/ 16 January 2016

Fastjet flies just fine, but can it soar?

Competitive edge: Fastjet avoids complex offerings that drive up flight costs.
Competitive edge: Fastjet avoids complex offerings that drive up flight costs.

The budget African airline Fastjet is yet to enter the domestic market, but it has already halved the cost of travel for South Africans bound for Dar es Salaam and now offers some financial respite for those heading to Zanzibar.

But the airline is still being challenged by sorting through the spaghetti bowl of bilateral regulations for every nation it seeks to fly to. And, like other African airlines, it continues to incur losses despite its regional market growth.

Fares for Fastjet’s daily route between Johannesburg and Zanzibar, which began operating on January 11, range from R1&nbs;704 to R3 200 for a direct, one-way ticket, including taxes.

This undercuts competitor Mango’s less frequent flights, which range in price from R1 995 to R4 278, all-inclusive, one way.

Fastjet aims to be the top low-cost airline in Africa, but it has faced an uphill battle ever since its first flight took off in 2012.

“It has taken us a long time to get where we are. I would have thought at the time of starting we would have been further by now,” said Fastjet’s outgoing chief executive, Ed Winter, speaking from London this week.

“But we worked our way through and know our way through the regulatory maze now, and people have seen we are here to stay and what we can offer.

“In Tanzania, we have transformed the way people move around the country. There has been both public acceptance and government acceptance.”

Since launching, Fastjet has slowly added routes to its network. From its base in Tanzania, flyers can travel to Johannesburg, Harare, Kilimanjaro, Entebbe, Lilongwe, Lusaka, Mbeya and Mwanza. As of Monday, they can add Zanzibar and Nairobi to that list.

“In truth, we should have been allowed to fly to Kenya three years ago. A bilateral agreement designated Fastjet as carrier … but it has taken up until now to battle through before Kenya Airways allowed us,” said Winter.

The Dar es Salaam-Nairobi route used to cost between $400 and $500 one way. In anticipation of Fastjet’s launch, Kenya Airways has brought prices down to about half that. “It wouldn’t have happened if we hadn’t been allowed to compete. It just shows what happens on these monopoly routes,” Winter said, adding that the Lusaka-Johannesburg route was one of them.

“We cut out all the costs that we can, [and] our cost base is lower than the likes of SAA or Kenya Airways. Part of that is not making offerings complex,” Winter said. “Complexity drives cost.”

Checked-in baggage and in-flight meals are not included in the fare. Those who want these extras must pay for them.

Fastjet also avoids interlining, which allows passengers to book different legs of their trip on several airlines and their baggage is then transferred between the aircraft.

Even lounges and frequent-flyer clubs drive up administration and costs, Winter said. “Our initial fares are very low. That is not sustainable to have every seat at that price. People who book later will see the prices push up somewhat,” he said.

There was a great deal of suspicion when Fastjet was launched over whether there was enough traffic to justify its routes and whether its low prices, which undercut its competitors, were sustainable.

When Fastjet’s Johannesburg to Dar es Salaam route was launched in 2013, the price was $100 one way, excluding tax. It has remained basically at that level, although some tickets are as low as R1 329 one way, including tax. November 2015 passenger statistics show it has grown its number of seats sold from 570 000 to 790 000 over a year – a growth of about 39%.

But profits still evade the airline.

Winter could not comment on the finances of the company as it is currently in a closed period before the release of its 2015 annual report.

The company recorded a loss of $72-million in 2014, of which $27.7-million related to discontinued activities. For the first half of 2015 the operating loss was $12.8-million, an improvement on the $19.8-million loss in the first half of 2014.

But investors have retained their faith in the airline. The London market, in which Fastjet has a listing, has been responsive, Winter said.

“We raised $75-million off a market cap of $20-million, so almost four times our market cap. In there were some blue-chip companies. From South Africa, companies like Old Mutual took a share.”

In June last year, oil prices halved from $110 a barrel and have been below that level ever since, reaching $31 a barrel this week.

On Wednesday, however, Fastjet announced Winter’s resignation but provided no reasons for his exit. The company said he would remain in his post until the handover to a new chief executive was completed.

The African airline market, excluding South Africa, is forecast to become one of the fastest-growing over the next 20 years. “So in the African regional market, there is growth. The problem remains profitability,” said Chris Zweigenthal, the chief executive of the Airlines Association of Southern Africa.

Despite ultra-low oil prices, the International Air Transport Association projects a cumulative loss of $400-million for airlines in Africa for 2015 and 2016. In the global aviation industry, Africa has been the weakest region for two years.

“Fastjet are probably here to stay and will find a way to survive,” said Zweigenthal. “They are very competitive.”

In 2013, Fastjet made headlines when it tried to acquire failed airline 1time. Then, its association with Edward Zuma (one of President Jacob Zuma’s sons) and two controversial businesspeople were called into question when it announced plans to launch a flight between Johannesburg and Cape Town.

The flight did not materialise, but domestic routes in South Africa are still very much on the cards, Winter said. “We will turn our attention again to South Africa. We need to be there. It is very much top of mind. The key in South Africa is to make sure that, whatever we do there, the structure of the company is beyond any grain of criticism from any incumbent carriers,” he said. “They don’t want to see their market disturbed. It’s very much a duopoly.”

In a way, Winter said, Fastjet is trying to lead a consumer-driven change to the market. “I look at us almost the way telecoms developed a few years ago. In Africa, particularly sub-Saharan Africa, it was really a restricted market. New players came in and revolutionised the market. I hope we are at the forefront of changing how aviation works in Africa.”

Mango spokesperson Hein Kaiser said Zanzibar has been a fantastic route for the airline. “Competition is always welcome,” he said, adding: “Mango’s fares remain highly competitive and our additional legroom, comfortable new seats and quality product will stand us in good stead.”