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Turbulence ahead.
FASTEN SEATBELTS

Africa’s pioneering low-cost airline is losing altitude fast

By Omar Mohammed

Fastjet, the low-cost African airline, has issued another in a series of series of profit warnings to investors, saying that earnings for the year will be “materially below market expectations.” The last time it warned investors that there was trouble ahead, in December, the airline cited regulatory holdups in Zambia and Zimbabwe, currency fluctuations across the continent, and government budget cuts in Tanzania. These problems have proven ”a lot more prolonged than management originally forecast,” the airline said on Monday (Mar. 7).

The London-listed airline was founded in 2012 with the aim of emulating the regional short-haul business model of European budget carriers like EasyJet and Ryanair. Indeed, Stelios Haji-Ioannou, who founded Easyjet, helped launch Fastjet, installing Ed Winter, a former EasyJet exec, as CEO of the upstart airline. Serving the emerging African middle class, the company runs five routes within Tanzania as well as international flights to Kenya, South Africa, Uganda, Zambia, and Zimbabwe.

It has been hard going. This week’s profit warning is the airline’s third in a year. As a result, brokers have been slashing their forecasts—Liberum expects the company to lose nearly $20 million before taxes this year, down from an earlier forecast for a $1 million profit. The company’s shares have lost nearly 70% of their value over the past year. In January, Winter resigned, saying he would stick around only until a replacement is found.

Haji-Ioannou, who owns a 12% stake in Fastjet, says management is to blame for the company’s struggles, not outside factors. “Fastjet has a bloated cost base which was created by Ed Winter and his staff,” Haji-Ioannou said in a statement. “The only way to reduce the overhead is for Ed Winter to leave the company now and the chairman to start the cost cutting.” He said in an equally hostile statement last week that unless costs come down, the airline “will soon run out of cash.”

For its part, Fastjet says it has $20 million in cash to keep the company going, and will consider raising more funds for “additional headroom.” This money will be crucial “to fund future growth as market conditions improve,” it said. Given that it hasn’t had anything positive to say about market conditions recently—quite the opposite—investors appear to be bracing for more turbulence ahead.

Feature image by satransport via Flickr (licensed under CC BY-SA 2.0; image has been cropped)