Deteriorating share values force FastJet board to act

FASTJET’S FUTURE WILL BE DECIDED IN THE AIR AND NOT THE BOARDROOM

(Posted 10th August 2013)

Reports are coming out of the UK that FastJet’s board had to deal with the unpleasant situation of their share value repeatedly falling below the actual nominal value in the recent past, a development causing the main investors serious headaches as it prevents them from raising more capital through the issue of new shares under UK company law. An audit report a few months ago already ruffled the feathers of senior management of the company, prompting CEO Ed Winter to launch a rare attack on their audit firm, seen then as now as a faux pas of the highest order and rather a shot in the own foot, as it caused the financial markets to pay more attention to the going on’s rather than less. It was learned then that the company had in its short life run up losses of over 56 million UK Dollars, attributed by Winter to ‘legacy debts’ incurred.

That is today largely attributed to former FastJet chairman Lenigas – reportedly forced to quit a few weeks ago as chairman when the situation became too dire – being responsible for a less than thorough due diligence of choice partner Fly 540, now standing accused of having sold his partners a mirage of bright sunshine which in reality turned into one of thunder and lightning.

The current situation has been described as so dire in fact that, according to the UK based source, Sir Stelios was left with little option but to take more shares a few weeks ago in lieu of his consultancy fees and other entitlements, as the company allegedly lacked the cash to pay up. While the directors of the company have now resorted to creative financial measures, like proposing a major share restructuring in coming weeks which will require the approval of a general meeting of the shareholders – an EGM has been called it is understood – the survival of FastJet will be primarily determined in the market, where they are now facing a make or break situation.

Successful on the domestic routes in Tanzania, where they fly from Dar es Salaam to Kilimanjaro and Mwanza with little opposition left, as Precision Air has withdrawn their B737-300 from the route and now operates ATR flights only on domestic flights. Air Tanzania, the moribund national airline of Tanzania, has reportedly also fallen to the wayside with Mwanza jet flights, leaving that market almost entirely to FastJet.

That alone however will not be enough to keep their fleet of Airbus A319’s busy to fly the required number of hours every month to make money. Their initial target market Kenya is still, for all practical purposes, closed to them to start their own branded operation. All eyes will therefore be on the success of their announced first international route on September 03rd to Johannesburg, for which fares starting from 100 US Dollars, PLUS TAXES AND FEES – the airlines still does not openly advertise the final cost of a ticket a passenger has to ultimately pay – have been announced. There, like on domestic flights within Tanzania in the past, they have a chance to carve out substantial market share through their pricing, but face the same danger like on the domestic routes that unless their fare mix can achieve a significant portion of sales at higher fares, booked closer to departure, their planes might fly with a high load factor but yet struggle to make financial ends meet.

‘Low Cost in East Africa is a myth of sorts’ said a Nairobi based aviator closely involved in the setting up of a new low cost venture in Kenya, before continuing ‘Unlike in Europe where a LCC can opt for much cheaper airports, some distance away from their target cities, in East Africa there are few such options. They have to use the same hub airports and the operators there cannot afford to give them lower fees. Existing airlines, if they would find out that a new entrant pays less than what they pay, what is published in the tariffs, would probably take them to court or resort to other action. Fuel is the same, cost of pilots is the same. Maintenance is the same. So they save a few bob by selling catering on board and try to make revenue by charging for baggage and such stuff but overall, they fly the same skies as we do. They can only survive with such fares if their load factors are persistently high, perhaps as much as in the low 90 percent range. And they need more routes to effectively fly say 150 or 180 hours a month with each aircraft, maybe even more. The market is now watching when FastJet launches Jo’burg and how South African will react with special offers. Combine these market challenges and their board room challenges, they have their work cut out for them’.

There has been no word as yet on the starting date of a South African domestic operation, which has been postponed twice in the past and the current financial situation may in fact push the company to move their strategic goal posts from a predominant FastJet ownership to a franchised operation, as Richard Bodin, COO of the company suggested a few weeks ago in Kampala at the Routes Africa meeting. The turbulences ahead, financially as well as the operational challenges and challenges to finally get into the Kenyan market, will no doubt keep the FastJet management busy and make for plenty of more stories to tell. Watch this space for regular and breaking news updates from Eastern Africa’s vibrant aviation markets.