fastjet, the low-cost African airline, today announces a trading update for the year ended 31 December 2018 and the first quarter of 2019.
Financial and Operational Highlights for 2018
· Group revenue from continuing operations increased by 166% to US$38.3m (FY2017: US$14.4m), driven by an increase in passenger numbers of 45% in Zimbabwe and 575% in Mozambique (as Mozambique only operated for two months in 2017) and an overall increase in yields of 33%;
· The Group concluded its investment in Federal Airlines in October 2018, providing a platform for entry into the South African Market;
· The Group incurred an operating loss for continuing operations for FY 2018 of $41.2m(1) (FY 2017 $11.2m loss on continuing operations); this result was however after one off exceptional items which arose from the capital raise performed in December 2018, which triggered one-off impairments of $23.9m against balances held in the Group balance sheet; the loss excluding these exceptional items for FY 2018 is $17.3m (FY 2017 $ 11.2m loss);
· The Group's divesture from its operations in Tanzania concluded in November 2018, resulting in the de-consolidation of $27.2m in revenue and $15.8m in after tax losses from the Group's continuing operations for the 2018 financial year;
· Future aircraft lease obligations related to Tanzania were terminated, resulting in a saving of $25.1m on the E190s and $41.4m on the ATR72's being removed from the Group's future obligations;
· The Group's Balance Sheet was restructured in December 2018, resulting in a reduction of 89% in long-term interest-bearing loans and the addition of four ERJ 145 aircraft valued at $11.5m as fully-paid assets to the Group's Balance Sheet;
· The above measures, and a significantly stronger balance sheet, have prepared the foundations for an improved overall performance through 2019.
(1) Subject to change due to FY18 audit currently in process of being concluded
· The first quarter of FY2019 represents a seasonally weaker demand period and was further impacted by cyclones Desmond (January) and Idai (March) in Mozambique, as well as by fuel protests and currency volatility in Zimbabwe;
· Q1 FY2019 results delivered an underlying net operating loss of approximately $0.2m on revenue of approximately $9.5m ($7.8m loss on revenue of $13.8m in Q1 FY2018), of which $5.1m loss on revenue of $7.6m was driven by Tanzania operations in Q1 2018.
· The underlying Q1 FY2019 loss of $0.2m from normal trading activities excluded a one-off significant exchange loss of $6.2m in Zimbabwe, linked to the monetary policy announced by the Reserve Bank of Zimbabwe, introducing a new local RTGS currency, at an exchange rate of US$ 1.00 = RTGS 2.50 - effectively devaluing our local bank balances overnight, as well as our debtors. Of the $6.2m total exchange loss in Zimbabwe, $5.9m was directly linked to our local cash balances and loan held with Annunuki; other remaining assets and liabilities made up the remaining $0.3m exchange loss;
· Cash balances as at 31 March 2019, after the Zimbabwe triggered devaluation and exchange loss, amounted to $2.9m, of which $1.5m is restricted inside Zimbabwe (prior to the Zimbabwe devaluation, $9.9m was restricted in Zimbabwe);
· Secured by the continued backing of the Solenta Aviation Holdings Limited group, who own 59.9% of the fastjet Group, we have flexible, extended credit terms on their services being provided, which continues to assist us with managing our overall monthly cashflows during this first half year and traditionally weaker trading period;
· Based on the Group's current trading performance, fastjet expects to generate a marginal underlying operating profit for the 2019 financial year, excluding the one-off foreign exchange losses driven in Zimbabwe. However, the Group's ability to repatriate funds from Zimbabwe, along with volatility with the Zimbabwean currency, remain as material risks to the business both in relation to ongoing liquidity and foreign exchange translation impacts. For the aforementioned reason the Group is taking measures to put into place debt-instruments against ungeared assets in order to create a liquidity contingency buffer.
Nico Bezuidenhout, fastjet Chief Executive Officer, commented:
"In 2018, we took significant and decisive action to right-size the Group and ensure the business has a solid platform on which to build future growth. Whilst these cost-cutting measures were at times painful, our newly-sized operations provide fastjet with a materially enhanced strategic position to pursue the growth opportunities on offer on the continent.
Despite the impact of cyclones in Mozambique at the start of the current year and continued fuel protests and currency volatility in Zimbabwe, fastjet is making progress and expects to generate a marginal underlying operating profit for 2019, with further route expansion planned for Zimbabwe in the second half of the coming year, as well as a brand entry into South Africa in 2020."
fastjet expects to publish its Annual Financial Statements for the year ended 31 December 2018 in June 2019.
fastjet's business in Zimbabwe continued to grow during the first quarter of 2019, realizing year-on-year revenue growth of 70% on the back of a 17% increase in output and a 71% increase in revenue per available seat kilometer. Fastjet now accounts for 36% of flight departures between the commercial centres of Harare in Zimbabwe and Johannesburg in South Africa (31% in Q1 FY2018), whilst it accounts for 64% (49% in Q1 FY2018) of the domestic flights between Harare and Victoria Falls and for just short of 50% (not operated in Q1 FY2018) of flights between Harare and Bulawayo.
Whilst fastjet's Zimbabwean operation, which accounted for 74% of Group revenue in Q1 FY2019, recorded a profitable quarter at an operating level, the business in this Country remains sensitive to currency volatility and political instability.
With the introduction of a new RTGS currency in Zimbabwe, fastjet began selling tickets in hard currency US$ and local RTGS (at the prevailing exchange rates) effective 1 March 2019; this has resulted in reduced load factors in March 2019 as the market adjusted to the new pricing mechanism of settling in hard currency US$ or a significantly increased RTGS currency.
The Group continues to closely monitor its ability to repatriate funds from Zimbabwe and the impact of hard-currency shortages in Zimbabwe on the Group's overall liquidity position.
fastjet Mozambique represents the newest of the fastjet-branded operations, having commenced business in Mozambique during November 2017. During 2018, fastjet managed to establish a domestic Mozambique market share of 16%, operating between the cities of Maputo, Beira, Tete and Nampula, with Nampula being substituted for Quelimane in November 2018. The Company has also forged a strategic partnership with LAM, the national carrier of Mozambique.
During December 2018, competition in the local Mozambique market intensified following the entry of Ethiopian Airlines as a domestic carrier. This increased overall aircraft and capacity supply, coupled with two category 5 tropical cyclones at the beginning of 2019, all of which served to suppress demand, prompting fastjet to deepen its relationship and partnership with LAM further. The two carriers will now place their airline designator codes on each other's services, align schedules and remove duplication. As a consequence, going forward passengers will have an increased choice of fastjet-coded services, with a reduced financial exposure to the Company.
The Group will continue to closely monitor the loss evolution of our Mozambique operations, both in context of demand (negative economic impact of natural disasters offset by pending gas extraction coming on-stream) and supply (LAM partnership and Ethiopian Airlines Market entry) considerations.
To mitigate future losses in Mozambique, fastjet has scaled back frequency on routes, to reduce overall capacity supply, and additionally aligned the schedules with LAM as mentioned above. The Board expects the trading losses in Mozambique to be far less in the remaining nine months of the year, compared to the first four months of 2019.
The Mozambique start-up losses remain our biggest operational challenge today, together with Zimbabwe's currency repatriation ability and ongoing limitations, and any further material exchange rate devaluations by the Reserve Bank of Zimbabwe.
South Africa represents the largest domestic aviation market on the African continent and is the largest trading partner to both Zimbabwe and Mozambique, whilst also being an important tourist source market for both these countries. fastjet has accordingly exercised its call-option as it relates to an investment in Federal Airlines ("FedAir"), the South African-based charter and shuttle services operator, effective 1 October 2018. The FedAir operation generated net profit after tax of US$1.1m for the twelve months ending December 2018 and provides an operating platform for the fastjet brand to enter the Domestic South African Market, in addition to presenting opportunities to gain synergies in back-office functions.
In preparing FedAir to have the ability to operate a fastjet branded airline on its own in South Africa in 2020, the Group has registered one of the ERJ145s on the FedAir aircraft operating certificate ("AOC") and FedAir will support the Zimbabwean operation on an aircraft, crew, maintenance and insurance basis ("ACMI") going forward effective July 2019. This allows FedAir to gain its own operational expertise on the ERJ145 fleet and further replaces any long-term support from Solenta Aviation (South Africa) on additional aircraft and crew supply.
Support Infrastructure and Brand
Subsequent to the divesture from the Group's Tanzanian business, the Group has also fully decentralized its Zimbabwean operations into Zimbabwe, with all core functions now managed in-country. Additionally linked to this, it has restructured its head-office support infrastructure in South Africa (Johannesburg), resulting in a labour cost reduction of approximately 30% (March 2019 vs. March 2018). Since the inception of its stabilization efforts in the second half of 2016, the Group reduced overall overhead costs by 59%.
During the first quarter of 2019, fastjet relocated its passenger call centre support function from Cape Town in South Africa to Harare in Zimbabwe, allowing the Group to make use of funds and infrastructure at its disposal in Zimbabwe, saving hard currency resources. fastjet also launched an upgraded reservations platform, website and "fare-family" product offering in March 2019, providing a foundation for the implementation of code-share partnerships and an enhanced product offering to our passengers.
From a Brand perspective, fastjet has been nominated as Africa's leading Low-Cost Airline for the 2019 World Travel Awards, an award it has received in 2016, 2017 and 2018. The Company has additionally been nominated for the 2019 UK Enterprise Awards and has the 2nd highest Facebook following of all African airlines. Fastjet continues to focus on service delivery and maintains on-time departures above 90%.
The Group's fleet currently consists of four 50-seat Embraer ERJ 145 aircraft deployed under the fastjet brand in Zimbabwe and Mozambique and 14 smaller gauge aircraft, four owned and the remainder leased, consisting of Beechcraft, Cessna and Pilatus aircraft types deployed in South Africa under the Federal Airlines Brand. The owned ERJ145 aircraft are producing accounting savings of approximately $0.9m per quarter and cashflow savings of a further $495k per quarter (compared to their leases in 2018).
Following the divesture from operations in Tanzania, the Group terminated the long-term leases on two Embraer E190 aircraft and the three ATR 72-600 aircraft, as previously announced.
The Group's fleet transition embarked upon at the end of 2016 is now complete, with all associated cost accounted for within the 2017 and 2018 financial years, and the fleet is now optimally sized for the Markets the Group serve.
The 2018 financial year represented the conclusion of the Group's two-year Stabilization Plan, which commenced in the second half of 2016. Over the course of 2017 and 2018, the business has transformed its operational footprint, right-sized its aircraft fleet, replaced core systems, restructured its balance sheet and relocated its support infrastructure to Africa. These measures, whilst often painful, have served to provide fastjet with a materially enhanced strategic position to pursue the growth opportunities on offer on the continent. The Group continues to improve its control posture and invest in productivity enhancing systems and processes as we remain in an ongoing improvement cycle.
Based on the Group's performance during the first quarter of 2019, the fastjet Board expects 2019 to be a marginally profitable year for the Group at an underlying operating level, with further route expansion planned for Zimbabwe, non-metal (codeshare) growth through partnership with LAM in Mozambique and tentative Brand entry in South Africa being areas of focus. The Group is furthermore aiming to achieve IOSA certification in fastjet Zimbabwe during 2019 whilst adding emphasis to enhancing our internal business information systems for decision-making and performance monitoring purposes.
From a risk-management perspective, apart from operational risk consistent with the Industry in which fastjet operates, the biggest risks that continue to confront the Group pertains to hard-currency availability in Zimbabwe as well as volatility in the Zimbabwean currency, and secondly the competitive environment in Mozambique with an oversupply of capacity. fastjet has taken steps to mitigate against these risks, including moving certain core services to Zimbabwe (and thereby availing of our cash resources inside this country), introduction of hard-currency pricing in Zimbabwe as well as removing external aircraft lease rentals through the outright purchase of aircraft in use in Zimbabwe.
This announcement is released by fastjet plc and contains inside information for the purposes of Article 7 of the Market Abuse Regulation (EU) 596/2014 (MAR), and is disclosed in accordance with the Company's obligations under Article 17 of MAR.
For the purposes of MAR and Article 2 of Commission Implementing Regulation (EU) 2016/1055, this announcement is being made on behalf of the Company by Kris Jaganah, Chief Financial Officer.