Kenya Airways (KQ) is reassessing its 41.23% stake in Precision Air, its Tanzanian subsidiary, as financial woes continue to deepen for the Dar es Salaam-based carrier. With liabilities exceeding total assets, Precision Air is in a state of technical insolvency, casting serious doubts over KQ’s ability to recover its investment, which is currently valued at approximately Tsh1.32 billion ($498,383).
This development comes as Precision Air struggles with mounting losses, significant debt obligations, and a declining financial position. For KQ, which has faced its own financial turbulence in recent years, the potential loss of this investment raises critical questions about its long-term regional strategy, financial resilience, and ability to support subsidiaries effectively.
A Strategic but Failing Investment
Kenya Airways initially acquired a 49% stake in Precision Air in 2003, positioning itself as a key player in the Tanzanian aviation market. However, after Precision Air’s 2011 listing on the Dar es Salaam Stock Exchange (DSE), KQ’s stake was diluted to 41.23%, with the late Tanzanian businessman Michael Shirima’s estate holding the majority stake at 42.91% and the public owning the remaining 15.86%.
The strategic intent behind KQ’s investment was clear: strengthen regional connectivity, create feeder networks for Kenya Airways’ hub at Jomo Kenyatta International Airport (JKIA), and establish a competitive advantage in East Africa. However, Precision Air’s financial troubles have turned this investment into a liability rather than an asset.
Mounting Losses and Financial Distress
Precision Air’s financial health has deteriorated significantly in recent years. In 2023, the airline posted a net loss of Tsh57.38 billion ($21.66 million), a stark contrast to its Tsh5.91 billion ($2.23 million) profit in 2022. Its total liabilities now exceed total assets, leading to a negative shareholder equity position of Tsh491.2 billion ($185.45 million), a decline from Tsh433.8 billion ($163.78 million) the previous year.
Debt remains a major issue. Precision Air’s outstanding loans surged to Tsh435.3 billion ($164.35 million) in 2023, up from Tsh398 billion ($150.27 million) in 2022. Worse still, these loans have been classified as current liabilities due to breaches in debt agreements, making them payable on demand. The airline has already defaulted on several obligations, raising concerns about its ability to remain operational without a major financial restructuring.
Kenya Airways’ Dilemma: Stay or Exit?
For KQ, which is also navigating its own recovery from years of accumulated losses and debt, the worsening situation at Precision Air presents a dilemma. CEO Allan Kilavuka has acknowledged that a review is necessary, stating that the decision will be guided by financial prudence while considering the need for regional connectivity.
However, if Precision Air were to collapse, KQ could lose its entire investment. As it stands, the subsidiary’s negative shareholder equity indicates that the airline owes more money than its assets can cover, meaning that even in liquidation, Kenya Airways would likely receive little to no return on its investment.
Aviation analyst Melodie Gatuguta from Standard Investment Bank highlights the risk:
“If the firm were to liquidate, KQ may receive little to no return on its investments. If KQ is interested in exiting its position, it may find it difficult to attract prospective buyers due to valuation challenges.”
A Broader Trend: African Airlines and Negative Equity
Precision Air’s struggles are not an isolated case in African aviation. Many national and regional carriers have found themselves in similar financial predicaments, weighed down by high operational costs, debt burdens, and external shocks such as COVID-19.
Kenya Airways itself has battled significant financial challenges. In 2022, the Kenyan government had to step in and assume KQ’s $841.6 million debt, which had been exacerbated by currency depreciation and high-interest costs on foreign loans.
Other African carriers facing similar issues include South African Airways (SAA), which required a government bailout and business rescue to stay afloat, and Air Zimbabwe, which remains on the EU Air Safety List due to safety and operational concerns, making international growth difficult.
The persistent financial distress among African airlines raises critical questions about the sustainability of state-owned and partially state-owned carriers. Many of these airlines continue to operate under heavy debt and require constant government intervention, ultimately burdening taxpayers.
Is There a Path to Recovery for Precision Air?
Despite its current financial turmoil, Precision Air’s management remains hopeful. The airline is pursuing a restructuring of its aircraft loans and engaging creditors in negotiations for extended payment plans based on projected cash flows.
However, analysts warn that without a significant cash injection, operational restructuring, and a reduction in debt obligations, Precision Air may struggle to turn its fortunes around.
Ken Gichinga, Chief Economist at Mentoria Economics, points out the grim reality:
“In the event of liquidation, equity holders will be paid last. They will pay banks and suppliers before shareholders.”
Comments are closed.