Fastjet has re-entered the Kenyan market a year after selling its stake in low-cost carrier Fly540. Fastjet Kenya is banking on low pricing to lure domestic travellers.
Last week, Fastjet Kenya was granted an Air Service Licence by the Kenya Civil Aviation Authority, and is awaiting its Air Operator Certificate in order to commence flights.
“Unless Fastjet Kenya offers a cheaper product with better aircraft, customers will still prefer road travel to air. The small jets used by low cost fliers are uncomfortable,” said Einstein Kihanda, the chief investment officer at ICEA Asset Management.
According to Fastjet officials, the airline will introduce the lowest fares in Kenya, which is likely to spark a price war among low cost fliers. The airline will ply the Mombasa, Kisumu, Eldoret and Wajir routes. The local routes will pave the way for Fastjet to fly on longer trips, as it takes up to one year for an airline to be allowed to operate international routes.
“The prices will be the lowest in the Kenyan market and we expect to leverage on tourists, businessmen and road travellers looking for better airline services. We hope to replicate the success we have had in Tanzania,” said Jimmy Kibati, Fastjet’s regional manager for East Africa.
Analysts warned that this strategy could see Fastjet run out of capital as its expenditure increases.
The risks in Kenya are likely to include a depreciating currency ahead the election year 2017.
Fastjet has already issued a profit warning to its shareholders, citing the depreciating Tanzanian and Zambian currencies and an election year in Tanzania.
Losses for Fastjet Tanzania before tax fell to $9.9 million this year from $20 million in 2014, mainly because of an increased number of flights. The firm’s revenues in 2014 rose to $31.5 million, from $19 million the previous year, boosted by a 56 per cent rise in the number of passengers.
The Tanzanian shilling has deteriorated significantly against the US dollar since April 2015; it hit Tsh2,164 last week, losing a fifth of its value since January. The Kenyan currency has lost 14 per cent against the dollar this year, and was trading at Ksh102 last week.
Fastjet signed a sales and distribution contract with Emirates allowing passengers access to its network across East and Southern Africa, and Fly540 has a partnership agreement with FlySAX and an international interline partnership with Qatar Airways.
“The partners could choose to boost the low-cost airlines. As they flex their financial muscle in the African low cost carrier markets, we are likely to see a wave of new aircraft, low prices and an aggressive expansion,” said Mr Kihanda.
Analysts said Fastjet plc, listed on the sub-market of the London Stock Exchange, would require more capital and partnerships in Africa to compete favourably across the region.
“Even if Fastjet Tanzania breaks even, it will take time before other units like Kenya, South Africa or Zambia become profitable,” said Eric Musau, a senior research analyst at Standard Investment Bank Ltd. Fastjet is establishing more units in Zambia and Zimbabwe, with future plans for Rwanda, Uganda and the Democratic Republic of Congo.
Apart from the Wajir route, Fastjet will be competing directly with Kenya Airways-owned Jambojet, a low-cost carrier that plies the Eldoret, Kisumu, Ukunda, Lamu, Malindi, Mombasa and Nairobi routes.
Jambojet has flown more than 500,000 passengers since it started in April 2014. Fly540 flies to Kisumu, Lamu, Malindi, Mombasa, Eldoret and Lodwar, and also to Juba in South Sudan and Zanzibar in Tanzania.
According to the African Airlines Association (AFRAA), Africa’s business environment is currently not favourable for local airlines. The average global fuel price is $1.45 per 3.7 litres, compared with $4 in Africa, 60 per cent higher, because of high taxes charged on the commodity.
“It is difficult for local carriers to compete favourably on the international market. On some routes, the taxes and additional charges are higher than the fares, lowering demand for air services,” said Elijah Chingosho, the secretary general of AFRAA.
Jetlink, a Kenya-based regional low-cost carrier, closed operations in 2012, citing financial problems.
The International Air Transport Association predicts that African airlines will post a collective profit of $100 million with a net margin of 0.8 per cent, the lowest in the world.
“This continues the relatively poor performance of the past few years. Last year, traffic growth for African airlines was weak because of various problems that disrupted tourism, but market share also continues to be lost,” says the latest IATA report.
African airlines are also expected to see the slowest growth among developing markets this year, with a capacity expansion of 3.3 per cent and demand expansion of 3.2 per cent.