The KB terms are clear (from clause 3):
"You can close your card account and pay off the amount owing at any time. Closure of the card account will also end any card-related services."
KB can't force you to accept its offer of a new card with different account and terms - unless you activate it.
KB terminated the Airpoints card, which it can do under Clause 3 and has done.
If KB assumed Visa's VAU programme would enable KB to change card terms but keep the same card number and account, it should have got a binding sign off first. From my own experience (20+ years on boards of two major card issuers, ending some years back) KB seems to be out of its depth.