fastjet: Major turnaround taking shape
fastjet was launched in Tanzania in Nov 2012, and is currently in the process of being right-sized and turned-around by industry veteran CEO Nico Bezuidenhout. (appointed August 2016) . The firm utilises a small fleet of modern jet aircraft, and has a long-term strategy to become Africa’s first low-cost, pan-continental airline.Investing in airlines has always been a hazardous game, given the industry’s notoriously poor record of capital allocation, cyclicality and exposure to geopolitics, terrorism and the oil price. Nonetheless, real improvements are being made at fastjet, with stronger management forcing through capital discipline and more flexible cost structures, alongside greater demand from emerging market tourists, who are increasingly opting to travel abroad.
Nico Bezuidenhout has dramatically cut variable and fixed costs by shutting unprofitable routes, matching supply with demand, replacing Airbus A319s (~145 seats) with smaller Embraer E145/190 jets, implementing new revenue initiatives and relocating the Head Office from Gatwick to Johannesburg. The upshot being that fastjet is in the process of halving its breakeven point to below $50m of annualised sales, and importantly set to be at least cashflow neutral in Q4’17, and positive thereafter.
Looking ahead, we calculate that liquidity is set to reach a low point in October (approx $2.5m) ahead of the busy seasonal peak of Nov/Dec, and close the year around this level – obviously not leaving too much ‘wiggle room’ in the event of setbacks. Consequently, while the Tanzanian economy is showing encouraging early signs of a recovery, fastjet is not totally out of the woods just yet.
Yet the fundamentals underpinning Africa’s airline industry remain attractive. Jet fuel prices are likely to stay low in light of significant over-capacity in the world’s crude markets. The sector suffers from relatively expensive airfares (3x-4x higher than Europe), frequent delays and poor customer service. Whilst the continent has a 1 billion population that is becoming more affluent and increasingly keen to travel.
Fastjet is a pan-African low cost airline. Co. operates domestic and international routes in all economically viable African markets. As of Dec 31 2016, Co. had three aircraft, two Airbus A319s in Tanzania and one Solenta Embraer E145 in Zimbabwe. As of Dec 31 2016, Co. held two Air Operator Certificates in Tanzania and Zimbabwe and operated six routes.
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