Precision Air said it will turn to other lenders for cash to fund its expansion plans after its initial public offer (IPO) was massively undersubscribed.
The airline, analysts say, is likely to borrow to help finance the leasing of additional aircraft, which will expose it to further foreign exchange currency fluctuations and eat into its earnings should the Tanzanian shilling weaken further. The Tanzanian shilling has depreciated about 13 per cent to the dollar this year.
Precision Air’s IPO performance will be a wake-up call for airlines across the region planning on raising cash to fund their expansion plans.
Kenya Airways, which has a 34.13 per cent stake in Precision Air after the IPO, is planning on selling additional shares through a Rights Issue at the Nairobi Securities Exchange in 2012 to fund an ambitious expansion plan that will see it fly to every African capital by 2013.
Air Tanzania (ATL), which resumed operations at the beginning of December, announced a capital expenditure plan to acquire 11 aircraft. However, this plan is reliant on the Tanzania government’s releasing $11.9 million that had been allocated in the national budget.
Precision Air released the results of its IPO on November 23, which showed that only $7.4 million of the $17.5 million it was looking to raise at the Dar es Salaam Securities Exchange was realised. The IPO ran from October 7 to November 4.
About half of the $17.5 million sought was to fund the airline’s fleet expansion from the current 11 craft to 14 by 2013. The airline still plans to list its shares on the Dar es Salaam Stock Exchange on December 15.
But after failing to raise the targeted amount, with brokers saying the undersubscription was a result of bad timing — investors were more interested in the Tanzania Breweries IPO that kicked off on November 4 — Precision Air said it would weigh its options, with leasing and third party financing being at the top.
“We need the money to modernise and expand our fleet, but this can still be achieved even with the money available, as we can purchase two new ATRs and lease the other three so that we have the five aeroplanes that we had targeted,” said managing director Alfonse Kioko.
Precision Air already has a $112 million loan from Citibank, which it used to finance the purchase of seven aircraft, according to its IPO prospectus.
However, investment analysts said additional lease plans to cover the shortfall from the IPO will have to be in dollars. This means the airline will have to derive more revenues in dollars to cover leasing and other costs such as fuel, which it will pay for in dollars.
“They will finance their lease in dollars so the biggest risk will be matching the dollar revenues to their expenses in the same currency,” said analysts from Standard Investment Bank, a Kenya stockbrokerage.
Precision Air, market analysts say, failed to market the offer to foreign investors, especially Kenyans. A total of 6,667 investors, mostly local retail and institutional investors, bought the shares.
Mr Kioko added that even before the airline embarked on an IPO, there were other institutions willing to fund its expansion, “But this wasn’t the only major issue at hand, because we wanted Tanzanians to be part of the Precision Air success story.”
Started in 1987 as a crop spraying company with operations concentrated on the large-scale farms in the northern highlands, the company was registered as a scheduled and charter air services company operating a five-seater Piper Aztech aircraft in 1993.
By 1998, it had been confirmed as the second designated national carrier and five years later Kenya Airways acquired a 49 per cent stake.
KQ needs to learn from Precision Air’s undersubscription by bringing its offer to the market at the right time. A number of firms, which had lined up for listing at the Nairobi Securities Exchange, have put on hold their plans fearing the bearish run at the bourse.
KQ’s shares are the third worst performing shares at the NSE, down 53 per cent since the beginning of the year to US cents 22.
KQ, though, seems to be cushioned by its partnership with KLM and the Kenya government which own 26 and 23 per cent respectively in the airline, committing to take up their additional shares in the Rights Issue.
By Joseph Mwamunyange and Leonard Magomba in Dar es Salaam and Emmanuel Were in Nairobi.
Air Tanzania has its revival plans hinged on government support.
ATL has been able to overcome its messy break up with South African Airways and reduce its losses to return to operations.