June 13 (Bloomberg) -- Africa is poised to get its first continent-wide discount air services after industrial group Lonrho Plc engaged EasyJet Plc founder Stelios Haji-Ioannou to help transform its aviation arm into a low-cost carrier.
Fastjet will employ operating licenses held by Lonrho’s Fly540 unit to establish flights in Ghana, Kenya, Tanzania and Angola using a fleet of Airbus SAS A319 airliners or Embraer E-190 regional jets, Ed Winter, who will run its holding company, Rubicon Diversified Investments Plc, said in an interview.
A rise in GDP and consumer spending means Africa is ready to support a discount carrier of the kind that has transformed aviation elsewhere, said Winter, who has worked at EasyJet and British Airways. Like carriers from Southwest Airlines Co. in the U.S. to Malaysia’s AirAsia Bhd., Fastjet aims to create a new market by offering fares low enough to persuade some people to fly for the first time and others to travel more, he said.
“The African aviation market is significantly under-served and there are massive opportunities,” Winter said, adding that Fastjet will be a “low-cost, point-to-point, no-frills, all-jet airline operating to European standards of safety and quality.”
The four markets to be targeted by Fastjet all have large-scale oil or gas developments, from which wealth is beginning to trickle down to a growing middle class, the executive said.
Demand will led by visits to friends and relatives, given Africa’s highly mobile workforce, the executive said, though short breaks of the kind that have spurred bookings at EasyJet and Ryanair Holdings Plc in Europe are becoming popular to destinations such as Mombassa and Zanzibar on the Indian Ocean.
Under the plan, Rubicon, an investment shell created from a former software company, will buy Lonrho Aviation, which runs Fly540, in an all-stock deal valuing the unit at $85.7 million. The reverse takeover will give Lonrho 73.7 percent of shares in Rubicon, which began trading on London’s Alternative Investment Market after a Feb. 23 suspension pending the takeover talks.
Lonrho rose as much as 9.9 percent and was priced 3.9 percent higher at 9.45 pence as of 1:11 p.m. in London, where it is based. Rubicon, also based in the U.K. capital, was down 4.9 percent at 3.38 pence after earlier trading 16 percent higher. Dealing in the enlarged share issue will commence July 2 following a shareholder vote on June 29, the companies said.
Discount aviation pioneer Stelios, who goes by his first name, will join Rubicon’s board and nominate Winter as its chief executive officer. The EasyJet founder will also get 5 percent of Rubicon stock and 0.5 percent of its revenue for providing consulting services and use of the Fastjet name, which he owns.
The steps detailed today are “small but significant,” Stelios said in a statement, with Africa’s pattern of densely populated cities separated by great distances representing “a potential new market of millions” and making the continent the “last frontier” for the airline industry.
“The deal makes strategic sense,” said Michael Campbell, an analyst at Daniel Stewart & Co. in London, in an investor note. “Stelios’s EasyGroup are experts in the low-cost airline business and we expect the operational hubs built by Lonrho in east, west and southwest Africa will benefit as a result.”
While European discount operators fly to north Africa and there have been experiments with low-cost carriers south of the Sahara, no pan-continental service has so far been attempted. Air links are currently so poor that residents traveling within the 15-nation Economic Community of West African States sometimes need to travel via Europe, Winter said, adding that a network of Fastjet flights from Ghana could obviate that need.
Lonrho’s aviation unit began operations in 2006 and carried almost 525,400 people in the 15 months to Dec. 31, generating revenue of $57 million. It suffered a loss of $19 million in the period on costs from opening the Angola and Ghana hubs.
Fly540’s 10 turboprop aircraft are too small to form the basis of a discount carrier, and talks with leasing companies on establishing a fleet of Airbus or Embraer jets are at an advanced stage, Winter said.
Rubicon had almost 9 million pounds ($14 million) in cash as of Dec. 31, raised from investors who will be shareholders in the new business. While fresh funds may be sought via a debt or equity sale, there’s no need for a major injection, Winter said.
Lonrho Chairman David Lenigas will add the same role at Rubicon following the transaction, replacing Robert Burnham, who will remain on the board. Shares of the London-based company, which also has interests in agriculture, hotels, ports and support services, have risen 1.6 percent this year.
EasyJet, Europe’s second-biggest discount airline, in which Stelios remains the No. 1 investor, has advanced 23 percent. The entrepreneur’s EasyGroup holding company isn’t traded.
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