Winter's discontent beginning to thaw

Fastjet CEO Ed Winter has become understandably reluctant to “put dates on things” outside of his control, after facing a stream of external barriers in his bid to turn Fastjet into a pan-African low-cost carrier.

The plan was simple: create a network of nationally branded Fastjet airlines across the continent. But reality is never that simple; Fastjet is having to build a new airline in every African market that it wants to enter.

“It’s been a big learning curve,” Winter said, describing the three years since Fastjet Tanzania’s November 29, 2012 launch. “I can’t remember how many aircraft we said we would be operating after the first three years but we’re at significantly fewer than that.”

A quick look back through the archives reveals that Fastjet was planning to have at least five A319s operational within six months of its launch, growing to as many as 15 aircraft in its first year. Three years down the line, it started 2015 with three aircraft and is about to grow to six.

After a tough fight for international flight permissions during its first year, Fastjet Tanzania ultimately won through and operated its first regional flight on October 18, 2012. The Dar es Salaam-based carrier now flies to Entebbe, Harare, Johannesburg, Lilongwe and Lusaka, in addition to its Kilimanjaro, Mbeya and Mwanza domestic services. “It’s been painful on occasion, but there you are,” Winter said, hinting at some of the battles he has weathered.

After years of frustration, Fastjet’s model is now rapidly taking shape. If everything goes according to plan, it will have grown from one to three airlines in 2015, with Fastjet Zimbabwe and Fastjet Zambia joining its original Fastjet Tanzania operation. The group’s fleet has also doubled, scaling up from three to six Airbus A319s. “It’s not been a wasted effort,” Winter said, referring to the company’s trials so far. “I think that’s pretty good progress.”

 

Fastjet Zimbabwe finally took to the skies on October 28, 2015, launching thrice-weekly services between its Harare home base and Victoria Falls.

The start-up is backed by private Zimbabwean shareholders, who are “not airline or aviation people”, said Winter. The Government has not taken a stake, as it is already involved with Air Zimbabwe.

True to form, Fastjet Zimbabwe’s launch took “a little bit longer than we originally thought” but the Zimbabwean Government has already designated the start-up on routes to Botswana, Malawi and South Africa.

Fastjet Zimbabwe is also seeking permissions to fly to Democratic Republic of Congo (DRC), Kenya, Mozambique, Namibia and Zambia.

 

In parallel with the Zimbabwe launch, the management team has been working to get Fastjet Zambia up and running.

“In Zambia, the roadblock was that they had never had an Airbus aircraft on their register and they are also restructuring their civil aviation authority (CAA) because they are very keen to get off the European blacklist,” explained Winter.

Zambia turned to the South African CAA, which has experience of Airbus operations, to help it add Fastjet’s A319 to its register.

Fastjet has held its Zambian air services licence for more than a year; it has already been renewed once. The airline has completed “virtually everything” that is non-Airbus specific and Winter was, at the time of writing, optimistic that the launch may still be possible before the end of 2015. “It’s all ticking away. We’ve signed a letter of intent for our first purchased aircraft, which is earmarked for Zambia. I am absolutely confident that by the end of this year we will have both operations up and running.”

Initially, the Zambian and Zimbabwean airlines will operate just one aircraft each, although this will grow as they secure further route rights. “I would see both Zimbabwe and Zambia requesting maybe three aircraft by the end of next year, but lets wait and see how the market develops.”

 

Now things are pointing in the right direction, Winter is hoping to see speedier progress with Fastjet’s wider African roll-out. “We found our feet fairly publically but over the next three years – through to the end of 2018 – our objective is to create a significant network, covering Tanzania, Zimbabwe, Zambia, Kenya, South Africa and Uganda. Across those six countries, we’ve set a target to link up to 40 unique destinations.”

Those six countries represent about 210 million people, roughly 20% of the African population, and slightly more in terms of gross domestic product (GDP). Assuming 10% of those 210 million people can afford to fly if the price is low enough, that equates to 21 million people.

“If I could capture just 2.5 million of those as egular customers – and by that I mean people who fly two round trips a year – that’s 10 million seats. With a $100 per seat average ticket price, it comes out at a billion dollar turnover. That would fill 34 aircraft. It sounds like a lot, to go from six to 34 aircraft in three years, but logistically it’s quite easy to do and I think we are now at the point where we’ve got enough traction politically to make that happen. Of course, during those three years, there are still a lot of traps and hurdles of get over.”

With Tanzania already well established and the two start-ups in Zimbabwe and Zambia now finding their feet, Fastjet’s efforts in 2016 will be focused on Kenya, South Africa and Uganda.

However, Kenya has already proven a tough nut to crack. Fastjet originally hoped to use the Kenyan air operator’s certificate (AOC) of Fly540, a regional airline that it acquired as its launch platform in Angola, Ghana, Kenya and Tanzania. However, while this worked as the foundation for Fastjet Tanzania, the other operations have proved too difficult to transition. Fly540 Ghana was grounded in May 2014 and sold for $1 in June 2015, while Fly540 Angola has been grounded for more than
18 months, awaiting sale or closure.

Fly540 Kenya was sold for a token amount in June 2014 following a bitter legal dispute with Five Forty Aviation CEO Don Smith. “Kenya would have taken far too much money and management time to turn into a strong, reliable base operation that matched up to our standards,” Winter explained.

Fastjet’s alternative plan for Kenya was to form a joint venture with local carrier Jetlink Express, which launched in 2004 and was grounded in 2012. Crucially, Jetlink held rights to serve Kenyan domestic and regional destinations. The two airlines signed a memorandum of understanding (MoU) in January 2013, but they never reached a full agreement and Jetlink Express has not resumed operations.

Plan C for Kenya is to create a new airline. “We decided it was far easier to start with a clean sheet of paper there, so we applied for an air services licence and we will develop an airline within Kenya ourselves,” said Winter.

However, the Kenyan authorities have refused Fastjet bilateral route rights from Tanzania and repeatedly deferred its air service licence application, which was finally granted in October. Fastjet Kenya plans to launch domestic flights in 2016.

 

South Africa has also created its fair share of frustrations. In late 2012, Fastjet struck a provisional deal to acquire failed low-cost carrier 1time Airline as its South African launch platform, but Winter said its debts were ultimately “beyond the point where we could save it”.

Instead, Fastjet switched its attention to a partnership with local companies Blockbuster and Federal Air. It was hoping to launch services between Johannesburg and Cape Town in May 2013 but this was pushed back to July 2013 and then ultimately abandoned when Fastjet secured its vital international rights from Tanzania.

Fastjet is now engaged in “a number” of partnership discussions in South Africa, although these talks remain confidential. “There are no applications in the door at the moment but it is a stated objective of ours to have the Fastjet brand operating domestically in South Africa,” Winter said.

Meanwhile, Uganda is looking promising after Fastjet Tanzania secured fifth freedom rights from Entebbe, allowing it to deploy Tanzanian aircraft between Uganda and third-country destinations including Juba, Nairobi, Kigali and Johannesburg. This is particularly significant following the demise of Air Uganda in 2014. “We just haven’t had the management time to concentrate on that but it is very much on the agenda for next year. Uganda is an interesting country because it has quite a big population and is large, but there are only really five airports that will take a reasonable- sized jet aircraft.”

Uganda’s people are well dispersed across the continent, giving them a reason to travel. The landlocked country also has quite an active economy, trading with coastal cities. “I see that as quite an exciting opportunity,” Winter said.

 

Expansion costs money and Fastjet has already burned through a lot of cash. However, it went through a successful fund-raising exercise in the spring of 2015, raising $74 million in fresh equity from investors like pension fund M&G, emerging markets specialist Hexam and J O HAMBRO.

“We’ve got plenty of cash at the moment. Our market capitalisation at the time [of the fund raising] was probably $20 million, so it was a massive percentage increase. These blue-chip firms clearly have great confidence in what we’re trying to do. We’re not trying to raise money at the moment – we are funded, we’ve got that cash – and that’s partly being used as working capital and also partly being used to fund aircraft acquisitions.”

With this injection in the bag, Fastjet has no plans to dilute its stakes in its existing airlines. “There will be the opportunity, as we go forward, of introducing more countries to bring in more investors but clearly we’d rather do that when the companies are bigger, more profitable and more valuable.”

In the first half of 2015, Fastjet nearly halved its interim losses to $10.1 million, but it has warned that the second half will be worse than forecast due to slower than anticipated route development and African currency weakness. “The net effect of the delays in the opening of new routes has resulted in all of the start-up costs for Zimbabwe and Zambia, plus the costs of doubling the Fastjet fleet, being incurred in 2015, with little of the corresponding income now expected to flow before 2016,” Winter said.

The lack of intra-African liberalisation has meant Fastjet has to create a new airline in every market, or acquire existing operators, to grow. While things are moving in the right direction, with liberalisation among 13 states anticipated by 2017, Winter is not convinced the theory will be turned into practice.

“The reality on the ground is that, in most of these areas, there is a huge amount of protectionism. Whatever anybody says about liberalisation, they don’t put it into practice,” he said. “It will happen one day. I’m just not sure that anybody would put a timeline on it. It’s a great shame, but it’s got to happen eventually.”

 

Winter is a great advocate of liberalisation and will do everything he can to help move it forward, as he believes it is a big hindrance to African growth.

“None of these countries have loads of spare money – they don’t have the schools, hospitals, roads and infrastructure they need – so why would they spend that money on an airline? It just doesn’t make sense. I’ve had discussions where ministers have said they need a national airline to support tourism. If they spend a fraction of that money on a really good tourism marketing campaign, then use a big multi-national carrier to bring the customers in, that makes far more sense than trying to create your own airline.”

However, what doesn’t kill you makes you stronger, and all the obstacles and hold-ups that Fastjet has faced have created a determined inner strength within the group. “We now have three years’ experience of dealing with regulators and politicians; we’re getting to really understand who the decision-makers are. When we started, we thought we’d have it all locked up by now, but we are making progress.”

Towards the end of the interview, Winter reminisced back to his days as chief operating officer with British Airways’ budget carrier, Go!, which grew to eight aircraft within its first year of operations. Timelines were much clearer and easier to predict.

“You could actually see what was happening and judge things, but obviously it’s earlier days in terms of the development of aviation bureaucracy in Africa; things will take the time they take,” he concluded. “You now have a company here that has that knowledge and I think that it will stand us in huge stead to take it forward.”