Latest News Editor's Choice

Business / Companies

Low-cost airlines hit turbulence, Flyafrica prepares for second coming

by Staff reporter
20 Mar 2016 at 09:18hrs | Views
THE charm of air travel, which has largely been spurred by Government's willingness to issue licences to prospective airlines in line with the open skies policy, has been a major motivation to many investors in the aviation sector, especially those who believe that the country and Sub-Saharan Africa are the next economic growth frontiers.

There has, noticeably, been an increase in investors - mainly local investors - eager to try their hand on low-cost airlines that are believed to be particularly primed for the local market, where limited disposable incomes demand specialised and affordable packages.

To date, the Civil Aviation Authority of Zimbabwe has licensed three low-cost airlines: Fly Africa, Fastjet and Rainbow Airlines.

Of the three, only Fastjet Zimbabwe is predominantly foreign-owned, while the other two are owned by local businesspeople.

However, events in the last 12 months have heightened skepticism about on the ability of low-cost airlines to operate profitably on the local market.

US$6 million injection

Trailblazer, Fly Africa Zimbabwe, which became the first airline to challenge Air Zimbabwe's monopoly when it launched in 2014, is preparing for a second chance to make an impression on the local market.

It is understood that the airline, whose Air Operating Certificate is owned by Nu-Aero Private Limited that is linked to the Karase family, has secured US$6 million to launch its renewed bid.

Recently, South African publication Travel News Weekly indicated that the Zimbabwean company will continue to pay three percent for the Fly Africa franchise to the Mauritian-based company.

It will also maintain its relationship with Hahn Air, a Germany-based ticketing platform, and outsource ticketing in the South African market to Holiday Aviation.

But the company is prepared to sever ties with Fly Africa if it does not fulfil its end of the bargain as spelt out in the franchising agreement.

The company's launch is understood to be imminent.

Attempts to get a comment from Fly Africa Zimbabwe chairman Mr Cassidy Mugwagwa were fruitless last week as he was said to be out of the country.

Low-cost airlines usually have a six-month window to launch their flights from the time CAAZ gives them a licence.

Fly Africa's re-launch happens at a time another low-cost airline, Fastjet Zimbabwe, is strengthening both its foothold and stranglehold on the local market after its launch in October 2015 - coincidentally the same month that Fly Africa was suspended from operating after a damaging shareholder dispute.

Fastjet announced on January 18, 2016 that it now operates daily flights between Harare and Johannesburg, while flights between Victoria Falls and Johannesburg are operated three times per week.

Its prices are pegged at US$80, excluding taxes.

Another local airline, Rainbow Airlines is similarly making a bid for the same market niche, but it is finding it increasingly difficult to take to the skies.

The business got its Air Service Permit from the Transport Ministry in June 2013 and had its demonstration flight from Harare and Kariba on July 21, 2015.

Since then, it has been finding the going tough and it has emerged that it has to renew its licence as the six-month window has lapsed.

Legacy baggage

Despite the sheer willpower of investors and Government goodwill, the low-cost airlines operating in Zimbabwe market carry "legacy baggage" related to shareholder disputes and cash challenges that pose a huge obstacle going forward.

Fastjet Zimbabwe has a genealogy traceable to Lornho — now Cambria Africa — a Zimbabwe-focused investment vehicle.

Ironically, through its aviation business Fly540, Lornho tried and failed to launch its low-cost airline in Zimbabwe though it had hubs in Kenya, Ghana and Angola.

Fly540 was subsequently sold to Rubicon Diversified Investments on June 13, 2012 in a deal worth US$85,7 million through which Lornho secured a controlling 73,7 percent shareholding in Rubicon.

The business was rebranded to fastjet under a brand licensing agreement with Sir Stelious Haji-Loannou, the founder of EasyJet.

The Africa unit is now named fastjet, and the local unit, whose parent is headquartered in Tanzania, launched its maiden flight on October 28, 2015.

But it hasn't been easy.

On March 7, 2016 the company issued its second profit warning in less than three months.

In the first profit warning, the business largely blamed the expected weak financials on soft demand in the African markets.

The turmoil has since claimed the scalp of the company's chief executive officer, Mr Ed Winter, who left the company last week.

Of late, there had been an uneasy relationship between Mr Winter and Sir Haji-Loannou, who controls 12 percent of the business.

Sir Ioannou, who is thought to be the second-richest person in Cyprus with an estimated fortune worth US$1,44 billion.

There are indications that Fastjet might be forced to raise additional funds in order to sustain its business.

"Based on current management forecasts, the boards expects results for 2016 to be materially below market expectations and the group no longer expects to be cashflow positive for the year.

"The board may consider raising further funds during the year to provide additional headroom and ensure that the company has the necessary resources to fund future growth as market conditions improve," Fastjet said in the recent profit warning.

There is however optimism that the business might regain its footing.

On the other hand, Fly Africa seemingly doesn't have such challenges, especially after reportedly securing a $6 million investment into the business.

But as it re-launches, it will he haunting by the previous episode where its licence suspended in October last year after a shareholder dispute between the Karase family that owns Nu-Aero and its South African partners who were led by Mr Mike Bond, a former director in collapsed airline, One Time of South Africa.

The dispute culminated in Professor Chakanyuka Karase, who was then CEO of Fly Africa Zimbabwe, surrendering the licence to CAAZ. Coincidentally, the licence was suspended the same week that its rival Fastjet launched its local operations.

The dispute has since been resolved and the licence re-issued.

There are customers who are bitter about the "stop-go" mode in which the business was conducted and Fly Africa has pledged to repay money owed to those affected.

Equally worrying is the fact that some of the Fly Africa franchises, particularly units in South Africa and Namibia, have been seriously struggling, casting doubt of the viability of the business.

This month, the associate director in the corporate finance department at South Africa's Deloitte & Touche, Mr Daniel Ternblanche, who was also appointed as the rescue practitioner of the SA businesses, indicated that Fly Africa SA will be liquidated as they were beyond salvation. The affected staff hasn't been paid for the past three months. There are also indications that the Namibia unit, which was a partnership with Namibian firm Nomad Aviation or Bay Air and Fly Africa, might not take off.

Nomad Aviation had a franchise agreement with Flyafrica Ltd through which the Mauritius-based company provided the Flyafrica brand name and expertise.

It, however, allegedly never honoured its side of the agreement.

Besides, the turmoil in the South African and Namibian market, Fly Africa Zimbabwe has more problems to worry about.

Although it is understood that the new venture in Fly Africa Zimbabwe doesn't have the Karase family, the airline will struggle to de-link themselves from the association between Nu-Aero and the Karase family as the former was the known investment vehicle of the latter.

For long, Nu-Aero, and by extension the Karase family, had been previously involved in aborted and sometimes botched projects.

At one time, Mr Matipedza Karashe, son of Chakanyuka Karase and fronted Nu-Aero then, had a run- in with Big Brother winner Mr Wendall Parson after their AvTour project — ostensibly tailored to provide air trips to local school children — failed to take off in 2012.

Again, in May 2010, the younger Mr Karase was arrested for allegedly swindling Mr Karikoga Kaseke of more than US$17 000 on the pretext that he was going to facilitate the registration of Mr Kaseke's planned airline, Royal Airline, with IATA.

As, for Rainbow Airlines, which is linked to Mr Frank Humbe, a former director Trust Multi-Tech, a local technology firm, the airline is finding it difficult to take-off.

It has since been discovered that it might need to relicence its operations after its July 2015 demo flight.

CAAZ public relations manager Ms Annajulia Hungwe re-emphasised last week that the regulations state that airlines have to operate within six-months after being licenced.

Rainbow Airlines told The Sunday Mail Business in January that its flights — initially scheduled for August last year — had been delayed as the business waited for the issuance of the foreign operator permit from the SA authorities.

"The reason why the launch was postponed in August lies primarily to the issuance of the Foreign Operator Permit by the South African Authorities. Issues concerning the issuance of that FOP have since been resolved.

"When the shareholders went into this business they were fully cognisant of the short shelf-life of many start-up airlines that had come and gone and therefore made a thorough study of the reasons for these failures.

"These are the very same issues that the business has been working on, plugging the holes, so that when we are in the air we will not be grounded," said the company then.

Packed market

Some experts claim some of the routes that the low-cost airlines are scrambling for are relatively small to sustain all of them profitably at the same.

It is believed that up to nine flights each way a day offering 1 000 seats in each direction are already available between Harare and Johannesburg.

National airline Air Zimbabwe, which used to guard the route jealously before the new dispensation, also services the same route together with other airlines.

There are however expectations that the Yamoussoukro Declaration of 1988, which advocated for the liberalisation of African air services and for open skies in Africa, will help to promote inter-linkages and intra-African trade, including promoting air travel in Africa.

Source - sundaymail