Further to the announcement issued on 29 September 2017, fastjet, the low-cost African airline, today announces its intention to exercise its option to purchase three ATR 72-600 ("ATR") turbo-prop aircraft and the entering into of a US$12m loan agreement with Solenta Aviation Holdings Limited ("SAHL").
· Underlying trading for the year ended 31 December 2017 broadly in line with expectations
· Continued stable trading in Tanzania and strong performance in Zimbabwe
· Early signs indicate a successful market entry into Mozambique with flights achieving load factors of 70% in aggregate
· Re-fleeting program resulting in significant improvement to load factors and revenue per seat
· fastjet (produced 759,162 seats) carried 535,363 passengers at an average load factor of 71% in 2017, an improvement in excess of 30% compared to a 54% system-wide load factor achieved in 2016
· Exceptional cash costs of US$4m incurred in December 2017 due to engine failure on the A319
· US$12m loan agreement entered into with SAHL to fund the exercise of the Company's option over the three ATRs
Rashid Wally, fastjet's Chairman, commented:
"Whilst 2017 presented some operational challenges for the group, it has been encouraging to see the rightsizing of fastjet's fleet beginning to yield positive results. The recent improvement in our trading performance in Zimbabwe and Tanzania combined with the successful launch of services in Mozambique gives us increased confidence in our growth strategy and the Board is confident of achieving a positive cashflow from operations for 2018."
Nico Bezuidenhout, fastjet Chief Executive Officer, commented:
"We are excited by the expected entry-into-service of turbo-prop aircraft during June 2018. This aircraft type serves a particular purpose in that certain short-haul routes with shorter runways now become accessible to fastjet, whilst the fuel-efficient nature of the aircraft will stand us in good stead in an environment where fuel prices have shown an upward trend."
The Group's fleet consisted of three Airbus A319 aircraft and one wet-leased Embraer E190 at the start of 2017. The Board is pleased to report that the phase-out of the 145-seat A319 aircraft previously operated within Zimbabwe and, predominantly, within the Tanzanian market, was concluded during January 2018 when the last Airbus aircraft was returned to the lessor. In its place the Company introduced two 104-seat Embraer E190 aircraft, commencing full scheduled operations during January 2018 after an extensive certification process. These changes are part of a comprehensive re-fleeting program, with a better supply-demand match being a core element of the stabilisation plan launched by the Company in H2 2016.
The next step in this re-fleeting exercise, announced in September 2017, will see fastjet introduce three 70-seater ATR-72 turbo-prop aircraft, aimed at gaining access to runways and markets previously inaccessible due to the Company's historic jet-only operations, whilst also complimenting existing aircraft types in between the 50 and 100 seater gauge sizes.
fastjet remains the leading airline in Tanzania and continues to see stable trading in its largest market. The Company plans to increase utilisation of its current E190 fleet in Tanzania, and, subject to receiving regulatory approval, plans to announce new route launches in Tanzania in the coming months.
Initial indications are that the right-sizing of capacity to demand is yielding the expected benefit, notably:
· as evidenced in year-on-year load factor improvements achieved within Tanzania:
· supported by an approximate 7% year-on-year increase in average fare per passenger across Tanzanian operations in Q1 2018, the first year-on-year average fare growth in this market since late 2016; and
· manifesting in robust growth in Tanzanian revenue per available seat produced, achieving year-on-year growth of approximately 29% in Q1 2018, the second highest year-on-year quarterly growth for this measure in Tanzania over the last 13 quarters.
During the last quarter of 2017 the Company had an unexpected engine event with the A319 aircraft, leading to unplanned exceptional cash costs of US$4m. In addition, the impact on revenues of this engine event together with a slightly longer than anticipated start-up period for the E190s, due to regulatory procedures in Tanzania, was approximately US$3m.
The political climate in Zimbabwe led to some volatility in trading in the period leading up to the Presidential change in November 2017. However, fastjet has since seen some of its strongest trading in the country since commencing operations, realizing strong quarterly growth in load factor:
Whilst the trading performance in Zimbabwe has been robust, hard-currency availability and fastjet's ability to repatriate funds from Zimbabwe remains challenged and adversely impacts the Company's overall liquidity position.
Under the brand license agreement with Solenta Aviation Mozambique, the first fastjet-branded flight in Mozambique took place on 3 November 2017. Although still in its early stages, this market entry has so far proven highly successful with flights between the major urban centres of Maputo and Nampula, and Beira and Tete achieving load factors of 70% in aggregate.
fastjet Mozambique and LAM, the National Carrier of Mozambique, on 21 March 2018, announced the formation of a strategic commercial partnership between the two airline brands that will see the parties cooperate on a number of commercial dimensions, including network and fleet planning, maintenance and operational support as well as sales and distribution.
The Company has continued to build the fastjet Brand, acquired in 2017 for a payment of US$2.5m, and in January 2018 was awarded the AWT Award as Best LCC in Africa, adding to similar accolades received from SkyTrax and the World Travel Awards in 2017. The Company realized approximately US$250,000 in Q1 2018 revenue from the brand license agreement entered into with Federal Airlines in South Africa, announced in September 2017.
ATR Letter of Intent and Memorandum of Understanding
On 29 September 2017 the Company entered into a Letter of Intent ("LOI") with ABRIC Leasing Limited, a member of the ACIA Aero Capital Group of Companies ("ACIA"), to provide fastjet with access to the three ATRs by way of a 10-year operating lease, along with an option to purchase the three ATRs. The exercise of the option to purchase is subject to approval by Export Development Canada ("EDC") as ultimate owner of the ATRs. The three aircraft are valued at approximately US$42m in aggregate, with outstanding debt of approximately US$30m repayable in quarterly installments over the next nine years. Under the LOI, fastjet are due to pay ACIA an option deposit of approximately US$11m ("ATR Purchase Option Deposit") for the purpose of acquiring the economic rights to the aircraft (as explained in the circular to shareholders dated 2 October 2017).
EDC have now indicated their approval in principle to the proposed transaction, subject to due diligence and legal documentation, and accordingly fastjet has agreed to exercise its option to purchase the ATRs and for this purpose to enter into a Memorandum of Understanding ("MOU") with ACIA and its associated companies to implement the proposed transaction.
In accordance with the MOU:
· fastjet provides notice of its exercise of the option to purchase the aircraft, by means of a novation of the existing head-lease held by ACIA, subject to final EDC approval;
· In the event that EDC fails to provide the requisite approval, ACIA and fastjet will seek to put in place an appropriate sub-lease arrangement instead, providing substantially the same economic benefits to fastjet; and
· Following service of formal notice the parties will have 90 days in which to complete the novation or sub-lease arrangements and, in the event that neither occurs, fastjet shall, subject to certain conditions, have a right of refund of the ATR Purchase Option Deposit.
Group-wide cash balances as at 28 February 2018 was US$10.3m, of which US$6.4m represented restricted cash in Zimbabwe.
Shareholder loan facility agreement ("the Facility")
On 4 April 2018 the Company entered into a US$12m loan facility agreement with SAHL to fund the exercise of the Company's option over the three ATRs with the balance to be used for general working capital purposes. The salient terms of the Facility are as follows:
· The Facility is for US$12m to be provided by SAHL to fastjet;
· Interest Rate of (i) the higher of US$ 30-day LIBOR and 6.45% pa or 8% pa until 30 June 2019, and (ii) from 1 July 2019, the higher of US$ 30-day LIBOR and 8.45% pa or 10% pa;
· Repayment of Loan by either (at fastjet's election) bullet repayment in full on 30 June 2019 or eight quarterly instalments of 12.5% of the Loan, commencing 29 March 2019 and concluding 28 December 2020;
· Drawdown of the Facility is available until 30 April 2018, or such later date as the parties may agree and subject first to satisfying certain conditions precedent including execution and delivery of security for the Loan;
· The required security for the Loan comprises security over certain key material assets of the fastjet group including the fastjet trademarks, the shares held by the group in fastjet Zimbabwe Limited, the shares to be acquired by the group in Federal Airlines (Pty) Limited ("FedAir") (if and when acquired), and the economic rights of the group to be acquired in the three ATRs;
· The security includes an SAHL right to nominate directors to the boards of FedAir and fastjet Zimbabwe Limited together with an additional director to the board of Fastjet PLC (such nominated individuals in each case to constitute a minority of directors of the respective boards of the companies).
· fastjet will utilise the Facility for the purpose of the payment of the ATR Purchase Option Deposit of approximately US$11m. Fastjet's rights of refund of the ATR Purchase Option Deposit prescribed under the MOU may be offset against capital payments under the Facility;
· SAHL is entitled to a fee of US$240,000 on the date of drawdown of the Facility; and
· The Facility Agreement includes standard representations, warranties and events of default, including restrictions on future borrowing and security (subject to exceptions).
Related Party Transaction
SAHL and ACIA are considered to be related parties to the Company by virtue of SAHL being a Substantial Shareholder as defined in the AIM Rules and as such, the entering into of the Facility Agreement constitutes a related party transaction pursuant to AIM Rule 13. The Directors of the Group consider that, having consulted with the Company's Nominated Adviser, the terms of the transaction are fair and reasonable in so far as its Shareholders are concerned.
Whilst the delays introducing the new aircraft onto our routes have been frustrating, it has been pleasing to see the positive impact of right sizing our fleet on both load factors and prices. The combination of strong trading in our established markets of Tanzania and Zimbabwe, together with the anticipated increase in routes following the introduction of the ATRs, and expected further growth in Mozambique, is another step forward in fastjet's long term ambition to become the leading pan African low cost airline.