Tuesday, 20 January 2015

Fastjet's parrot gains more feathers

Low Cost Carrier fastjet, the new orangeish, or at least yellowish, thing in the African skies has been interesting from the start. Its economics have seemed to defy the laws of financial gravity, a lot of money has looked as if it were being spent for little gain. Unfamiliarity with the continent has not helped.

Trick or treat? A breath of fresh air in Africa, or a venture destined to fall victim to deeply entrenched and highly defensive attitudes to all who threaten vested national and local interests?

The company and its people were new to Africa, just as Virgin Nigeria had been a decade before it. That company decided to call it a day after seeing the back of maybe £100 million. Unlike Virgin Nigeria, fastjet's Head Office is firmly planted in England rather than Africa.

In a recent discussion with Airnthere, fastjet CEO Ed Winter, CCO Richard Bodin and CFO Nick Caine see a different, more optimistic story and eventual outcome. They are resolute that fastjet will be staying the course and that significant breakthroughs are near.

Just as Virgin Nigeria did not seem to have the well placed right allies who could truly deliver , fastjet have found themselves stranded on rocks they hadn't seen .Did they rely too heavily on parties whose value and influence they over-rated?  There was the initial tie-up with Lonrho whose long experience on the continent they believed could be a key to their pan-African dream. But this company wasn't the continent spanning political powerhouse of the Tiny Rowland days when presidential and ministerial doors swung open at the sound of his footsteps. That had been dismantled long ago and what remained was a much smaller business without the power of the mining interests and the political clout that went with it.

The hoped for rapid growth which marked the takeoff of Easyjet, Ryan Air and other European low cost carriers hasn't yet happened. Key countries, notably Kenya, have proved very hard to crack. This has meant a heavy reliance upon less prosperous Tanzania to provide the initial commercial and operating base.

While the company has provided more continually updated information on its results and traffic growth than any other in Africa, unfortunately so far the black ink hasn't replaced the red.

Africa needs this venture to succeed, but its rejectionist tendencies are strong.  The old core of  state owned national carriers, whether still alive or not, remains an ongoing cloying influence. Governments still tend to hanker after them. Times have been changing though. Nigeria, Ghana, Uganda, Zambia and now Malawi's governments have walked away and let nature take its course. Their old national carriers have gone. Kenya's government sold most of its majority shareholding in Kenya Airways, with 26% going abroad to KLM after BA backed away from bidding late in the day.

Ethiopia has always been Africa's exception. Even in the most difficult days of the Mengistu regime the governments have always left the airline to be run free from political involvement and intervention. As result a robust and  successful business has run ever since it was launched with US Trans World Airlines' assistance. Its DC6Bs started the east-west traverse in the 1950s and it has flourished ever since. Its management is confident, battle hardened, knows its business and has depth.

 Privatised airlines have arrived  across the continent. In a growing number of cases foreign investment and involvement has been welcomed or sought. Travelers in Africa have benefited enormously. Thanks to some very low fares many have experienced air travel for the first time and are reluctant to go back to buses or the almost non existent trains. Networks, frequencies and city pair connections have grown beyond recognition although there are still far too many with less than daily links. Waiting several days for connections doesn't work for anybody in 2015. Addis Ababa and Nairobi have become significant hubs despite creaking airport infrastructure now only slowly being relieved. Private carriers or foreign operators have been granted local traffic rights and have quickly filled in voids left by state owned predecessors.

Ed Winter is determined, declaring that the potential for new, well run,low cost/fare airlines is enormous. The arithmetic is simple he says. "There are 210 million people in the initial six countries fastjet aims to serve. If just 1% fly with us twice per year that's 2.1 million round trips a year and that tallies with a plan for thirty A319s averaging 7 sectors a day."

The challenge is getting from potential to reality. This is where the obstacles come in.

Despite the advantages that ventures such as Fastjet offer, there is not unequivocal enthusiasm for them. Protectionism takes numerous guises and forms. There are usually layers of everything in Africa, many subterranean with few ripples visible on a smiling surface.

To add to the complexity of its task and regardless of any local shareholdings, acquisitions , franchises and involvement fastjet is seen by those at the barricades as foreign. In some places it is therefore acting as a conduit for rearguard reactionary influences, responses and negativity. Even its major operating base,Tanzania hedges its bets .While being happy to host fastjet on the one hand, partly because it puts the country one up on Kenya, something that always pleases Tanzanians, it does not appear at ease without the comfort blanket of a national airline. Hence, despite the presence of PrecisionAir (49% Kenya Airways owned), it has always been keen to see its very own prodigious loss maker Air Tanzania somehow kept afloat. Next door, Kenya, while presenting one of the most modern minded business faces on the continent, has certainly not welcomed fastjet with open arms. Kenya Airways' drive to promote its low cost or at least low fare subsidiary Jambojet has at least something to do with being able to say to the government "Kenya doesn't need a foreign low cost carrier,-we've got our own".

This is an ongoing problem. Nevertheless the fastjet team see light at the end of the tunnel. Originally they considered Kenya, with its established air travel markets and ideal geographical location as its best bet for a launch platform to give it quick access to volume over a good route portfolio. To this end they bought local carrier Fly540 as a base upon which to build a new jet equipped low cost carrier. With Fly 540 came 4 AOCs in Kenya, Tanzania, Angola and Ghana and on the face of it a fairly simple process to achieve its aims. Unfortunately legal wrangles, misunderstandings over Fly540s existing debts and a number of other things meant that things didn't work out like that. Angola owner of heavily defended national carrier TAAG, is a difficult aviation environment at the best of times. The government is protectionist towards traffic rights, restricts remittances of profits and makes import of spares a slow moving nightmare. In Ghana a number of existing small domestic airlines have intervened with the government and there are logs across the road. All these things may well be surmountable in time but each day, week, month costs money. fastjet has not invested in the Fly540 business for a considerable time and has divested itself of Fly540 Kenya. In 2014 it also suspended operations in Angola and Ghana pending restructuring.

That is why Tanzania with its long distance domestic routes, road network limited by lumpy terrain and (so far) the Serengeti National Park in a direct line between Dar es Salaam and Lake Victoria and its decrepit railways has been fastjet's first operating home .It is the only place where things have gone much as per the original plan. Aided by some rock bottom fares, first time flyers have constituted 40% of the market and volumes above that have helped average yields and aircraft utilisation to push upwards. Four international routes, including Johannesburg, have added to the domestics enabling critical mass to be built. Airnthere's view is that if the company had realised how difficult Kenya was going to be and that Angola and Ghana would also be problematical they could have saved large amounts of time and money by starting in Tanzania in the first place and working outwards but one can understand how things looked to them at the time.

There are now two pushes on Kenya and once the Zambia based operation is up and running there will be a third. In the first push fastjet has now been designated by Tanzania as an operator on the Dar es Salaam -Nairobi route and Kenya is due to respond during January. In the second, against the background of Jambojet expanding its network, fastjet has applied for a Kenyan AOC in its own right. A decision on this is also expected in January and there is a feeling that some opinion in Kenya is moving in favour of more independent competition to avoid Kenya Airways controlling capacity and fares. Kenya Airways will meanwhile be arguing vigorously that Jambojet is a standalone company and not just a subsidiary and is at sufficient arms length to make licensing fastjet unnecessary. The airline will also be saying that it needs government to be protecting it at a time when Ebola on the one hand and the terrorism related downturn of Kenya tourism on the other is badly affecting its bottom line.

Despite ongoing frustrations Ed Winter and his team point to new signs of some very positive tail winds.

Under a 2011 protocol the traditional 51% national ownership requirement for national ownership was dropped from Tanzanian BASSAs. The requirement  switched to having its Head Office in the country and that being "The principle place of business". Disappointingly Kenya, with the most thriving civil aviation industry on the eastern side of the continent north of South Africa, has reaffirmed the 51% ownership restriction. Nevertheless fastjet is confident that the new structure of its Kenyan business will meet the requirements.

Also encouraging is the Zambia Government's recent approval of an Air Service Licence for fastjet. It is now said to be viewing the newcomer's AOC application positively, the first stage having  now been completed. The imminent startup of fastjet Zambia promises the establishment of an extensive network based on Lusaka.

In the last few days fastjet has also been granted 5th freedom rights by Uganda to operate between Entebbe, Nairobi, Johannesburg, Juba and Kigali. Reciprocal approvals are yet to be given but the prospect of a pan-African carrier moves closer to reality.

So what do we make of all this?

1) After a long and expensive gestation ,things are looking up for the airline. Being able to properly establish itself in Kenya would be a big boost although competition with Kenya Airways and Jambojet could make it difficult to get yields up and there could be a bleeding match. Kenya Airways' own current financial downturn may limit the amount they can afford to invest in fighting off the newcomer but that can't be taken as a given.

2) Adding a base in Zambia will be very powerful in beginning a multi-country franchise with interlocking networks. It offers another chance to get into Nairobi as a Zambia designated carrier.If the same can be achieved from Dar es Salaam and Entebbe fastjet's presence in Kenya begins to be significant with or without their own Kenya based operation.

3) Ghana and Angola could remain problematical and not worth persuing until a profitable core operation has been built up on the eastern side of the continent.

In conclusion, Africa, its governments, travelers, and airline industry needs fastjet and its impetus for beneficial change. Its tourism and other businesses and industries could all benefit enormously,- and at no cost to themselves. It's an opportunity which if lost could take a long time to come round again. For fastjet it's going to be a question of funds.

Saturday, 10 January 2015

A reluctant bride.-Aer Lingus rejects IAG again.

The news that Aer Lingus has again rejected the advances of IAG despite an increased price comes as no surprise.

Difficult though it may be for some "analysts" to grasp, this may not be all about cash. There is some pride and emotion in there too.

When IAG first appeared it was presented in a soft light as a merger between BA and Iberia. This was so as not to frighten the horses in either London or Madrid. There was talk of things like a live link between the AGMs in Madrid and London so that British shareholders would be able to speak and vote without having to go to Spain. That never happened. The BA Chairman at the company's last ever AGM said that BA would remain as British as it ever was, a meaningless statement if ever there was one. This sounded all very warm and cuddly and the vote in favour of "the merger" went though with virtually no comment from the anaesthetised floor.

The actuality though was very different. This was not a merger but the sale of both airlines to a new entity. Despite this, the myth of happy merger persisted and Willie Walsh talked of other major carriers "joining". By this he really meant "selling themselves" to IAG. Cathay Pacific was one target and there appeared to be surprise and certainly disappointment that they didn't leap at the chance of signing up. The reality is that why on earth would they? Cathay is a long standing and independent minded company. Why would Swires and other shareholders give up their direct control of  the high profile flagship business to receive in exchange maybe a few Board seats and, if the other IAG companies did as least as well as they did on their own, a dividend cheque to a higher value than they would have generated independently?

It may be that the Irish have a price at which they won't be able to resist selling their historic national carrier to a Spanish company but they haven't got there yet. Even then it could be that in the background people, and the government in particular, are very loath to see the company fly out of national control. As far as Ireland is concerned once it's gone,it's gone. The green livery and shamrock tails would be just a branding facade.

Saturday, 3 January 2015

Britain's annual rail fares angst.

Yes, it's that time of year again.

Britain's rail fares have risen by an average of 2.2%, much in line with real inflation.

At the same time massive new investment continues with electrification of the Great Western mail line and its eastern tributories, the North West Liverpool-Manchester-Preston-Blackpool triangle and a number of other major infrastructure projects. There are also more shiny new trains, albeit mainly for the London-orientated south.

The screams from the media, including some about the average 3% profits being made by the train operators being exported to subsidise rail fares in Europe are both emotional, absurdly xenophobic and indicative of a welfare state-bred belief that cheap train fares are as much an entitlement as other welfare benefits.There is also an illogical underlying belief that it is immoral for anyone to make a profit from providing a public service.  This doesn't just apply to the railways or even transport in general.It also paralyses the essential reform and re-funding of  Britain's National Health service. That though is another story.

The upward drift of rail fares is aimed to reduce the amount of government,- for which read taxpayer,- subsidy to the railways. The doctrine of "User Pays" is not unreasonable. Why should a moorland sheep farmer who never goes anywhere near a train subsidise a much better off London commuter?

Railway and all transport funding is likely to come under review again after the May General Election. With Health, education and foreign aid all red ringed against "cuts" the distorted pressure on other departments grows by the day. Fortunately the Great Western electrification is well under way now and it is too late for the axe to be wielded although it could be misguidedly and short termist "thrifted". The fact that it ends up in Wales is helpful though. Similarly the north western triangle is beyond the point of no return and it also has political significance.The long neglected Midland Main Line may though have to wait until the Great Western is finished and the trans-Pennine, one minute the political flavour of the month and the next left aside, is also vulnerable timewise although both projects will happen at some stage even if after 2020. HS 2 will come under attack, but political nerves need to hold on this one. It has taken years to progress as far as it now has (The glacial movement through Parliament of the Hybrid Bill to enable work to actually start on 2016 or more likely 2017.) and to start the interminable battle against the Chiltern and shires opposition groups  again is as debilitating a prospect can imagined. It must just battle on and get built this time round before rail capacity between London and the north strangles itself.

Most of the road projects announced, or more correctly re-announced for the umpteenth time, by the government recently are a long way from seeing the first shovels hit the ground. The local opposition "Say no To..." groups will be girding themselves and getting armed with evidence of newts, bats and the rest.

Road improvements are not going to remove any of the case for a continuous programme of rail improvements. That being so, the rail commuters in particular are going to have to accept that they will have to pay increasing fares to use the only system capable of getting them to work in the big employment centres, especially London. That won't stop the annual media "Shock, Horror" circus at fare rises time. They need it anyway because it is stuff they can write in advance for 1st January editions without having to interrupt their festive season.