The shutting down of Kenya Airways’ cargo handling and processing unit, one of the most profitable arms of the company, may have contributed to the near financial ruin of the national carrier, The Standard on Sunday can exclusively reveal.
The cargo unit, Kencargo International Limited (KK), was shut down in 2004 and the cargo handling business outsourced to a competitor whose list of original shareholders include the Orange Democratic Movement (ODM) party leader Raila Odinga, who also doubled as a KQ shareholder, a risk assessment report by audit firm Deloitte reveals.
On March 3, 2004, Titus Naikuni, just months into his tenure as the Kenya Airways managing director, stood before the company’s board and disclosed contents of an earlier meeting held in Amsterdam.
The Amsterdam meeting on March 1 was between him and representatives of two other companies with interests in the aviation industry regarding the future of an in-house cargo division. A day later, on March 4, another board meeting was held. This time, the outcome was final. One of the national carrier’s most profitable arms was to be wound up.
Details of the winding up of this arm are contained in a confidential risk assessment report dated August 2016 which was conducted by Deloitte and presented to Ms Wanjiku Mugane, the chairperson of the Audit and Risk Committee of the national flyer.
The risk assessment report details how, through various errors of omission, commission and part naiveté by KQ’s top management, the firm lost out on the lucrative air cargo business.
The decision by KQ to wind up KK, a profitable subsidiary of KQ, was undertaken without the performance of any detailed independent due diligence procedures into the merits and demerits of winding up KK. It appears to have been rushed and not properly handled by the Board and management of KQ and resulted in the subsequent redundancies of key KQ cargo staff,” the report reads.
Before 2001, KQ ran its cargo operations through an in-house cargo division, as well as through two subsidiaries, namely Kenya Airfreight Handling Limited (KAHL) and African Cargo Handling Limited (ACHL). KAHL was a full-service provider of cargo warehousing services. ACHL, on the other hand, was a full-service provider of airline ground handling and airport related services.
On January 31, 2001, KQ registered a subsidiary named Kencargo International Limited (KK) based in Nairobi. The shareholding of the subsidiary was as follows: KQ — with an equity interest of 60 per cent; Martinair Holland NV (MP) — with an equity interest of 20 per cent; and Koninklijke Luchtvaart Maatschappij (KLM) — with an equity interest of 20 per cent.
A shareholders’ joint venture agreement was signed by KQ, KLM and MP on March 14, 2001 in terms of which it was resolved that KK would assume responsibility for all KQ cargo activities in Nairobi from April 1, 2001 and in the remainder of the KQ stations — London, Johannesburg, Lagos and Dubai — by May 1, 2001.
The strategic plan was to develop a subsidiary serving up to 25 airports in Africa, the Middle East and Europe. Phase one of the plan was for KK to act as a cargo agent for KQ and phase two was to involve KK in acquiring charter freighters as part of the strategy to becoming a fully-fledged cargo carrier for KQ and as one of the market leaders in Africa.
For the first three years of its existence, the plan worked. At the time when KK was being wound up, financial records from the airliner show that KK had achieved growth of 125 per cent in revenue for the year ended March 31, 2003, and a net profit growth of 173 per cent, mostly from sales with regard to belly capacity of KQ passenger flights, before KK’s acquisition of its own freighters. Other arms of the business were not doing as well.
Just three months after the super profits by KK were announced, the airway’s board sought the help of two companies, McKinsey and Company and Hay Group Management Limited, to advise on cost cutting measures. The two advisory companies started their mandate in June 2003, Naikuni’s fourth month as MD. Four months later, Hay Group and McKinsey recommended the corporate restructuring of KQ.
Conflict of interest
So on that fourth day of March 2004, the KQ board sat and resolved that KK ceases to operate and that MP and KLM sell and transfer their respective shares in the company to KQ for the following considerations Martinair shares — US$50 000 and KLM Cargo shares — par value.
It was reported in the minutes that an agreement had been reached between KQ, MP and KLM that MP would sell its shares in KK to KQ and that KLM would also transfer its shares to KQ for the nominal par value. This was because KLM’s contribution in the joint venture was in kind, by providing a licence for use, as well as access rights to the Cargoal cargo booking system.
The Deloitte report queries the possibility of laxity within the KQ board as well as conflicts of interest between KQ shareholders who also doubled as owners of a company in direct competition for KQ’s cargo business and the procedure that was used to pull the plug on what was arguably one of the airline’s most profitable ventures, sending the carrier into a tail spin leading to near absolute financial ruin. “We found no evidence to show that detailed due diligence procedures had been performed by the core team of KQ, including Mr Naikuni, Ms Oyas, as well as McKinsey and Hay Group, into the merits and demerits of absorbing KK into KQ as a cargo subsidiary. The restructuring procedures were performed after KK had registered substantial financial growth in under two years of operation,” says the report.
But as KK was being wound up, another player who had been eyeing its cargo handling pie for years saw an opportunity to play his hand — the Astral Aviation Limited (AAL).
Effective from September 14, 2001, AAL signed an interline agreement with KQ, which enabled it to conduct cargo business at specific negotiated rates. Because of a lack of intra-feed capacity (due to KQ’s reliance on the belly space of passenger flights for cargo, to specific destinations in Africa), KQ contracted AAL to de-feed its cargo from the Nairobi hub at JKIA to the Eastern and Southern Africa destinations, to which scheduled passenger flights did not fly.
Among the owners and employees of AAL were individuals who also doubled as shareholders of the national carrier. For instance, data retrieved from the KQ’s computers reveal email communications between Mr Ghadia, the CEO of AAL, and Mr Naikuni dated August 11, 2005. The communication confirmed that AAL had a cargo relationship with KQ and that Mr Ghadia’s family were shareholders in KQ.
“This was confirmed in KQ’s annual return for period ended March 31, 2008 from which we ascertained that annual return No: 51974 of Mr Gadhia Sushila M and Mr Mansukhal K Gadhia of P O Box 386 Kisumu held 2,018 shares in KQ as at 17 October 2008, since 3 June 1996.”
Other directors of the company named in the draft risk assessment include ODM leader Raila Odinga, who, upon registration of the company ,was not only a shareholder but the chairman as well. Others named as original shareholders are Anwar Majid Hussein, Shashikant Gadhia, Ian Sedykh and George Opondo Okongo.
The report names the current shareholders and directors as Anwar Majid Hussein, Shashikant Gadhia Shareholder, Raila Junior Odinga and Amman Basin.
It also details how the various directors and shareholders have interests across the aviation industry.
Of concern for the risk assessment team was how inward billing and outward billing between KQ and AAL was done.
Inward billing relates to transactions where AAL carried goods on behalf of KQ while outward billing relates to KQ airlifting cargo on behalf of AAL. When there is an inward billing, AAL invoices KQ for the services provided and is therefore a “payable” by KQ. Outward billing arises when KQ invoices AAL for the services provided and is therefore booked as a “receivable” in KQ’s books of account.
“We recorded several instances where inward and outward billing rates charged between AAL and KQ had been higher (inward) or lower (outward) than the approved interline agreement rates between the two entities. Management of KQ were unable to explain inward billing discrepancies in excess of US$5 per transaction, while for outward billing, they explained that the discrepancies were as a result of billing errors within the system, which picks IATA rates that stipulated SPA rates. AAL acknowledge the discrepancies and is prepared to settle this issue with KQ,” the report says.
It also says that business decisions that had been taken by the board and management of KQ over the period under review, had given AAL strategic advantages to exponentially expand its cargo business in Kenya and Africa.
“This resulted in a total cost for KQ amounting to more than Sh400 million over the period 2006 to 2015, in outward billing charges by AAL or approximately Sh40.5 million per month since 2001,” the report reads. “After the winding up of KK in April 2004, AAL was designated as the national cargo carrier for Kenya effective from April 2007.”
The Deloitte report is categorical that the KQ board erred in doing away with its cargo arm.
It has also emerged that KLM and Martinair Holland who were both shareholders in KQ’s Kencargo, were at the same time its competitors, running parallel cargo businesses from the JKIA.
They cooperated with KQ under the direction of Mr Naikuni in the winding-up of KK in return for entering into commercial agreements to carry out cargo business directly with KQ Cargo.