Lonrho sells its Fly540 stake to fund for Sh7.2bn
Fly540 is set be absorbed into a new Africa-focused low-cost airline to be managed by a European budget carrier after its majority shareholder Lonrho transferred its stake to a British investment firm in a deal worth Sh7.2 billion.
Lonrho, which owns 49 per cent of Fly540, has transferred its aviation business to the investment firm Rubicon, which will establish a pan-African airline that will be run by EasyJet, the second largest low-cost carrier in Europe after Ryanair.
Rubicon intends to start the Africa-focused low-cost airline — FastJet — which will be modelled along EasyJet that is hinged on low fares but passengers paying for extras like food and baggage.
It is targeting to connect the bulk of Africa’s travellers to the rest of the world through its Ghana, Angola and Nairobi hubs, following a strategy that is also at the heart of Kenya Airways’ growth plan, in partnership with intercontinental carriers. This move will transfer their local rivalry to the continental stage.
“FastJet will focus on developing a true low-cost airline for Africa based on the existing Lonrho Aviation platform, which in its existing operations as Fly540,” Lonrho said in a statement on Wednesday, announcing the Rubicon deal.
“The combination of Lonrho’s experience in Africa, the aviation experience of Sir Stelios Haji-Loannou and Easy Group…and Rubicon’s cash resources will enable FastJet to quickly develop its low-cost airline,” added Lonrho.
The billionaire Haji-Loannou, who has a five per cent stake in Rubicon, is the owner of EasyJet and ventures under the budget Easy brand including hotels, car hire and cruise services.
The loss-making Fly540 flies to seven countries in eastern Africa, including South Sudan, Uganda, Burundi and Tanzania, with its hub being Nairobi.
Its other hubs are in West Africa and south West Africa and now it plans to link the hubs to launch across the continent.
“Lonrho’s strategic hubs operate in Kenya, Tanzania, Ghana and Angola, providing unparalleled route network and operating platform to launch across Africa,” said Lonrho.
Lonrho will remain a majority shareholder in Rubicon in the share swap transaction worth $85.7 million (Sh7.2 billion) and the aviation business will be listed separately at the London Stock Exchange. It will keep its hotel, agribusiness and infrastructure wings that focus on Africa and will be free to sell its 73 per cent stake in Rubicon after a year.
“Rubicon shares received by Lonrho as consideration for the disposal will be subject to a 12-month lock-in period,” said Lonrho.
Budget carrier FastJet will go in a head to head battle with Kenya Airways that has hinged its profitability on connecting African cities to Europe and Asia.
It plans to double its fleet from the current 33 to 62 by 2016--which will allow it to connect more African cities to Asia through its Nairobi hub.
Presently, KQ draws 49 per cent of its Sh85.8 billion revenue annually from its Africa routes, 27 per cent (Europe), 10 per cent (Middle East), nine per cent (Asia) and five per cent from its domestic routes.
The airline’s profit grew to Sh3.5 billion in the year to March 2011 compared to Sh2 billion in a similar period last year, but issued a profit warning for the year ended March this year and investors will this morning know the extent of the profit drop.
FastJet is banking on the experience of EasyJet to gain market share in Africa and has appointed former chief operating officer of the European budget airline Ed Winter as its CEO.
Fly540 and other regional carriers like Jet Link are facing heat from KQ which has kept its domestic fares low and increased frequency on local routes to grow its share of the Kenyan business.
The KQ domestic rival previously said they cannot recover their running costs if they match Kenya KQ on pricing, claiming that the carrier has engaged in predatory pricing with the intention of locking them out of the market.
This is part of the reason that Fly540 under FastJet is changing tact with an eye on larger operations that can allow it to match carriers like KQ on pricing.
It made a loss of $19 million (Sh1.6 billion) in the 15 months to December. “The losses were predominantly due to the start-up cost costs of opening Angola and Ghana operational hub,” said Lonrho.