Low-cost airlines start to penetrate African international market, led by fastjet

There are only three airlines offering international low-cost services within Africa

On 18-Oct-2013 fastjet became only the third LCC to operate international services within Africa, joining sister carrier Fly540 Kenya and South African Airways (SAA) subsidiary Mango. The three carriers combined now provide about 4,000 weekly seats in the intra-Africa international market, which is equivalent to approximately a 0.2% share of total capacity.

International LCC capacity by carrier within Africa: 21-Oct-2013 to 27-Oct-2013

Rank	Airline		Total Seats
1	5H	Fly540	2,469
2	FN	fastjet	936
3	JE	Mango	744

Source: CAPA - Centre for Aviation & Innovata

Mango has been operating two weekly services from Johannesburg to Zanzibar in Tanzania since early 2013. In Sep-2013 the route was upgraded from regular charters to scheduled services, marking the first time Mango has had a scheduled international operation since launching in 2006. Mango competitor Kulula, which launched domestic services in 2001 and is Africa's largest LCC based on current total seat capacity, currently does not operate any international routes.

Johannesburg-Zanzibar was previously served by another South African LCC, 1time, which ceased operations in Nov-2012. 1time also had served two other international routes, Johannesburg to Livingstone in Zambia and Mombasa in Kenya.

Fly540 Kenya currently operates three international routes, serving Zanzibar from Mombasa and Nairobi and Juba in South Sudan from Nairobi. fastjet has a 49% stake in Fly540 Kenya, which mainly operates domestically using regional aircraft.

International LCC routes within Africa ranked by seat capacity: 20-Oct-2013 to 26-Oct-2013

Rank	Origin		Destination		Total Seats	One-way weekly frequencies
1	NBO	Nairobi Jomo Kenyatta International Airport	JUB	Juba Airport	1,372	14
2	MBA	Mombasa Moi International Airport	ZNZ	Zanzibar Abeid Amani Karume International Airport	999	13
3	DAR	Dar Es Salaam International Airport	JNB	Johannesburg Oliver R Tambo International Airport	936	3
4	ZNZ	Zanzibar Abeid Amani Karume International Airport	JNB	Johannesburg Oliver R Tambo International Airport	744	2
5	NBO	Nairobi Jomo Kenyatta International Airport	ZNZ	Zanzibar Abeid Amani Karume International Airport	98	1

Source: CAPA - Centre for Aviation & Innovata

fastjet also has stakes in Fly540 Angola and Fly540 Ghana, although in both cases the London-listed group has been trying to reduce its exposure. Fly540 Angola and Fly540 Ghana are small unprofitable regional carriers that currently only operate domestic services.

Africa's other two LCCs, Air Arabia Egypt and Air Arabia Maroc, do not operate any services within Africa - domestic or international. Air Arabia Egypt currently serves six destinations in the Middle East from its Alexandria hub while Air Arabia Maroc serves 15 European destinations from four Moroccan airports, according to Innovata data.

LCCs remain drastically under-represented in Africa

So far this year LCCs have accounted for about 11% of total capacity (domestic and international) within Africa. This compares to a system-wide LCC penetration rate of about 37% within Europe, 30% within North America, 34% with Central/South America and 24% within Asia-Pacific, according to OAG data.

LCC capacity share (% of total seats) within Africa: 2001 - 2013*

Note: * for 2013 figure for first 10 months of the year is provided
Source: CAPA - Centre for Aviation with data provided by OAG

Almost all of the LCC capacity within Africa is domestic South Africa. LCCs currently account for about 40% of domestic capacity in South Africa. fastjet is one of several companies that has been looking to launch a South African low-cost carrier since the collapse of 1time and a smaller and shorter-lived LCC, Velvet Sky, in 2012.

See related reports:

• fastjet plans first international route, delays South African domestic launch
• FlySafair's wings are clipped by South Africa's High Court at the point of take-off

A much smaller share of the total LCC capacity within Africa comes from fastjet's domestic operation in Tanzania. fastjet launched domestic services in Nov-2012 with a fleet of two A319s, taking over routes previously operated with regional aircraft by Fly540 Tanzania. A third A319 was added shortly after its launch and fastjet has since repeatedly delayed fleet expansion.

fastjet's initial fleet plan envisioned 15 aircraft by the end of 2013. fastjet still expects to eventually reach 15 aircraft but it will end 2013 with the same number of aircraft it started the year with - three.

fastjet needs international services to be sustainable

fastjet currently operates only three domestic routes, Dar es Salaam to Kilimanjaro and Mwanza as well as Kilimanjaro to Zanzibar. It plans to launch a fourth domestic route, Dar es Salaam to Mbeya, on 1-Nov-2013.

While fastjet has started to achieve in recent months respectable load factors and average fares, Tanzania's domestic market is not large enough to support an LCC. The carrier currently has 41 weekly return flights in the domestic market, including 21 on Dar es Salaam-Mwanza, 14 on Dar es Salaam-Kilimanjaro and six on Kilimanjaro-Zanzibar. As a result its three A319s have been utilised on average less than five hours per day.

The launch of Mbeya will not significantly improve utilisation, an important component of the LCC model, as it will only be served with three weekly flights. fastjet could not initially serve Mbeya as the airport was only recently upgraded to accommodate jet operations. There are no other airports in Tanzania that can handle jets, limiting domestic expansion opportunities.

fastjet is confident it can expand domestically in Tanzania over time by adding frequencies across its four existing routes but it acknowledges it needs an international operation to survive. "Clearly the whole model is not based on three domestic routes. International routes are absolutely key to the model," fastjet CEO Ed Winter told CAPA in a recent interview.

fastjet is planning to launch several additional international routes from Dar es Salaam over the next few months which will at least initially be operated using the current three-aircraft fleet as the carrier for now has no timetable for adding a fourth aircraft. Mr Winter also expects Dar es Salaam-Johannesburg will soon be able to support a daily service, up from the three weekly frequencies launched on 18-Oct-2013. The anticipated daily Johannesburg service along with the new Mbeya flight is expected to push up the average utilisation of two A319s to up to 12 hours per day with the third aircraft set aside as a spare.

Utilisation of the third aircraft should increase to similar levels as more international routes are added. The third aircraft has so far been used as a spare, enabling a high level of reliability which is unusual for Africa but also highly unusual and cost prohibitive for an LCC.

fastjet plans several more international routes starting with Lusaka

Mr Winter says Dar es Salaam to Lusaka, Zambia, is in line to be fastjet's second international route and is ready to be launched as soon as the carrier decides on a commencement date. Dar es Salaam-Lusaka has not been served non-stop since Tanzania's Precision Air Services suspended services earlier this year, leaving most passengers travelling between the Tanzanian and Zambian capitals to have to fly via Nairobi or Johannesburg.

Mr Winter says that fastjet is also planning to serve Lilongwe in Malawi, Entebbe in Uganda, Juba in South Sudan and Nairobi and Mombasa in Kenya. Lilongwe, Juba and Mombasa are not currently served by any carrier from Dar es Salaam. The Dar es Salaam-Entebbe route is only served by Air Uganda with one daily regional jet service.

Nairobi is the largest international market from Dar es Salaam and is served primarily by Kenya Airways. Johannesburg is currently the third largest international destination from Dar es Salaam.

Dar es Salaam top 10 international routes ranked by capacity: 21-Oct-2013 to 27-Oct-2013

Source: CAPA - Centre for Aviation & Innovata

Kigali in Rwanda was also one of the original international route designations secured by fastjet from Tanzanian authorities. But Mr Winter says fastjet had decided against Kigali as it is a very expensive airport to operate into due to there being only one ground handling supplier. The small size of the market is also challenging. Kigali is currently served from Dar es Salaam by Rwandair with six weekly regional jet flights, according to Innovata data.

For the two Kenyan destinations (Nairobi and Mombasa) service from Kilimanjaro and Zanzibar as well as Dar es Salaam is part of the business plan. Fly540 Kenya now operates some of these routes but currently does not serve the main Nairobi-Dar es Salaam market. fastjet expects to eventually restructure, take over and re-brand Fly540 Kenya's domestic and international operation, following the model it used initially in Tanzania. A319s will be brought in, replacing the current fleet of regional aircraft although the A319s will not be able to access some of the smaller domestic markets.

Tanzanian authorities have already designed fastjet for all its planned new international markets - Kenya, Malawi, South Sudan, Uganda and Zambia. Service to Johannesburg, which fastjet sought to launch first as it is the largest potential market, proved to be a long drawn out battle when it came to securing all the required authorities from the South African end. Mr Winter acknowledges fastjet would have ideally launched Johannesburg service a year ago but he is confident all the other identified routes can be finalised quickly. Fastjet sees launching services to South Africa as an important milestone and setting the tone for more international expansion.

However, most African countries continue to jealously guard their bilaterals and protect government-owned airlines. Over time the barriers will be lifted. The question is how long will it take and if fastjet, which has incurred large losses over the past year and has identified itself as a "going concern," will survive long enough to see the market sufficiently open up.

See related report:

• fastjet reports USD42 million net loss for 1HFY2013 as the Africa LCC hits protectionist barriers
• fastjet posts USD56 million loss but remains optimistic about African success

fastjet expansion could lead to response from SAA and Mango

fastjet has now broken South African Airways' monopoly on the Dar es Salaam-Johannesburg route. SAA currently serves Dar es Salaam with 12 weekly flights. So far the flag carrier has responded to fastjet's entry by adding one additional weekly frequency and by lowering fares, which previously started at about USD400 each way excluding taxes. fastjet fares start at USD100 one way excluding taxes.

Dar es Salam to Johannesburg capacity by carrier (one-way seats per week): 19-Sep-2011 to 14-Apr-2014

Source: CAPA - Centre for Aviation & Innovata

SAA is expected to monitor the route closely as fastjet adds capacity and could eventually hand one of its daily flights to Mango should it need to significantly cut its fares to compete. For now SAA's strategy does not involve Mango operating in any regional international route served by SAA. Instead Mango is planning to pursue conservative international growth and stick to developing leisure routes which SAA does not serve such as Johannesburg to Zanzibar and Kilimanjaro.

See related report: SAA low-cost subsidiary Mango looks to international market as competition with fastjet beckons

The protective strategy is logical given that regional international routes are the only part of the SAA network that is currently profitable. But as competition in the regional international market gradually intensifies, SAA will inevitably need to re-look at how it uses Mango.

Southern African international market badly needs LCC penetration

Having to compete against fastjet on the Johannesburg-Dar es Salaam route represents just the first taste of LCC competition for SAA in South Africa's high yielding short-haul international market. There are currently about 150,000 international seats within the southern Africa region. SAA is the market leader with about a 38% capacity share. This market is not currently served by a single LCC despite being purely a short-haul market.

International capacity (seats) by carrier within southern Africa: 21-Oct-2013 to 27-Oct-2013

Rank	Airline		Total Seats
1	SA	South African Airways	57,273
2	UU	Air Austral	17,776
3	MK	Air Mauritius	15,974
4	BA	British Airways	11,272
5	SW	Air Namibia	8,158
6	BP	Air Botswana	8,043
7	TM	LAM - Mozambique Airlines	7,996
8	DT	TAAG	4,876
9	EK	Emirates	3,738
10	MD	Air Madagascar	3,440
11	KQ	Kenya Airways	2,338
12	ET	Ethiopian Airlines	1,713
13	KL	KLM Royal Dutch Airlines	864
14	D6	Interair South Africa	440
15	P0	Proflight Zambia	174

Source: CAPA - Centre for Aviation & Innovata

Now that it has succeeded at entering the South Africa-East Africa market, fastjet aims to enter the intra-Southern Africa international market, where it believes demand can be stimulated by bringing down the ridiculously high fares that now characterise international flights within this region. fastjet aims to penetrate the southern Africa international market using a planned affiliate in South Africa as well as potential affiliates in other African countries.

fastjet South Africa, a joint venture with South African investment firm fastjet Holdings (previously known as Blockbuster), initially planned to launch domestic services in Jun-2013. However the launch was delayed as fastjet decided to first focus on international services from Tanzania, starting with the Dar es Salaam-Johannesburg route. Mr Winter says fastjet South Africa is now aiming to launch services in early 2014.

The new South African LCC plans to initially serve the domestic market, providing new competition to Mango and Kulula. But the carrier is keen to quickly start tapping the short-haul international market, where it sees huge opportunities to stimulate demand.

Mango and Kulula have so far been reluctant to pursue international expansion. fastjet has a different perspective as it does not have a full-service unit to protect. While Mango is owned by SAA, Kulula parent Comair also owns a full-service British Airways franchise that operates flights on domestic and regional international routes.

fastjet looks to follow AirAsia model

Securing international traffic rights from South African authorities could prove challenging as several of South Africa's bilaterals are capacity constrained and SAA will likely be given preferential treatment for additional rights. But some markets are open and for others fastjet may be able to enter through affiliates in other countries. As in the case with Tanzania, foreign carriers from other African countries are under-utilising their traffic rights or are not serving South Africa at all.

In addition to Kenya in eastern Africa, fastjet has been looking at establishing affiliates in Angola in southern Africa and in Ghana and Nigeria in western Africa. All these markets are in narrowbody range of South Africa and suffer from very high average fares. fastjet sees an opportunity to get around bilateral restrictions by following the AirAsia model of establishing affiliates in multiple countries.

Ghana and Nigeria, however would require flights near the maximum range of fastjet's A319s. Focusing on linking South Africa with other countries in southern Africa and the south part of eastern Africa (such as Tanzania) would result in flights more within the normal range of narrowbody LCCs.

fastjet is not alone in seeing opportunities to penetrate southern Africa's short-haul international market. There are several LCC start-up projects that are well into the planning stages including flyAfrica.com and 1time Zimbabwe. SAA's domination of the market and resulting high fares will weaken over time, although the process will be slow. Fortunately for SAA, the group can always turn to Mango to participate in the inevitable growth that will come when the bottom end of the market finally opens up.

LCCs will gradually succeed at penetrating South Africa's international market and the broader intra-Africa international market. fastjet's Johannesburg service is just the tip of the iceberg. But it will likely take several years for the ice that fastjet is slowly chipping away at to melt and for liberalisation to become a reality.