AIR TRANSPORT

An auditors warning about unsustainable losses at FastJet sent investors fleeing the pan-African start-up in early June, but strong sales growth in Tanzania and the prospect of a new operating base in South Africa is keeping interest in the airline afloat. Martin Rivers spoke to the companys CEO.
hares in FastJet halved in value over the course of two days in June, when auditor KPMG warned of material uncertainty about its ability to continue operating amid deepening losses. The Stelios Haji-Ioannou-backed carrier posted a net loss of $56 million across its FastJet and Fly540 brands during the 18 months to December 2012, prompting KPMG to warn that continued fundraising would almost certainly be required if the airline is to stay afloat. But strong sales figures coupled with steady progress in entering the South African and Nigerian markets saw its share price immediately bounce back. Though the volatile stock was still 75% down on its January peak as African Aerospace went to press, chief executive Ed Winter is confident the tide has begun to turn in Africas fledgling low-cost carrier market. Most companies in our position, which are just developing, raise money as they need it, he said at the IATA AGM in Cape Town, shortly after KPMG issued its profit warning. I cant sit down and say yes Ive already got in the bank enough money for the next 12 months, because I havent. But Ive got the absolute expectation that the facilities and the arrangements will continue to raise funds. Insisting that FastJet is not facing a liquidity problem, Winter acknowledged that the 18month result was disappointing. However, the cut-off point of December 2012 was just one month after the FastJet brand launched, meaning that the vast majority of its losses stemmed from weak performance by subsidiary Fly540. FastJet acquired Fly540 in June 2012 mainly to gain control of its air operators certificates in Tanzania, Kenya, Ghana and Angola and the London-listed parent company had always envisaged winding down its loss-making subsidiary as the new brand expanded. Those plans hit turbulence late last year, however, as the two companies became embroiled in a branding and ownership dispute that threatened to unravel the partnership. To date, FastJet has only launched operations in Tanzania. Winter admitted that a lack of clarity both before and after the transaction had given rise to bitter divisions between FastJets management and Don Smith, chief executive of Fly540 parent Five Forty Aviation. At the height of the dispute, Smith was demanding that FastJet repay $14 million in debt to third parties as well as repaint Fly540-branded aircraft in Ghana and Angola leaving him to run the comparatively wellperforming Kenyan unit. FastJet responded by

WINTERS

hauling Smith before Britains High Court. Confirming that all legal action has now ceased, Winter said a Memorandum of Understanding signed by both sides in April has laid down a protocol of how we will work together towards joint objectives. He added: Were in a position now whereby we can just work together to allow Fly540 to develop for the moment and be ready for transition to FastJet at the appropriate time. Though KPMGs stern warning undoubtedly rattled nerves, FastJet pounced on the subsequent news that its Tanzanian unit is regularly flying profitably after just six months of operations. That reflects a 50% surge in sales since the local Fly540 operation at Dar es Salaam was wound down and replaced by FastJets three Airbus A319s. qqqqq

WARMER
and 12 units by the end of the year. Speaking shortly before a Memorandum of Understanding with Nigeria's Red1 Airways was unveiled, he added that active discussions with a number of other countries are under way. However, he also conceded that negotiations in Ghana and Angola have not significantly advanced. In Ghana, FastJet has now re-engaged in discussions with the government about passenger taxation. The airlines bargaining hand will be strengthened by news that Fly540s passenger numbers in the country have risen 52% year-on-year since Winters team took the helm. But parallel capacity growth by local operators Starbow and Africa World Airlines could undermine calls for reform, and delays to resurfacing the runway at Kumasi Airport highlight the infrastructure challenges facing FastJet all over Africa. Angolan flights remain a way off, Winter admitted, with restrictions on moving currency and spare parts impeding the viability of the lowcost model. Although Ethiopian Airlines subsidiary ASKY has gained ground in west Africa, Winter said there will be no mad rush to enter the sub-region. I dont think were losing ground there, he insisted. The important thing is to enter those markets when were ready, when weve actually got the right level of agreement with the governments, and as we see infrastructure improving. The biggest feather in FastJets cap looks set to be the introduction of domestic South African flights, though a precise launch date remains unclear. A twice-daily JohannesburgCape Town service - planned in conjunction with local carrier Federal Airlines - was suspended at the eleventh hour. Division chief executive Kyle Haywood has yet to confirm whether he will still wet-lease a Boeing 737-300 from Star Air Cargo for the route. But Winter emphasised that he is "totally committed" to opening the South African base.

Winter said the introduction of international flights from Tanzania will further strengthen its results. The airline currently operates solely domestic services to Mwanza, Kilimanjaro and Zanzibar, but in June it obtained route approvals for South Africa, Zambia and Rwanda. "We have expended huge effort over the past six months in obtaining these rights, and we can only thank the government and population of Tanzania, who have lobbied hard to allow us to gain access to the bilateral rights," Winter said at the time. In Tanzania the key is to get international routes, he affirmed. Weve been lobbying hard. Even more significantly, the resolution of the dispute with Fly540 means that Kenya is actually on our radar for somewhere in the next six to nine months. Expansion in Tanzania and Kenya will pave the way for the fleet to begin growing operations director Rob Bishton has said 14 specific aircraft are being reviewed by FastJet meaning the airline could still meet its target of between six

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LOW-COST CARRIERS

Weve now got bookings stretching out for months and months, whereas when we started people wouldnt book more than a couple of days ahead.
ED WINTER
The launch of the South African unit has come under intense media scrutiny domestically. FastJets earlier attempt to buy out defunct local operator 1time Airline failed due to the countrys strict foreign ownership laws. In response, Winter struck a deal with local investment firm Blockbuster, since renamed FastJet Holdings, which will own 75% of the new South African venture. It counts Edward Zuma, son of the countrys president, among its directors. But its hazy corporate structure has led critics, such as Erik Venter, chief executive of rival Comair, to question whether FastJet plc in London is pulling the strings from behind the scenes. Fed Air is an absolutely independent airline with its own accountable manager and thered be no way Id be allowed to influence or control what they do, Winter said when asked about Venters concerns. He emphasised that UK involvement in the business unit is restricted to its 25% stake plus commercial arrangements for consultancy services. qqqqq Drawing parallels with hotel chain Hilton which functions as a central company providing expertise and branding to franchisees Winter said the South African model could be replicated elsewhere in the continent. He also questioned Comairs motivation for objecting to FastJets entry, complaining: Venter continually says he believes in a competitive market, and I support him in his arguments against [flag carrier] SAAs subsidies. But the way hes acting is absolutely [suggestive] that he doesnt want competition. Having fought pitched battles with regulators, governments, rivals and even its own subsidiary, FastJets first six months of operations have been every bit as painful as sceptics warned. However, no-one ever claimed that introducing low-cost air travel to Africa would be easy. Noting that 38% of FastJets passengers are first-time flyers, Winter said the seeds of change have sprouted. People are getting confidence in us, he insisted. Weve now got bookings stretching out for months and months, whereas when we started people wouldnt book more than a couple of days ahead. And this is enabling us to really roll out the proper low-cost model, because people are accessing $20 fares by booking early. Its amazing how quickly people are adapting and learning. Critics have said, Oh it wont happen in Africa. Well, it is happening in Africa.

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