” the memorandum reads. However, invoice billings seen by this paper last week show that McKinsey has earned Sh2.3 billion in last six months, at a time airline is struggling to remain afloat.

It has been drawing about Ksh43 million as weekly fee since March this year. This has emerged as one of the most expensive consultancy bills in Kenya’s corporate scene even as management continues to defend itself against concerns that it may not be getting value for money. KQ boss Mbuvi Ngunze said in an earlier interview that he cannot comment on the specifics of the contract because of privacy clauses but maintained the company had been awarded the contract competitively.

“The contract was competitively done and its implementation is overseen by the board. I cannot speak on the specifics of the contract. They bid for the tender and I cannot disclose the details,” Ngunze said.

KQ insiders say the firm bills for its services in dollars and the weekly fees are hurting its cash flows given that it is currently running its operations largely on debt. In addition to the weekly fees, the company also bills the airline for various services among them “performance and professional” fees.

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For instance, an invoice number 127CM dated September 19, 2016 of Sh43.5 million (USD 435,000) was received by the airline for ‘implementation stage weekly fees.’ Similar invoices were entered in March, April, May through to September. On August 14, the firm invoiced a Sh46.4 million for professional fees.

Similar fees were entered for December, January and February. There have been about 40 different invoices entered in the period. The  largest invoices were in July and September when it billed Ksh290 million and Ksh 600 million, respectively, as performance-based fees. McKinsey was brought in after KQ made cumulative losses of S Ksh 52 billion in the last two years, throwing the national carrier into its biggest financial distress in the last decade.

In a bid to stem the losses, the airline has had to take painful decisions and had to sell some of its assets to free up money in order to meet its daily obligations. So far it has fired almost 100 employees in its restructuring plan known as Operation Pride that aims to send home about 600 workers. It is also preparing for the second phase of sackings that will see mark the second round of employees leaving.

The company has Ksh142 billion in debt and it says it is now negotiating with the lenders to obtain waivers for non-compliance with certain financial covenants as at March 31, 2016.

Kenya Airways ignored its auditors and lost billions in flawed jet fuel purchases KQ put up on sale a prime plot at home in Embakasi and has also sold a parking slot in world business capital of London. It has also sold several planes and leased others. The airline says it will take action against those who caused it losses as found by a forensic audit by Deloitte

Kenya Airways (KQ) lost at least Ksh 3.2 billion through purchase of expensive jet fuel between 2013 and 2015, an audit has found. Initial findings of the forensic audit by Deloitte Consulting Ltd showed the airline chose to buy her fuel through a “flawed jet fuel procurement process”. That denied the national carrier the much-needed savings that were being enjoyed by other airlines who were buying their fuel through the African Airlines Association (Afraa).

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“It is the responsibility of the jet fuel procurement manager, as well as the head of supply chain, to ensure that KQ always obtains the best possible prices for any products purchased. In addition, these same individuals are part of the Afraa tender committee, responsible for procuring on behalf of the association,” says Deloitte.

Price bargains Afraa was formed in 2008, but only became operational in 2012 when it first began to procure jet fuel on behalf of its members. The association provides airlines with a better bargaining position with the fuel suppliers by combining all the volumes of the member airlines and procuring the fuel as a single unit.

The result of this arrangement was price bargains for each of the member airlines owing to the fact that the fuel prices are highly dependent on the volumes purchased. The report shows KQ could have saved Sh3.2 billion at the current exchange rates if it had obtained similar prices as Afraa did.

“The fact that KQ was not able to obtain better prices or even similar prices to the prices obtained by Afraa is evidence of a flawed procurement process. This is compounded by the fact that KQ consumes significantly higher volumes of fuel than Afraa in Kenya,” the report adds.

Deloitte did at least 10 reports on different sections of the airline from procurement, ticketing, special purpose vehicles, and jet fuel procurement. The purchases were happening at a time when the airline was sinking deeper and deeper in losses.

The airline made two consecutive losses of Ksh 26 billion in the last two years of the audit, losing a cumulative Ksh 52 billion.  The airline made its purchases using the Open Tender Pricing System (OTS) while Afraa uses the Mean of Platts Arab Gulf (Mopag) pricing model. Asked why it encouraged her suppliers to bid based on OTS, KQ said it was in the suppliers’ request that the bids be carried out in that pricing model and not any other price structure.

“We established that in the OTS pricing model, the risk of increases in freight and premium costs rests entirely on KQ, as the company has to bear the cost of increases in freight and premium and all the other costs that are incurred in the importation of the fuel,” the report notes. Audit’s concerns The airline ignored its internal audit function that had raised concerns over the difference in pricing basis used by Afraa and KQ.

Afraa secretary told the auditors that the association prefers to obtain quotations based on Mopag price model. “Mopag is superior as most of the variable costs are fixed, and thus the risk associated with the variables are also fixed as opposed to OTS, where the client is not in control of the price movements and bears all the associated risks,” the report notes.

The secretary further explained that the invitations were open to all suppliers, as long as they were compliant with the IATA regulations and standards, and have the capacity and, most importantly, can meet all the requirements stipulated in the terms of reference.

Ironically, the purchase model was validated by advisory firm McKinsey, which has been earning billions of shillings for providing consultancy services to sink the airline. The airline’s officials also persisted that OTS was cheaper than Afraa and elaborated.

“Jet fuel supply chain data obtained for the last 30 months (Jan 2014 to June 2016) from Vivo, Gulf and Bakri and validated by McKinsey confirmed that KQ has saved over USD2 million on fuel procurement at JKIA by using OTS methodology compared to Mopag,” the employees in charge told auditors.
McKinsey earned at least Ksh 2.6 billion in consultancy fees in the last six months. But as it later turned out, the lower prices as validated by the firm were due to decreasing freight cost.

 

 

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