Kenya Airways (KQ) has been forced to review the status of its 41.23 percent shareholding in Precision Air Services Plc as the Tanzanian subsidiary faced mounting financial troubles.

With total liabilities exceeding total assets, the resulting negative shareholder equity signals a bad state of financial health for Precision Air, reducing the possibility of the Kenyan national carrier recovering the money invested in it.

Kenya Airways chief executive Allan Kilavuka said they are reviewing their investment in Precision Air in line with the overall turnaround plan for KQ.“Our investment in Precision Air is not merely about short-term financial results but about ensuring long-term connectivity, job creation and economic opportunity for the regions it serves,” Mr Kilavuka told The EastAfrican in an emailed response to our query. “As the national airline, we have a clear turnaround strategy that is already yielding positive results, and we are applying the same disciplined approach to assessing the best path forward for Precision Air.”A decision will mostly come after consultations with KQs’ own stakeholders, regulators and experts. But Kilavuka argued financial prudence will be the key guide, besides the desire to support easier air connectivity in the region.

It is a decision Kenya Airways has been forced into after facing the possibility of losing its entire investment in the Tanzanian subsidiary valued at around Tsh1.32 billion ($498,383).

Years of accumulated losses and mounting debts have eroded the subsidiary’s shareholders’ equity, pushing it into a state of technical insolvency. Precision Air’s hopes of survival now hinge largely on successful debt restructuring negotiations with bankers and creditors.

And KQ, which is also weighed down by depleted working capital and shareholder equity balances, risks losing its entire investment in Precision Air should the troubled subsidiary be liquidated. KQ is itself trying to reclaim its financial footing following years of its own accumulated losses and debts.“A negative shareholder equity points to either a history of accumulated losses, high level of debt and significant asset depreciation. In the case of Precision Air, the airline has been suffering from swelling accumulated losses. As such, the airline has faced cash flow issues as well as legal issues related to debt, thereby affecting operations,” said Melodie Gatuguta, a research associate for banking at Standard Investment Bank.“With regard to the airline as an investment to KQ, if the firm were to liquidate, KQ may receive little to no return on its investments. In addition, if KQ is interested in exiting its position, it may find it difficult to lock in prospective buyers with regards to valuation,” she added.

Shareholder equity refers to how much money a company has after subtracting all its expenses and debts. A negative shareholder equity arises when a company owes more money to investors than its assets can cover.

A negative shareholder equity is often a bad sign since it means the company has not only been losing money, but has lost more money than its owners have put into the company in the first place.“Precision Air can turn around its operations and return to profitability, there may still be opportunities for recovery and growth,” said Ms Gatuguta.“In the event of liquidation of Precision Air, equity holders will be paid last. They will pay banks and suppliers before shareholders,” said Ken Gichinga, a Chief Economist at Mentoria Economics.

Read: Kenya Airways, Precision Air seek waiver extension of competition rulesPrecision Air fell into a net loss of Tsh57.38 billion ($21.66 million) in 2023 from a net profit of Tsh5.91 billion ($2.23 million) in 2022. Its negative working capital deteriorated to Tsh537.5 billion from Tsh485.9 billion in the same period.

Its total liabilities exceeded total assets resulting in a shareholders’ deficit position of Tsh491.2 billion ($185.45 million) a worse off position compared to a shareholders’ deficit position of Tsh433.8 billion ($163.78 million) in 2022.

Precision Air was financed by loans totalling to Tsh435.3 billion ($164.35 million) in 2023 up from Tsh398 billion ($150.27 million) in 2022, and these loans have been classified as current due to breach of agreements.“The group and company also defaulted on their debt obligations as stipulated in the debt agreements resulting in debts amounting to Tsh435.3 billion ($164.35 million) being due on demand,” Precision Air said in its annual report (2023).“Because of this default, the inability of the group and company to generate cash that would be sufficient to settle arrears and instalment payments as per the debt agreements and the on-going discussions with the lenders on possible rescheduling of the borrowings, there is no reliable basis for developing a reliable liquidity risk profile for borrowings,” it added.

Kenya Airways acquired a minority 49 percent shareholding in Precision Air in 2003. Precision Air would be listed on the Dar es Salaam Stock Exchange in December 2011, with a total of 7,056 investors participating in the initial public offering (IP0). The IPO sold 16 percent stake in Precision Air to the public diluting KQ’s shareholding to 41 percent.

Currently, KQ’s investments in Precision Air is valued at around Tsh1.32 billion ($498,383) for a 41.23 percent stake according to Precision Air’s annual report.

KQ is the second largest shareholder in Precision Air after the estate of the late Tanzanian Michael Shirima, which owns the majority 42.91 percent shareholding. The public holds the remaining 15.86 percent of the shares.“Both airlines (KQ and Precision Air) are grappling with negative equity due to prolonged losses, heavy debt burdens and pandemic-related disruptions. Despite a rebound in passenger demand, accumulated deficits still outweigh assets, reflecting the financial strain,” said Ngugi Waweru, a research analyst at Faida Investment Bank. “For investors, negative shareholder equity raises concerns. For instance, with a negative equity position, it is unlikely for the airlines to pay dividends as profits (if any), which must go towards rebuilding equity and servicing debt.”Precision Air said it will continue focusing on improving profitability and liquidity to ensure it remains competitive in the market with a key focus on pursuing restructuring of the aircraft loan facility and entire balance sheet and continuous engagement of creditors to agree on payment plans based on the paying ability of the company and in line with projected cash flows.

Precision Air has invested in two subsidiaries—Precision Handling Ltd and Precise Systems Ltd—both of which are dormant, with their investments impaired to the tune of Tsh1 billion ($377,563) and Tsh10 million ($3,775.63), respectively.

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