Can LCCs survive under African sun?
Fastjet, the ambitious brainchild of Britain‘s EasyJet, is clinging to the dream of becoming Africa’s first successful budget carrier. After several failed attempts it has decided to stir up the management striving to overcome the curse that has plagued all homegrown and imported LCCs trying to conquer the hearts and wallets of Kenyans, Ugandians and other nationals of the 1.2 billion continent.
After a bumpy start in 2012, the carrier had an equally tough ride. In the first half of 2016 alone, it had suffered a loss of $31 million, performing three times worse than the year before. Consequently, its shares on London Stock Exchange had drastically dropped in September 2016 by more than 17% to 20.95 pence.
Alas, the ambitious plans to grow Fastjet’s fleet to 34 Airbus A320s by 2018, seems like a pie in the sky. And Fastjet is not alone in this, with no rolemodel to look up to. According to a study by Airline Leader, the African airline sector remained unprofitable with traffic growth less than 5%. Political instability, slow economies susceptible to the fluctuation in oil prices have contributed to the low demand in the airline industry. Can Fastjet with its new executive team break the curse and become the pioneering budget airline of the Black Continent?
Africa’s potentials and barriers
Despite hosting 1.2 billion of the global population, Africa as an aviation market is still untapped. The revolutionary Yamoussoukro Decision (African Open Skies) signed by a majority of the countries in 1999 is yet to bring substantial benefits to the market, right now plagued by extremely high airport fees and lax safety standards. The regulatory barrier is named as one of the reasons of the difficulties for African LCC to grow in their homeland. Furthermore, Africa still does not have a large middle class that can afford frequent regional and international air travel.
Fastjet, established in 2012 after the acquisition of Kenya-based LCC Fly540, expected to follow the success of the European budget airline model. However, its first routes within and from Tanzania did not meet success as the country faced political trouble and economic downturn.
Gerald Khoo, an analyst with Liberum, told the Telegraph that the challenging economic conditions in Tanzania and overly ambitious capacity growth resulted in a load factor collapse. Neither passenger numbers nor revenue kept pace with the additions to seat capacity, and losses increased.
After expansion to Zimbabwe did not turn losses into profits, Fastjet performed necessary steps to save the airline from bankruptcy. The airline appointed Nico Bezuidenhout as CEO on August 1, 2016, moved its headquarter from London to Johannesburg, sold its aircraft and cut some routes.
“My focus since being appointed has been to undertake a fundamental review of all aspects of Fastjet’s business model and operations”, Bezuidenhout commented on the losses. “My immediate priority is to stabilize the business, reduce costs and ensure that we have the correct size of the fleet, in terms of both number and size of aircraft.”
Last year, the airline announced that it will cut its fleet of Airbus A319s from five to three planes and shift to smaller aircraft such as Embraer E-jets.
In January 2017, the airline got a new investor from South Africa, Solenta Aviation Holdings, which acquired 28% of the stakes valued at $19.2 million. The recent announcement on the new management structures is the latest effort taken by the company to save the LCC.
Others who have tried
Alexis Janoray, a Senior Project Manager at Proparco (French Development Financial Institution), wrote that the excessive constraints of the regulatory environment and the absences of genuinely ‘open African skies‘ are the major obstacles for Fastjet‘s growth. Other LCCs operating on the continent see the same issue.
South Africa‘s LCC Skywise Airline, for example, was grounded in December 2015 due to unpaid airport service fees. The grounding was initiated only 10 months after the carrier’s launch.
In 2012, two African LCCs – 1time and Velvet Sky – filed for liquidation. 1time lived for eight years and before ending its career, the carrier had filed for business rescue to give it protection from creditors because it was "financially distressed". However, in November 2012, it ceased operations and filed for liquidation. Velvet Sky operated for nearly a year and during that time the carrier experienced technical problems, flight delays, cancellations, unpaid bills, debt, change of owners, which eventually led to the carrier’s liquidation in June 2012.
Boeing 737-300 (ZS-SPU) of Velvet Sky airline taxying from terminal at Cape Town International Airport on 24 June 2011. (Photo by Mark D Young/Wikipedia)
Flyafrica, another African LCC, started its services in 2014 and was suspended a year after due to shareholder disputes and a failure to meet regulatory requirements, and not having an accountable manager and a local head of maintenance of the company.
eTurbo News wrote that high costs charged by the African governments contribute to the increase of ticket price. Similarly, the Nigerian Civil Aviation Authority (NCAA) stated that one of the underlined issues to implement the African Open Skies was the high aeronautical charges at some airports in Africa due to low traffic.
A new attempt
The strategies taken by Fastjet‘s management have not yet shown significant progress. With the latest announcement on the new management structure, the carrier’s ongoing ‘stabilisation plan’ will remain a question of its success or failure.
“LCCs have succeeded in most parts of the world, says Laurence Heath, a researcher at Falcon Consultancy. “The main exception is within large parts of Africa, where the markets are too small. The travails of FastJet demonstrate the difficulties: it should have been a success, initially well financed and with expertise from easyJet. However, it has so far failed for two reasons: firstly it was not able to set up the multinational structure initially proposed and secondly because the markets were too small to develop viable services with relatively large aircraft such as the A320.”
Competing with the well-established FCS within Africa such as Ethiopian Airways, Egypt Air, South African Airline and Royal Air Maroc might be the main focus for the LCCs to take some passenger shares in the region’s commercial aviation industry. In addition, the presence of other competitors such as the Gulf carriers and European airlines will make the competition tougher.
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