African low-cost carrier fastjet plans to launch scheduled domestic flights in South Africa by the end of May 2013 initially on the trunk route between Cape Town and Johannesburg. The carrier has confirmed the signing of a Memorandum of Understanding (MoU) with local South African investment company Blockbuster to establish a new business entity after it dismissed previous exploratory plans to establish operations by using the assets of collapsed budget carrier 1time.

In compliance with South African law, it is anticipated that the new entity will be 75 per cent controlled by Blockbuster and 25 per cent owned by fastjet. Blockbuster, which is associated with a number of high profile South Africans including, Edward Zuma, the son of President Jacob Zuma, and prominent local businessman Yusuf Kajee, has already agreed a deal with existing carrier Federal Airlines to act as the vehicle to get to the business into the air. fastjet has also raised additional working capital to assist with the South Africa launch though a successful placing with an institutional investor who is committed to low-cost air travel in Africa.

“We do not seek to be a hostile competitor in the market place as we fully understand and appreciate the significance of the national carrier and existing airlines in country, but we want to provide extra seat capacity to South Africans so that they can travel when and where they want at better prices.”

David Lenigas
Chairman, fastjet

In recent months, fastjet has been in discussions with a number of South Africa-based entities to support its market entry strategy, including the well publicised negotiations regarding a potential purchase of liquidated airline 1time. In the opinion of the Directors, the value of the 1time “has diminished” over time and as there is “still no indication that 1time creditors will accept the fastjet offer”, the company has instead chosen this new path to meet its growth aspirations.

fastjet believes the South African market is “well-suited” to its low-cost operating model and it plans to initially offer twice daily flights on the route between Johannesburg and Cape Town. These flights will be timed, according to the carrier’s senior management, to attract both business and leisure travellers on one of the world’s busiest city pairs. Flights are tentative scheduled to start on May 31, 2013 with additional destinations being added as part of a planned ramp-up of operations in South Africa.

"Though we have been in talks with a number of companies regarding licensing arrangements, we have ultimately decided that in order to best serve South African customers, we should invest not in the past, but in the future. We are now firmly focused on quickly getting up and running in order to create a fresh, unique and commercially sustainable offering which will stimulate the market,” said Ed Winter, Chief Executive Officer, fastjet. "fastjet sees a strategic gap in the South African marketplace for a pan-continental, low-cost airline operating the yield management model required to keep fares affordable for passengers, not just at launch, but also in the long-term."

Using the licence of Federal Airlines will enable fastjet to enter the market much quicker than by establishing a new standalone airline. Federal Airlines has more than 20 years experience in South African skies. Originally established as Comair Charters in 1989, the Federal Air brand was adopted in 1993, initially offering safari shuttle services before expanding into the scheduled market. The carrier now operates a fleet of general aviation and small turboprop aircraft up to 19-seats in capacity with flights across South Africa and to Mozambique.

"We believe that the operating agreements in place between Blockbuster and Federal Air represent a great opportunity for fastjet, our local investors, our partners at Federal Air and most importantly, the South African public," said Winter.

Following the collapse of budget operator 1time in November last year, fastjet claims air fares have increased in the domestic South African market with existing operators taking advantage of the changing market conditions to maximise the benefits of the now reduced supply of seats. Fastjet says many aircraft are now operating at near full capacity, specifically on the key Johannesburg to Cape Town and Durban routes due to the capacity reductions.

Our own analysis of data from IATA’s AirportIS shows that average one way fares in February 2013 on the route between Johannesburg and Cape Town were down 4.8 per cent on the same month in 2012, although prices were up 5.5 per cent the previous month. Across the first two months of this year bi-directional O&D demand on the route has fallen 13.7 per cent versus the same period in 2012. Last year an estimated 3.14 million bi-directional O&D passenger travelled on the route with demand split between South African Airways (43.5 per cent), Comair (19.1 per cent), Kulula.com (14.4 per cent), Mango (11.3 per cent), 1time (10.3 per cent) and short-lived carrier Velvet Sky Airlines (1.2 per cent).

fastjet’s debut in South Africa will pitch in directly into competition with the country’s largest domestic operators but plans to grow its critical mass by adding further routes from Federal Airlines’ base at O R Tambo International Airport in Johannesburg and inter connectivity between South Africa’s largest cities will help it establish itself across a variety of markets.

“We do not seek to be a hostile competitor in the market place as we fully understand and appreciate the significance of the national carrier and existing airlines in country, but we want to provide extra seat capacity to South Africans so that they can travel when and where they want at better prices," said David Lenigas, Chairman, fastjet. "Today is an incredibly exciting day for fastjet, not just in South Africa, but across the entire continent. As populations grow and disposable income and consumer spending increases, there is greater demand for affordable air travel. We would like to be part of the solution.”

In 2012 the South African domestic industry was dominated by national carrier South African Airways, which through its mainline business and regional partners carried a 46.9 per cent share of the total 10.57 million domestic O&D passengers. 1time had an approximate 10.2 per cent share of the market, carrying just over one million O&D passengers and is the void that fastjet will hope to fill with any network growth. In the table below we look in greater details at the development of the South African domestic market over the past five years.

The announcement of the South African growth plans follows in the same week that the low-cost carrier’s shareholders signed a MoU with Don Smith, Chief Executive Officer of Five Forty Aviation Limited which trades in Kenya as Fly 540 to resolve recent disputes and establishing a way by which the two parties can work together to maximise the value and business prospects of both Fly 540 and fastjet.

The MoU provides a positive platform for fastjet to strengthen its East African hub and includes, among other provisions, an agreement by both parties to stop legal proceedings in order that mutually beneficial and constructive resolutions are discussed and implemented.

"Both fastjet and Don Smith are pleased to be putting the unfortunate, highly publicised events of the past few months behind us. Don Smith remains the CEO of the Kenyan business and we are pleased to have him as part of the fastjet/Fly540 team," said Ed Winter.