Fastjet becomes Africa's largest LCC

By Costantine Muganyizi

Fastjet's breakthroughs in 2015 included securing an operating certificate to launch Fastjet Zimbabwe in October.

 Budget airline Fastjet is set to become the largest low cost carrier (LCC) in Africa after launching of four new routes early this year, including the Dar es Salaam-Nairobi that is expected to drastically transform air travel in the region, the Centre for Aviation (Capa) has said.

 

The carrier is in the middle of the largest expansion of its international route network since it commenced operations three years ago, the Australia based aviation outfit said in a regional analysis of the sector late last week.

 

According to it, the airline plans further expansion in Africa’s international market throughout 2016, including from a new base in Zambia.

 

“Two newly launched routes to Kenya from its original base in Tanzania represent a breakthrough after three years of regulatory delays. Two new upcoming routes to South Africa from its second base in Zimbabwe are also a major milestone as they represent the first international routes outside Tanzania, a stepping stone in Fastjet’s connect the dots pan-Africa strategy,” the analysis reads in part.

 

Capa says Fastjet has huge opportunities for further growth – particularly after the suspension of services by flyafrica.com, the only other pan-African LCC group. However, there are also huge challenges to overcome, including regulatory hurdles and unfavourable economic conditions in some of its markets, it adds. 

 

The latest regulatory setback occurred in Malawi, prompting the carrier to suspend services to Lilongwe. Malawi has bitterly denounced the move saying Fastjet has been let down by its business model. 

 

Fastjet flights between Dar es Salaam and Lilongwe took off in late July last year, marking the launch of the LCC’s sixth international route in Africa. The development was applauded by the Malawian authorities with Transport minister Francis Kasaira saying the company had responded to calls for affordable air travel in the region.

 

Flight tickets for the route have been costing from US$50 (about 110,000/-) one-way, excluding taxes compared to the US$300 (about 660,000/-), plus taxes, charged by other carriers. The airline, which is yet to breakeven, said the Malawian market had become commercially unviable. 

 

Reasons for the Malawi withdrawal

It cited the major reasons for withdrawing from the southern Africa market as depreciation of the Malawian currency (the kwacha) and the government's unwillingness to grant it 8th freedom cabotage traffic rights for flights between Lilongwe and Blantyre despite earlier assurances they would be granted.

 

The government responded by saying that Fastjet should blame its business model and not the country for its decision to withdraw from Malawi. 

 

“They should just say they have failed in business instead of finding the government as scapegoat. Their fares were too low to sustain in the airline business. They had very few passengers. They thought by offering low fares they would attract more passengers but this never happened,” minister Kasaira was quoted saying by the local media.

 

The load factor has been a huge challenge across the board in the company’s operations. This is a measure that determines the number of seats available, which are filled.

 

According to Capa figures, Fastjet’s load factor dropped to only 60 per cent in November 2015 compared with 77 per cent during the corresponding period in 2014. Its load factor was only 63 per cent in October 2015, and 64 per cent in September 2015.

 

The company said it carried 62,843 passengers in November, down 0.5 per cent from the 63,146 it carried a year earlier. According to its official data, the airline carried the highest number of passengers since its inception in 2012 in July last year. 

 

The travellers increased to 71,763 from the 65,216 who used the airline in June and they were 3,600 more over the previous record of April 2015. Fastjet carried over half a million passengers in the first nine months of 2015 in Tanzania, which was 44 per cent more over the same period performance in 2014.

 

The airline data show that most of the 588,825 passengers were transported in the third quarter of the year. During the three quarters of 2014, Fastjet Tanzania carried 408,590 passengers.

 

Had it sold all the seats available during the period, the carried passengers would have been around 840,000. The company passenger statistics show that the average load factor for the period was 70 per cent leading to the carrier flying with 30 per cent of the available seats empty.

 

“This is the first in a series of analysis reports on Fastjet. This first instalment will focus on the Kenya market, which is initially being served by the Tanzanian subsidiary, while the next instalment will focus on Zimbabwe, South Africa and the overall 2016 outlook for the group,” Capa said.

 

Fastjet slowly picks up pace of expansion

Fastjet launched operations in late 2012 with a Tanzanian operating certificate and three A319s based at Dar es Salaam. Multiple regulatory setbacks prevented the group from launching several planned international routes from Tanzania and establishing affiliates in other African countries. 

 

“As a result Fastjet’s initial fleet was underutilised, impacting profitability, as the group was confined primarily to Tanzania’s relatively small domestic market,” the analysis further reads.

 

Late last year, the company revised its revenue and profitability projections downwards after business slumped due to several factors, including the outcome of the General Election in Tanzania.

 

In a December statement, Fastjet said it was proactively taking steps to cut operating costs and overheads after October's poll led to reduced government and civil service traffic and lower travel demand. The new government has instituted several austerity measures to boost national coffers and curb misuse of public funds.

 

““The process of forming a new functioning government has been protracted,” said Gerald Khoo, analyst at LIberum, said last month. “Concerns about the outlook for government spending have also weighed on consumer sentiment, given that a large proportion of the population works for the government.”

 

The airlines monetary fortunes have also been adversely affected by weakening of the shilling in Tanzania and the kwacha in Zambia. The statement said tough markets and currency headwinds would lead to lower than expected revenue in 2015 and 2016.

 

The Fastjet Group Plc. board of directors said they were however optimistic that 2016 would be a year of network growth and that it expected to be cash-flow positive for the next financial year.

 

Financials

The shilling weakened 25 per cent against the dollar last year and the kwacha by 72.4 per cent. Former chief executive Ed Winter said the currency turmoil combined with a worldwide reduction in commodity prices caused an economic downturn in both Tanzania and Zambia. 

 

“Fastjet is proactively taking steps to manage its operating costs and overheads, and fully align its growth strategy with demand,” the group said in an operational and trading update on December 22.

“As such, despite the current challenging market conditions and currency headwinds, which are expected to lead to lower than anticipated revenues in 2015 and 2016, the company remains confident that these actions will ensure it continues to be well placed to capture the significant growth potential in the African aviation market,” it added.

The Tanzania based carrier reported a 2015 half-year net loss of US$10.1 million, which was nearly half the US$20 million interim loss it posted in 2014. It warned in a statement that the second half of the year would be worse than originally forecast.

 

 

Sectoral insiders estimates 2015 losses at US$31.1 million, compared with US$19.5 million previously.

 

Fastjet Tanzania launched its first international route in October 2013, from Dar es Salaam to Johannesburg, after eventually overcoming regulatory delays with South African authorities. It was able to launch three more international routes in 2014 – to Lusaka in Zambia, Harare in Zimbabwe and Entebbe in Uganda – enabling full utilisation of its initial fleet of three A319s.

 

In 2015, there were more breakthroughs, as Fastjet was able to secure an operating certificate from a second African country, enabling the October 2015 launch of Fastjet Zimbabwe. The group also expanded its fleet for the first time since its late 2012 launch, adding two A319s in Tanzania and one A319 in Zimbabwe, for a total of six aircraft.

 

“The expanded fleet in Tanzania enabled the group to launch services to Lilongwe in Malawi, and expand capacity on several of its existing domestic and international routes. Fastjet’s passenger traffic for the 12 months ending 2015 was up 39 per cent to 791,000,” the Capa analysis reads in part.