EasyJet founder Sir Stelios Haji-Ioannou and a team of regional and industry experts are launching sub-Saharan Africa's first low-cost airline. FastJet could be one of the region’s largest carriers in just a few years - and investors still have time to grab a ticket before take-off.
- Huge potential for African air travel
- Strong management team
- First mover advantage
- Established operating platform in place
- Market not fully liberalised
- Unstable operating environment
Last year, Rubicon Diversified Investments was just another Alternative Investment Market (Aim)-listed cash shell. Elsewhere in the City, Africa-focused conglomerate Lonrho was talking to Stelios about the future of its airline, Fly 540. Before long, Stelios had dreamt up the FastJet brand and Lonrho had bought a stake in Rubicon. The three got together in December and, last month, Lonrho reversed Fly 540 into Rubicon. That's quite a combination, and one that could revolutionise the African airline industry. It will be piloted by Ed Winter - he established low-cost carrier Go for British Airways and was operating chief for Stelios at easyJet.
Mr Winter says the timing is "perfect". Africa's air transport system is small, fragmented, unreliable and often dangerous. But a population explosion, forecast economic growth of 7 per cent, oil money, an expanding middle class and poor road and rail infrastructure should all drive demand for air travel over the next decade.
Fly 540 carried 54,000 passengers in June and its existing fleet, mostly turboprops, are tipped to turn over $119m (£77m) this year and make a $19m cash profit before aircraft rent and ownership costs. Yet, existing air operating certificates in Kenya, Tanzania, Ghana and Angola will allow FastJet to ramp up quickly. There'll be first-mover advantage, too, and, with little serious competition, FastJet can cherry-pick high-return routes. Management thinks traffic will "easily" double within six months of its first FastJet-liveried Airbus A319 jet taking to the skies in October. That, however, could be chicken feed.
RUBICON DIVERSIFIED INVESTMENTS (RUBI) | ||||
|---|---|---|---|---|
| ORD PRICE: | 3.75p | MARKET VALUE: | £49.2m | |
| TOUCH: | 3.7-3.8p | 12-MONTH HIGH/LOW: | 8.6p | 0.5p |
| DIVIDEND YIELD: | nil | PE RATIO: | 2 | |
| NET ASSET VALUE: | 0.5p† | NET CASH: | £8.8m** | |
| Year to 30 Jun | Turnover (£m) | Pre-tax profit (£m) | Earnings per share (p) | Dividend per share (p) |
|---|---|---|---|---|
| 2011 | nil | -0.07 | -0.16 | nil |
| Year to 31 Dec | ($m) | ($m) | (¢) | (¢) |
| 2012* | 119 | -4.00 | -0.10 | nil |
| 2013* | 290 | -12.0 | -0.50 | nil |
| 2014* | 510 | 10.0 | 0.20 | nil |
| 2015* | 763 | 61.0 | 1.80 | nil |
| % change | +50 | +510 | +800 | - |
*Liberum Capital estimates Normal market size: 40,000 Market makers: 6 Beta: -1.1 †Prior to December 2011's fundraising **As at 31 December 2011, and following a £9m placing £1=$1.55 | ||||
"You don't have to be too optimistic to talk big numbers," says analyst Peter Hyde of broker Liberum Capital. He reckons FastJet could carry over 8m passengers in three years' time, generating $763m of revenue and profit of $125m with a 16 per cent margin. If so, the shares could be worth up to 11p, he says.
It will need around 30 new planes to do that - management wants five within six months of launch and up to 15 in a year. It will also take each new route at least eight months to break even, so expect a fundraising soon. Still, leasing planes gives the group flexibility and means it can grow according to demand.
Of course, there are risks - Africa can be an unstable place to do business and there are worries about the liberalisation of air travel there. But two-thirds of air transport services within Africa are now liberalised, while Lonrho - after a century of being in Africa - has the experience to help keep the airline out of trouble. Even the royalty fees paid to 5 per cent shareholder Stelios for the next 10 years could be worth it, given his credibility and skill at negotiating down costs. And Fly 540's ready-made operating platform, with its knowledge of demand and relationships with suppliers and airports, is gold dust.
