Fastjet: Results for the 18 month period to 31 December 2012

fastjet announces its results for the 18 month period to 31 December 2012, which will also be made available on the Company’s website and posted to shareholders.

Chairman’s statement

Background
On 18 November 2011, the Company, when it was called Rubicon Diversified Investments Plc, announced its intention to adopt a new investing policy. The Company aimed to seek an acquisition or acquisitions in the global aviation services sector with a focus on Africa.

On 23 February 2012, the Company announced it was in discussions to acquire Lonrho Plc’s aviation businesses operating in Africa. Trading in the existing ordinary shares was suspended on 23 February 2012 until the Company could enter into binding agreements and publish an Admission Document for the enlarged Group.

On 8 May 2012, the Company announced it had entered into a brand licence with Sir Stelios Haji-Ioannou’s easyGroup Holdings Limited (“easyGroup”), under which it had agreed to licence the fastjet brand from easyGroup subject to certain conditions including the completion of the Acquisition (the “Brand Licence”). Under the Brand Licence, the Company agreed to issue to easyGroup shares equal to 5% of the Company’s diluted share capital and options over a further 10% of the Company’s diluted share capital. Sir Stelios and easyGroup also agreed to provide consultancy services to fastjet for the duration of the Brand Licence. easyGroup has the right to appoint two Directors to the Board of fastjet whilst the Brand Licence is in force.

On 13 June 2012, the Company announced that it had entered into an acquisition agreement to acquire the entire issued share capital of Lonrho Aviation (BVI) Limited (“Lonrho Aviation”), the holding company representing Lonrho Plc’s interest in a pan-African airline business operating under the ‘Fly540’ brand, plus a 49.98% economic interest in Five Forty Aviation Limited (“Fly540”). On the same date, the Company published an Admission Document.

On 29 June 2012, at a general meeting of the Company’s shareholders, resolutions were passed, approving the Lonrho Aviation acquisition and the acquisition of a further 49.98% economic interest in Fly540 Kenya (together “the Acquisition”). The Acquisition was completed on 2 July 2012.

Directorate

In July 2012, Edward Winter was appointed Chief Executive Officer of fastjet. Edward has vast experience in the low-cost aviation business, as a founder of Go and former Chief Operating Officer of easyJet, as well as a long history in the broader airline industry as chief pilot and in senior management roles at British Airways. His knowledge and leadership has been a great asset to the Company as we launch and grow fastjet. Edward is one of the two easyGroup nominees to the Board.

In December 2012, Richard Blakesley resigned from the Board as Finance Director and was replaced by Angus Saunders. Angus has extensive experience in the global aviation industry and was previously Finance Director of British Mediterranean Airways Limited.

fastjet Launch

fastjet launched its new low-cost services on 29 November 2012, with the first aircraft commencing operations from Dar-e-Salaam in Tanzania. In anticipation of the launch, a substantial amount of preparation work had been completed on the operational, sales and marketing, recruiting, IT and regulatory side to ensure the fastjet launch met its stated commitment of supplying an airline that operated to international standards. The head office team has been strengthened with the hiring of key individuals with strong global airline backgrounds from the likes of easyJet and Ryanair.

Current Trading

A review of current trading is provided in the Chief Executive’s Review. Unfortunately, the Fly540 operations have not performed to our expectations and we have made an impairment to goodwill and to investments (see note 3).

Funding

In March 2013, the Company announced that it had entered into a convertible securities deed with Bergen Global Opportunity Fund, LP (“Bergen”), an institutional investment fund managed by Bergen Asset Management, LLC, a New York asset management firm, in connection with zero coupon convertible securities with a nominal amount of up to £15,681,750.

Future Initiatives

The South African market is seen by the fastjet Board as a significant opportunity and essential to fastjet’s pan-African ambitions. In recent months we have been in discussions with a number of South African-based entities to support our market entry strategy.

In April 2013, the Company announced the signing of a Memorandum of Understanding (“MoU”) with local South African investment company Blockbuster, with the objective of fastjet operating services in South Africa by the end of May 2013. Blockbuster is associated with a number of high profile South Africans. It is anticipated that the new entity will be 75% owned by Blockbuster, in compliance with South African law, and 25% owned by fastjet. fastjet is targeting early July 2013 to launch the initial Johannesburg to Cape Town route.

A commercial arrangement has also been struck between Blockbuster and local operator Federal Airlines, a company with a 20 year history in South Africa, which will facilitate bringing the fastjet low cost brand to the South African public.

Outlook

The next few months will represent a greater transformation for the Company as we endeavour to further implement and grow the fastjet business model. The Board is confident it has the right strategy and team in place to build a successful and profitable future for our shareholders.

The current Board would like to take this opportunity to thank its staff and our shareholders for their continued support during this initial start-up phase.

David Lenigas
Executive Chairman

31 May 2013

Chief Executive’s Review

I am pleased to present my report for the 18 month period to 31 December 2012.

Operations review

fastjet operations

Following the acquisition of Lonrho Aviation and Fly540 Kenya in July 2012, management spent considerable time reviewing the Fly540 businesses and activities to determine the appropriate place to initially commence the fastjet low-cost airline model. East Africa was selected ahead of West Africa due to market economic indicators and potential quantum of capital required. Tanzania was then chosen as the commencing country ahead of Kenya based on a number of factors including:

- the Tanzania Fly540 operation was relatively new, and as such, was expected to have the least number of legacy issues;
- the Tanzanian government and Civil Aviation Authority were very positive and welcoming;
- the Airbus A319 aircraft had already been approved on the Tanzanian register;
- the competitive environment was more benign than in Kenya where Kenya Airways dominates the market and has considerable influence over the Kenyan Government and the Civil Aviation Authority.

The Fly540 operation in Tanzania was closed in early November 2012 to allow the introduction of fastjet on 29 November 2012. Operationally it has been a great success with exceptionally high levels of punctuality and regularity and has certainly proved the ability to operate efficiently within African infrastructure constraints. The passenger loads on the two domestic routes between Dar-es-Salaam and Kilimanjaro and Dar-es-Salaam and Mwanza averaged 79% in December, the first month of operations. Similar loads were achieved in January and February 2013 but fell to 64% in March and 66% in April following the introduction of additional flights on secondary domestic routes from Kilimanjaro. Many of the passengers have been first time flyers, having previously used road transport on these routes. The ability to stimulate and grow the market using the low-cost airline model has now been proven to work in this part of Africa. The fastjet brand of reliable affordable air travel has been rapidly accepted and endorsed by the Tanzanian consumer. fastjet is now the most “liked” sub Saharan African airline on Facebook, ahead of long established airlines such as Kenya Airways, South African Airways, Ethiopian Airlines and Precision Air.

Prior to commencing operations fastjet was assured by the Tanzanian Government that international route rights from Dar-es-Salaam would be immediately available to the airline. The business plan, local organisation and resources were put in place on that assumption. Obtaining those route rights has taken much longer than expected through bureaucracy and protectionism in the countries where fastjet wishes to fly. The result has had an adverse effect on the business plan incurring the additional costs of under utilised resources. An operation of purely domestic routes within Tanzania would not be a viable business and therefore gaining international route rights has been a very high priority. Lobbying in recent months has eventually produced action and we understand that, following constructive talks with the Tanzanian Government, international routes are expected to become operational within the next two months.

Review of Fly540 operations

The Fly540 businesses acquired from Lonrho Plc have all seriously underperformed relative to expectations with an EBITDA loss due to continued Fly 540 operations being US$17.8m. Management has taken steps to restructure these businesses and remove legacy inefficiencies. We have reviewed the fair value and the goodwill and impairment of the assets acquired as a result of the Lonrho Aviation and Fly540 acquisitions and made impairments totalling US$15.9m and fair value adjustments of US$19.0m, details of which are set out in the notes.

A summary of activity in all countries of operation during the reporting period follows:

Angola

Angola has the potential to be a profitable and sustainable business but is beset with a number of issues relating to moving money freely due to Angola Central Bank controls and delays in clearing aircraft spares through Angolan Customs.

Whenever spare parts are required for a grounded aircraft, it can take weeks to import the parts and get the aircraft serviceable. This has meant extended periods with a reduced schedule and consequent reduced revenues. The spares holding in Angola is being increased, but it is not economically viable to hold every conceivable spare part that may be required.

The Central Bank controls on currency exchange have also created delays in being able to make payments outside of Angola including lease payments and payments for spares and maintenance. The management team has spent considerable time working with the banking authorities to find ways to overcome the current difficulties.

Ghana

Ghana has seen a substantial rise in competition during the period on the key domestic route from Accra to Kumasi, with a large increase in the size of the market but at a significantly decreased yield. The expected upgrade of the Kumasi runway to accommodate jet aircraft has not yet taken place.

Ghana had a fleet of two aircraft, an ATR 72-500 turbo prop and an Embraer E170 jet. The E170 was used to open international routes from Accra to Abidjan, Cote d’Ivoire and Accra to Freetown, Sierra Leone. Both routes have now been discontinued but remain of interest once a low cost model can be introduced into West Africa. The E170 aircraft suffered from significant periods of being unserviceable and with the withdrawal from those routes has since been returned to the lessor.

The West Africa market, with a population of more than 300m people is a significant and so far largely untapped market. A key issue for management prior to introducing the fastjet low cost model continues to be lobbying for lower government passenger taxes. Fly 540 Ghana currently has been granted designation on 5 international routes from Accra – Abidjan, Cote d’Ivoire; Freetown, Sierra Leone; Lagos, Nigeria; Ouagadougou, Burkina Faso; Monrovia, Liberia. These route rights will be of significant value to fastjet Ghana when the low cost brand is introduced.

Kenya

Kenya is the most mature market in East Africa and will eventually be a very significant low-cost operation under the fastjet brand when that is introduced. As previously announced, there has been a legal dispute between the Company and the vendors of the 49.98% economic interest in Fly540 Kenya as to whether the acquisition was completed. On 23 April 2013, fastjet entered into a Memorandum of Understanding (“MoU”) with Don Smith, Chief Executive Officer of Fly540 Kenya which trades in Kenya as Fly540, with a view to resolving these disputes and establishing a way by which the two parties can work together to maximise the value and business prospects of both Fly540 and fastjet. As a result of the disputes, we deemed we did not have the operational or financial control over the business and it has therefore been treated as an investment in the period. There are significant debts in Fly540 Kenya and for that reason we have impaired the value by US$13,336k. See note 3 for details.

Prior to being closed in November 2012 to make way for the fastjet introduction, Fly540 Tanzania was operating an inefficient model with just one aircraft and creating significant losses despite attempts to make short term changes to the business.

The fastjet operation in Tanzania is covered in other parts of this report.

Fastjet intends to reduce its current 90% equity shareholding in Fly540 Tanzania and is in initial discussions with a number of Tanzanian investors.

Further investments
South Africa

As previously announced, fastjet had been in negotiations with the provisional liquidator of airline 1time in Johannesburg, South Africa, for the purchase of 1time. However, we were unable to reach a compromise agreement with the creditors.

As detailed in the Chairman’s Statement, a commercial arrangement has been struck between local South African investment company Blockbuster, since renamed fastjet Holdings (Pty) Ltd, and Federal Airlines, a company with a 20 year history in South Africa. The agreement will allow fastjet Holdings to leverage Federal Airline’s existing licensing infrastructure and deliver its low-cost airline brand to the South African public.

An MoU has been signed to allow the Company to take a 25% shareholding in fastjet Holdings Pty Ltd, with the remaining 75% being held by South African nationals. The South African Civil Aviation Act requires that, unless the Minister of Transport makes an exception, 75% of the voting rights have to be held by South African citizens. fastjet is targeting early July 2013 to launch the initial Johannesburg to Cape Town route.

South Africa is going to be one of the prime focus areas for fastjet over the coming period, whilst we review and continue to restructure some of the smaller operations we have elsewhere in Africa.

Discussions are also on going in a number of other African countries with a view to launching airlines under the fastjet brand.

Marketing and Distribution

High load factors and the high percentage of first time flyers on our initial routes demonstrates the market acceptance of the low cost carrier model in Tanzania. We have also been encouraged by a steady increase in our average yield. Whilst we continue to offer a US$20 fare to stimulate market interest, we now have an average fare in excess of US$70 with some seats commanding rates in excess of US$170.

Ancillary revenue streams are seeing a steady improvement. Over 40% of fastjet’s passengers pay for an additional service of some variety. We would expect to see this figure rise as we offer additional supplementary services over the next year.

Since launch we have built significant brand equity with our African Grey Parrot motif becoming increasingly well known across the Continent. This brand awareness has had a dramatic effect upon our cost per acquisition (CPA) in Tanzania and we continue to manage our marketing expenditure down, inline with our increasing brand reach. Wider reaction to our brand strategy has resulted in several prestigious marketing awards.

Since launch, we have embraced the strongest possible channel mix. We now dominate the social media aviation environments of Facebook and Twitter in Africa. fastjet is now sub Saharan Africa’s most “liked” airline. This allows us to instantly communicate with our customer base and has a dramatic effect on reducing marketing expenditure further.

Additionally we have introduced new and innovative payment methods such as the payment of seats using mobile phone accounts (M-Pesa and Tigo) that have manoeuvred us around the low internet penetration and credit card usage figures across Africa.

We have also been working with airlines that fly into Africa but struggle to find suitable partners to transport their passengers intra-country. To that end, we have recently been approved by Tui, Europe’s largest Tour Operator, to fly their passengers to our destinations. We are also in the process of signing similar distribution deals with other large operators. We have also signed an MOU with Emirates Airlines to link their passengers into the fastjet network.

Finance review

Results for the period
Operating loss before impairment charges for the 18 month period to 31 December 2012 amounted to US$30.0 million (12 months to 30 June 2011: US$0.1 million operating loss).

Revenue for the 6 months after the acquisition was US$21.1 million with US$1.5 million attributable to the one month of the fastjet business. In the trading statement dated 26 March 2013 fastjet anticipated revenues in the region of US$32 million. The large difference between this and the reported US$21 million is attributable to the change in accounting treatment for Fly540 Kenya which is now treated as an investment.

Cash at 31 December 2012 amounted to US$7.5 million (30 June 2011: US$0.005 million).

At 31 December 2012, the Group had net cash amounting to US$5.5 million. Since that date the Group has incurred further losses in its operations. As set out in the Chairman’s Statement, the Group entered into a convertible securities deed with Bergen, a US asset management firm, which has provided up to £15.7 million. As at 30 April 2013 £13.1 million was still undrawn. The Company has also completed share placings since 31 December 2012 amounting to £8 million.

As explained in Note 1, the Directors have reviewed the Going Concern basis which they consider appropriate. They have referred to a material uncertainty which the auditors have referred to in their report.

Strategic Review

The Company’s strategy is to create a pan-African low-cost airline brand. Unlike in Europe, where the aviation market is fully liberalised, African aviation remains nationally controlled with route rights dependent on the negotiation of Bilateral Air Services Agreements between governments.

The strategy is therefore to create a series of airlines, all operating under the fastjet brand, and meeting identical international standards of reliability, safety and customer service. The flights for these airlines will all be sold on one website as a single brand, providing the consumer with a pan-African airline experience, and the airlines with a reputation and sales platform across the Continent.

In order to mitigate many of the issues and delays that we have encountered over the past months, management is pursuing a policy of a creating a shareholding structure in each airline that allows for greater local investment. Management is therefore in on-going discussions with a number of potential local investors and airlines in various African countries. Where fastjet have a minority holding, control of operational and customer service standards will be achieved through the brand licence and provision of key services.

The management team remains fully convinced by, and committed to developing, the huge aviation market opportunities throughout Africa.

Edward Winter
Chief Executive Officer

31 May 2013

Report of the Directors

The Directors present their report together with its audited accounts for the 18 month period from 1 July 2011 to 31 December 2012.

Principal activities and investment policy
As at 31 December 2012 the principal activity of the Group was investing in the global aviation and aviation services sector with a particular focus on Africa.

Results and dividends
The income statement is set out on page 33 and has been prepared in US Dollars, the functional and reporting currency of the Company and the Group.

The Group’s net loss after taxation attributable to equity holders of the Company for the period was US$52.4m (2011 – US$0.068 loss).

No dividends have been paid or proposed.

Review of the business and future developments
A full review of the Group’s performance, financial position and future prospects is provided in the Chairman’s Statement and Chief Executive’s Review.

Post balance sheet events
At the date these financial statements were approved, the Directors were not aware of any significant post balance sheet events other than those set out in the notes to the financial statements.