ANALYSIS: Fastjet begins South African excursion

This story is sourced from Pro
See more Pro news »

Fastjet, the pan-African low-cost carrier backed by Stelios Haji-Ioannou, will begin South African services in July with a Boeing 737-300 wet-leased from local operator Star Air Cargo. Division chief executive Kyle Haywood believes that the launch will restore price competition in a market dominated by two low-cost players - Comair's Kulula brand, and South African Airways' Mango subsidiary.

But the myriad legal difficulties Fastjet has endured since its November 2012 launch show no sign of abating, with Comair chief executive Erik Venter already hinting that his new rival's corporate structure may fall foul of South African law.

Fastjet's earlier, unsuccessful attempt at entering South Africa - by far the continent's largest low-cost market - hinged on proposals to take over 1time Airline, which was provisionally liquidated in late 2012 with debts of almost rand (R) 500 million ($59 million).

The London-listed company had planned to take over 1time's air operator's certificate and run reduced services with its fuel-guzzling Boeing MD-80 fleet, before gradually introducing the Airbus A319 type deployed at its Tanzania base. But strict foreign ownership laws that bar foreign companies from holding more than 25% of a domestic airline scuppered the deal.

Enter Blockbuster, an investment company associated with several high-profile citizens - including Edward Zuma, the son of South Africa's president - which now owns 75% of Fastjet's local venture. The arrangement involves Fastjet PLC providing top-level guidance to the subsidiary, with Federal Airlines conducting day-to-day operations, and Blockbuster - now renamed Fastjet Holdings - abiding by South Africa's foreign ownership laws. Problem solved, according to Haywood, but Comair's Venter is not convinced. He argues that Blockbuster is merely a "front" for foreign ownership, with all strategic decisions being taken in London, and the Fastjet brand merely functioning as a "virtual airline".

"We obviously disagree with what is being said by Erik Venter," says Haywood, noting that Comair's own British Airways franchise involves a "not too dissimilar" structure with the London-based flag carrier. "Our arrangement is legally compliant under South African aviation legislation...We have the airline flying in Tanzania - Fastjet is an operating concern - so I don't believe it is a virtual airline."

Uncertainty surrounding Blockbuster's history and structure has also raised some eyebrows. Despite owning 75% of the new venture - with Fastjet PLC holding the remainder - nothing has been disclosed about the precise roles of its directors, the most prominent of which are Zuma and Yusuf Kajee.

"There's no legal requirement to disclose actual stakes or responsibilities," Haywood confirms. "But all of the directors that sit within the company have had previous business interests, they've navigated through business environments in South Africa, they all bring different things to the table." Zuma comes from a legal background, Haywood notes, while others have aviation-specific expertise.

Although Fastjet's South African unit will undoubtedly face further scrutiny, few believe that the country's low-cost market is best left alone. An investigation by the local Sunday World newspaper found that since November 2011 - shortly before another low-cost carrier, Velvet Sky, ceased operations - the lowest fares on the Johannesburg-Cape Town trunk route have risen by 62%.

Perhaps more tellingly, the demise of 1time just seven months ago precipitated a doubling of Comair's share price. Little wonder that Venter is keen to preserve market share by warding off Fastjet.

There is one issue, however, on which the two rivals see eye-to-eye. "It's well documented that SAA has taken in quite a lot of subsidy from the state, and continues to do so," Haywood says. "If that is used to put them into a more competitive position, then that is a concern to any airline operating in this market." Referring to Comair's legal challenge to SAA's state guarantee, Haywood says he sees "a lot of merit" in the arguments voiced by Venter.

But Nico Bezuidenhout, chief executive of the flag carrier's Mango subsidiary, unequivocally rejects allegations of unfair competition. "Mango categorically does not require a bailout, has never required a bailout, and does not in any way, shape or form benefit from any recapitalisation," he insists.

Under the initial phase of its expansion, Fastjet expects to increase frequencies on its twice daily Johannesburg-Cape Town route, while also looking at a Cape Town-Durban service. Regional expansion will come after "a year or two", Haywood says.

The chief executive should expect his rivals to voice strong opposition at every stage of the airline's growth. But its South African partners are well placed to lend support, and its experience in dealing with legal disputes in Tanzania and Kenya should strengthen its resolve. "Fastjet has good potential to grow in South Africa," Haywood says confidently. "There is space for all of the players to operate a profitable business."