FastJet moves to sell off Kenyan Fly540 operation and tag onto Kenyan Airways hub plans

Dino D'Amore
By Dino D'Amore June 26, 2014 13:26

FastJet moves to sell off Kenyan Fly540 operation and tag onto Kenyan Airways hub plans

African low-cost carrier Fastjet is to sell its stake in Fly540 Kenya for a nominal fee to Fly540 director Don Smith, in the process taking a $10m write-down on the sale.

“Disposing of our investment in Fly540 Kenya allows us to pursue our priority objective of creating Fastjet Kenya as a new entity which will operate to the same low-cost model, international standards of safety, reliability and punctuality as Fastjet Tanzania—and utilize the same commercial strategy and distribution platforms. Further information on the company’s plans to launch Fastjet Kenya will be announced in due course,” CEO, Ed Winter stated yesterday.

To say that the Fastjet investment in Fly540 did not go to plan would be a significant understatement to say the least. Fly540 Kenya has run in the red while Fly540 Ghana and Angola were both grounded as losses mounted. But as reported last week, Fastjet Plc’s revenue more than doubled to $53.4 million in the year ended Dec. 31 from $21 million a year earlier.

More importantly average revenue per passenger more than doubled to $95.20. As mentioned last week FastJet shares were well worth securing, the announcement of these figures this week has sent shares up.
But, should FastJet be launching a Kenyan operation any time soon?
The answer is an emphatic no, and if Ed Winter had made no mention of FastJet Kenya today then he would have seen his shares far higher than they are right now.

The Kenyan market is continuing to contract rapidly, so much so that Kenya Airways is looking to a move to focus on transit business to offset the drop in tourist traffic. Kenya Airways has seen its load factors fall to 65.6% from 68.7% in the past month and this week alone its shares shed another 6%.

The reason for Kenya Airways share price volatility is clear – Its core market is diminishing fast, with European business down by over 20%, while at the same time fleet expansion is picking-up. Kenyan Airways cannot announce delivery deferrals or move to sell delivery slots though as it is re-focusing on carrying transit passengers through its Nairobi hub, as such it needs to compete with the best aircraft.

Even so, the airline expects capacity to increase by a huge 40% during this financial year to March 31, 2015 as new 787s and 777s are delivered. Replacing and parking-up older aircraft is the obvious scenario in the short term with selling off the older aircraft on the table if terrorist actions in Kenya do not cease.

Of course at this point we could wonder what would happen to these aircraft deliveries if the US Ex-Im Bank mandate is not secured in September. Delivery costs would go through the roof and at that point deferral might be an only option – but that is conjecture at this stage.

What is not conjecture however is the fact that the grand plan from Kenyan Airways is to mimic the Ethiopian Airlines model, at the same time competing with this established giant while the threat of terrorist action at Kenya’s main Nairobi hub is a real and present danger according to Capitol Hill. What are they going to compete on? Price?

Fares are already on the floor and the Middle East airlines are able to connect the international dots out of Tanzania very well indeed. But this brings us back full circle to FastJet. Its Tanzania operation has performed well as it is acting in part as a feeder airline for onward international connections and this means that the move to become an international hub operation from Kenya Airways presents Fly540 Kenya and any future FastJet Kenya operation a significant opportunity to become the feeder airline for that business, whilst at the same time it will have seen competition drastically reduce from Kenya Airways on its own routes.

Ed Winter is gambling in part on an opportunity to feed Kenyan Airways and on this he might well be on to a winner so long as security at Nairobi airport can be increased and maintained and of course so long as the Kenyan middle class does not melt away any more than they have done already.

Given that 70% of this wealth bracket is tied to the Kenyan tourist trade, I would argue that right now the outlook is not good and Kenyan Airways should be looking to Chinese worker transits to fill aircraft. But in the meantime keep an eye on Nigerian route load factors to see if the Kenyan Airways plans to date have worked out.

Dino D'Amore
By Dino D'Amore June 26, 2014 13:26
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