199mn shares

You must hand it to Kq for breaking new ground. Technically it is not a dilution but a boon to current minority shareholders, here's why:

1. Before this deal Kq had negative equity so they owned nothing in the - no residual ownership - firm despite holding its shares.

2. This deal takes care of the negative equity in its entirety meaning that shareholders despite a reduced % holding in the firm they can now lay claim to its assets. Kind of a negative negative arrangement yielding a positive outcome aka diluting negative equity through debt conversion results in a plus.

3. Increased number of shares will of course suppress the share price on the bourse so it's a case of you win some and lose some. If the dilution is as huge as anticipated Kq could even yield a margin of safety for investors.

However, since there will be no cash injection other than the $100m from KLM can Kq generate enough cashflows to maintain working capital, pay down the remaining debts and return to profitability? I have my doubts but time will tell. On the balance of things it will not take long for the rights issue to be announced. That squeeze won't be pretty for the minorities.

It is technically impossible to save Kenya Airways. Instead, the government should use the money it regularly saves KQ with, to launch an alternative airline that is wholly owned by the government (strictly no other investors). My reasoning is that KLM is the parasite that eats KQ from within, and at this point, it is impossible to get rid of it. The government should retain it's KQ shares, and watch KQ slide into insolvency. When the airline's assets are auctioned, it will get some as a shareholder, and as a creditor. These assets can then be used by the new airline which it will wholly own.

Jipe moyo @Obiero as thousands of shareholders are forcing their way out to escape the wrath of restructuring aka turnaround!

Read here: http://www.nation.co.ke/...05266-pwbo77/index.html

"Some Kenya Airways workers believe KLM routinely takes traffic that belongs to the Kenyan carrier.

However, this allegation has been dismissed by the Seabury report as a misconception since “if desired”, KQ could block KLM’s expansion in Eastern Africa through joint network governance.

The argument within KLM is that if it reduces service to Eastern Africa, a new competitor might come in and take the route and so it is defending the Eastern Africa route for KQ against an onslaught from Gulf airlines, including Etihad, Emirates and Qatar.

Initially, KQ’s regional and domestic operations were to be structured to feed both KLM and KQ’s intercontinental operations with a provision of seamless connectivity.

Kenya Airways was to take over the operations of “most of” KLM tail-end services via Nairobi and its European network was to be adjusted to optimise hub-to-hub operations.

It also meant that KLM’s Eastern Africa destinations, served via Nairobi, such as Lilongwe and Dar-es-Salaam, were to be taken over by KQ. This did not happen.

Secondary destinations in northern, central, eastern and western Europe were to be served by KQ via KLM Amsterdam connections, “subject to a detailed analysis of the business benefits of each pair”.

Both KLM and KQ agreed to offer competitive fares reflecting their connecting services.

But even with that, questions have been raised within Kenya Airways as to why KLM sells more out-of-East Africa tickets than KQ.

It is now known that KLM does not make any efforts to sell KQ tickets while KQ makes efforts to sell both its tickets and KLM’s.

The winner here remains KLM, which rakes in more revenue from Eastern Africa than KQ.

“This imbalance is indicative of a sales relationship in need of improvement,” says the Seabury report.

Another loss for the country is that the government agreed to ban charter flights to and from Jomo Kenyatta International airport to safeguard KQ.

The import of this clause was that tour companies could not fly tourists on their choice airline. The winner for this arrangement was KLM since it commands the north-south route.

Again, while KLM had agreed to respect “grandfather rights” to existing route licences, new information is that it has been selling these slots.

“Kenya Airways has sold its highly valuable slots into London Heathrow Airport, and proceeded to lease some unfavourable slots from KLM,” says Kenya Airline Pilots Association Secretary-General Paul Gichinga.

NO UNDERSTANDING
In the aviation industry, grandfather rights allow an airline to keep a slot in perpetuity, provided that it uses it for at least 80 per cent of occasions during a single season.

Without these grandfather rights, or slots, an airline is unable to expand to major international airports. KQ has sold its slots at Heathrow.

The 1996 agreement also said that the business will be conducted “in the best interest of the company on sound commercial profit making principles”.

Despite this cooperation, the two airlines agreed to “remain competitors in certain spheres of business” and to establish a code of conduct governing their behaviour in areas where they remained competitors”.

Now, officials from both firms agree that KLM dominates working group discussions and that KQ has no say.

“KLM feels that it dominates only because KQ does not put in similar effort,” says the Seabury report. “It does not prepare for meetings and frequently does not have proper background for their positions.”

One of the recommendations given by the consultants is that KLM needs to take time to explain sophisticated issues to KQ so as to “stay transparent and include KQ input in all steps of decisions”.

KQ was also asked to assign “top talent” into the working groups and resources. This is because KQ employees have a general lack of understanding on how the joint venture operates and how to cooperate at day-to-day levels." (Article Originally posted in the Daily Nation and written by one John Kamau)