AVIATION is the worst sort of business, Warren Buffett used to say. It grows rapidly, absorbs a lot of capital and earns little, if any, money. Nowhere is that truer than in Africa, the toughest airline market of all.
This is reflected in the plight of Fastjet, an African low-cost carrier that easyJet founder Stelios Haji-Ioannou helped set up. Earlier this month, shares in the UK-listed small cap fell 70 per cent on news that it was down to its last $3m of cash. It risked ceasing trading if it didn’t raise millions of pounds of extra funds, and it staved off a full-blown crisis by raising $10 million in an accelerated book build process — in which certain qualified investors were invited to take part in a new share issue. It raised $7m through the placing at a price of 8 pence per share. Solenta Aviation Holdings, FastJet’s biggest shareholder, agreed to subscribe to 28.9m shares at the placing price for gross proceeds of $3m.
Long-suffering shareholders had already seen a 97 per cent fall in value over five years. They have repeatedly stumped up more capital as the group devoured nearly $200m of cash. Asked to throw good money after bad, investors should question whether the business model is flawed.
When launched in 2012, Fastjet aimed to bring low-cost air travel to a continent barely touched by it. Opportunities looked bright given Africa’s economic growth and a fragmented market dominated by weak national carriers. The company made mistakes. Planes were too big, for example. It has fixed this by using smaller planes on quiet routes. But it cannot skirt the problems faced by the rest of the continent’s airline industry, where profit margins average minus 1 per cent, compared with nearly 6 per cent for North America.
Heavy regulation and protectionism are largely to blame. Europe’s budget airline boom came only after treaties broke down barriers in the 1990s. The first phase of an African equivalent was inked in January. More work is needed to realise its potential. In the meantime, the dream of a pan-African low-cost carrier will struggle to take off.
Fastjet could find a more modest niche. It is trying to connect regional centres to main hubs, collaborating with national carriers. This could put an end to cash calls. But do not count on it. Fastjet selected as its symbol the grey parrot, known for its intelligence and longevity. For now, its choice does not look particularly apt.
