fastjet (FN), in its results for the 18 month period to 31 December 2012 has said that its Fly540 businesses in Tanzania, Kenya, Ghana and Angola - acquired from Lonrho Plc - have "all seriously underperformed relative to expectations" with management having now taken the necessary steps to restructure these businesses and remove legacy inefficiencies. Overall, fastjet says it had posted a loss before tax of USD55million, including USD23.5million of write-downs of goodwill and other matters. As a consequence, the airline says it will focus its attentions on its nascent South African operations with plans to reduce its majority shareholding in Fly540 Tanzania to various undisclosed Tanzanian shareholders.
Amongst the various obstacles the group has faced in its various subsidiaries include a lack of access to international routes; governmental exchange controls and taxation hampering payments abroad; increased local and regional competition; and a lack of legal finality to certain deals.
The following is a summary of activity in all countries of operation during the reporting period:
Tanzania:
Prior to commencing operations, fastjet was assured by the Tanzanian Government that international route rights from Dar-es-Salaam would be immediately available to the airline. The business plan, local organisation and resources were put in place on that assumption. Obtaining those route rights has taken much longer than expected through bureaucracy and protectionism in the countries where fastjet wishes to fly. The result has had an adverse effect on the business plan incurring the additional costs of under utilised resources.
An operation of purely domestic routes within Tanzania would not be a viable business and therefore gaining international route rights has been a very high priority. Lobbying in recent months has eventually produced action and we understand that, following constructive talks with the Tanzanian Government, international routes are expected to become operational within the next two months.
Prior to being closed in November 2012
to make way for the fastjet introduction, Fly540 Tanzania was operating
an inefficient model with just one aircraft and creating significant
losses despite attempts to make short term changes to the business.
As such fastjet
now intends to reduce its current 90% equity shareholding in Fly540
Tanzania and is in initial discussions with a number of Tanzanian
investors.
Angola:
Angola has the potential to be a profitable and sustainable business but is beset with a number of issues relating to moving money freely due to Angola Central Bank controls and delays in clearing aircraft spares through Angolan Customs.
Whenever spare parts are required for a grounded aircraft, it can take weeks to import the parts and get the aircraft serviceable. This has meant extended periods with a reduced schedule and consequent reduced revenues. The spares holding in Angola is being increased, but it is not economically viable to hold every conceivable spare part that may be required.
The Central Bank controls on currency exchange have also created delays in being able to make payments outside of Angola including lease payments and payments for spares and maintenance. The management team has spent considerable time working with the banking authorities to find ways to overcome the current difficulties.
Ghana:
Ghana has seen a substantial rise in competition during the period on the key domestic route from Accra to Kumasi, with a large increase in the size of the market but at a significantly decreased yield. The expected upgrade of the Kumasi runway to accommodate jet aircraft has not yet taken place.
Ghana had a fleet of two aircraft, an ATR 72-500 turbo prop and an Embraer E170 jet. The E170 was used to open international routes from Accra to Abidjan, Cote d’Ivoire and Accra to Freetown, Sierra Leone. Both routes have now been discontinued but remain of interest once a low cost model can be introduced into West Africa. The E170 aircraft suffered from significant periods of being unserviceable and with the withdrawal from those routes has since been returned to the lessor.
The West Africa market, with a population of more than 300million people is a significant and so far, largely untapped market. A key issue for management prior to introducing the fastjet low cost model continues to be lobbying for lower government passenger taxes. Fly 540 Ghana currently has been granted designation on 5 international routes from Accra – Abidjan, Cote d’Ivoire; Freetown, Sierra Leone; Lagos, Nigeria; Ouagadougou, Burkina Faso; Monrovia, Liberia. These route rights will be of significant value to fastjet Ghana when the low cost brand is introduced.
Kenya:
Kenya is the most mature market in East Africa and will eventually be a very significant low-cost operation under the fastjet brand when that is introduced. As previously announced, there has been a legal dispute between the Company and the vendors of the 49.98% economic interest in Fly540 Kenya as to whether the acquisition was completed.
On 23 April 2013, fastjet entered into a Memorandum of Understanding (“MoU”) with Don Smith, Chief Executive Officer of Fly540 Kenya which trades in Kenya as Fly540, with a view to resolving these disputes and establishing a way by which the two parties can work together to maximise the value and business prospects of both Fly540 and fastjet.
As a result of the disputes, we deemed we did not have the operational or financial control over the business and it has therefore been treated as an investment in the period. There are significant debts in Fly540 Kenya and for that reason we have impaired the value by USD13.3million
South Africa:
As previously announced, fastjet had been in negotiations with the provisional liquidator of airline 1time in Johannesburg, South Africa, for the purchase of 1time. However, we were unable to reach a compromise agreement with the creditors.
A commercial arrangement has been struck between local South African investment company Blockbuster, since renamed fastjet Holdings (Pty) Ltd, and Federal Airlines (7V), a company with a 20 year history in South Africa. The agreement will allow fastjet Holdings to leverage Federal Airline’s existing licensing infrastructure and deliver its low-cost airline brand to the South African public.
An MoU has been signed to allow the Company to take a 25% shareholding in fastjet Holdings Pty Ltd, with the remaining 75% being held by South African nationals. The South African Civil Aviation Act requires that, unless the Minister of Transport makes an exception, 75% of the voting rights have to be held by South African citizens. fastjet is targeting early July 2013 to launch the initial Johannesburg to Cape Town route.
South Africa is going to be one of the prime focus areas for fastjet over the coming period, whilst we review and continue to restructure some of the smaller operations we have elsewhere in Africa.
Overall,
an EBITDA (Earnings Before Interest, Taxes, Depreciation and
Amortization) loss due to continued Fly540 operations is expected to
amount to USD17.8million.
See the full report here.