Fly540 under scrutiny after sale of shares to British firm

A recent change in the ownership of regional flights operator, Fly540, has run into strong regulatory headwinds, whose full impact is expected to be felt in Kenya and the UK.

Fly540’s continued operation as a Kenyan airline was last week hanging in the balance as analysts and regulators differed with its owners over the full import of last month’s sale of shares to a British firm.

See: Fly540 timeline

At the heart of the matter is the lack of clarity in Fly540’s new ownership structure, which is key to the airline’s continued holding of a licence as a Kenyan operator.

The change in ownership occurred after British investment firm Rubicon bought Lonrho’s African aviation business, including its 49 per cent stake in Fly540, for $86 million (Sh7.2 billion).

Rubicon further announced plans to acquire interest in a large portion of the remaining 51 per cent stake from the majority shareholder, 530 Investment, at a price of $2.25 million (Sh185 million) – raising its total interest in the firm to 99 per cent.

That would effectively remove Fly540 from local ownership, a requirement for its continued operation as a Kenyan airline.

The Kenya Civil Aviation Authority (KCAA), which regulates Kenyan airspace, said it was yet to be briefed on the $86 million (Sh7.2 billion) deal, warning that the airline’s designation would have to change if it transferred majority ownership to foreign hands.

“The CEO (Donald Smith) is the manager accountable for the operating certificate, which is not transferable,” said KCAA director general Hilary Kioko.

Mr Smith did not respond to questions as to whether he had reached a buyout deal with Rubicon on the 51 per cent stake as indicated in an earlier announcement.

He has, however, recently published a notice in local newspapers stating that the majority shareholder in the airline has not changed.

Rubicon said completion of the deal as planned would give it a 99 per cent “economic interest” in Fly540 and that it would appoint a new team of managers in the UK to run the new outfit.

Economic interest usually refers to securities in a company other than shares, including preferred stock, warrants, options, debt instruments and indirect interests that empower the holder to vote on key decisions.

Such interests can, however, be converted into equity giving the holders effective control of a company.

Mr Kioko said aviation rules required that the airline notifies the regulator of any changes in its ownership and apply for the relevant licence variations.

“We have not been informed of any ownership changes in Fly540 as they are required to do,” said Mr Kioko in an interview.

It is differences in interpretation of the 99 per cent ‘economic interest’ that lies at the centre of the contention that Fly540 can no longer hold a Kenyan licence.

Mr Smith, a Kenyan accountant, maintained that he still heads the airline and owns the 51 per cent stake as Rubicon only bought Lonrho’s shares.

“It is still a Kenyan owned company,” he said in a telephone interview. “They have majority economic interest, but Fly540 remains a Kenyan company.”

Peter Simani, partner at Simani & Associates Advocates, said the airline would have to show effective ownership to continue to operating as a designated Kenyan carrier. “It’s not prudent to designate Fly540 or Fastjet as Kenyan airline until effective ownership and control is first established to be Kenyan. We have to secure the local industry,” he said.

Rubicon intends to start a pan-African low- cost carrier dubbed FastJet. Ed Winter, a former operating officer of UK low-cost carrier EasyJet, has been appointed the CEO of FastJet.

Mr Kioko said Fly540’s licence expires in 2014 when its owners will be required to furnish KCAA with the ownership certificate or during the rebranding.

The relevant licences include Air Services Licence (ASL) and Air Operators Certificate (AOC).

ASL allows an operator to run services on a particular route while AOC allows use of aircraft for commercial purposes.
The latter lists the aircraft type, registration and flight routes among others.

In a recent public notice, Mr Smith said Rubicon’s majority economic interest had no impact on its local ownership.

Regulation

Rubicon acquired 49 per cent of Lonhro’s stake in Fly540 and separately acquired a stake in 530 Investment, which owns 51 per cent of Fly540.

“Rubicon will separately acquire for consideration comprising $2.25 million in cash and the 530 Vendor (Don Smith) consideration chares, a 49 per cent legal and economic interest and a further 49 per cent economic interest in 530 Investment.

When combined with Lonrho Aviation’s 49 per cent interest in Fly540, this will result in a 99 per cent economic interest in Fly540 Kenya owned by the Enlarged Group,” the notice says.

It acknowledges the need for local partners to help with the regulation and licensing of the airline.

Losing its designation as a Kenyan airline would see Fly540 lose the right to operate scheduled domestic flights as well as regional flights.
Fly540 launched operations in Kenya in November 2006 with flights between Nairobi and Kisumu and has grown to serving close to 10 destinations domestically and regionally including Entebbe, Mwanza, Eldoret and Lamu.

pmaina@ke.nationmedia.com