African airline shares hopes head for crash

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The Investment Club is experiencing extreme misfortune. In February every single share it has bought nose-dived, the shares differentiated only by their rate of decline even as the FTSE 100 climbed relentlessly.

The club’s unit price consequently plunged 11p to £3 and the share causing the most damage by far is the holding in FastJet. Do we hold or dump?

FastJet metamorphosed from the acquisition by Rubicon Div­ersified Investments of Lonrho’s African airline division. Key shareholders in the enlarged company were Lonrho and Sir Stelios Haji-Ioannou. It was revealed in June 2012 that FastJet was to be a low-cost African airline with pan-African ambitions, aiming to deliver the same service as its European counterpart to the African continent. Great idea, especially with Stelios’s input.

To forward these ambitions it intended to use the African regional airline Fly540, which was acquired as part of the Lonrho deal and operates in Sudan, Uganda, Kenya and Tanzania in East Africa. On 29 November, 2012, FastJet made its first flight from Dar es Salaam, Tanzania, to Kilimanjaro and Mwanza.

On 19 December, 2012 Fastjet announced that it had entered into an option agreement to buy the entire issued share capital of 1time Airline, which was in provisional liquidation. By acquiring the shares, Fastjet would gain the right to operate domestic and reg­ional air services in South Africa.

FastJet then signed a memorandum of understanding on 28 January, 2013 with Kenyan airline JetLink Express to create a joint venture which will give a platform for the launch of the Fastjet brand in Kenya. Jetlink has traffic rights to a number of domestic and regional destinations in Kenya, but its operations were suspended in November 2012 due to cash flow problems.

Its expansion plans seem to be flying, so why are its shares not? Protectionism, bureaucracy and perhaps duplicity are the culprits.

Almost immediately after launch FastJet hit turbulence with a dispute involving Don Smith, Fly540’s founder.

Smith claims he is still owed £6.78 million relating to inter-company debt owed to Kenya’s Chasse Bank, which FastJet had pledged to repay but has not. FastJet has turned to England’s High Court to gain a ruling that it has fulfilled all its obligations under the purchase agreement. Expansion in east Africa is now mired in litigation.

FastJet’s access to the lucrative South African market through the purchase of 1time has been thwarted by South African foreign ownership laws. Those laws limit foreign ownership of a South African airline to 25 per cent, so its southern African ambitions are also currently on hold.

All these variables along with the paucity of historic earnings due to the company’s youth make a fundamental case for hold or dump impossible.

The share price’s short history and volatility does not allow for any trend analysis to base a decision on either.

Therefore, the club has two options. The first is to put a sell limit at our break-even price and hope the shares volatility spikes up and allows us to sell.

Alternatively, we can all just sit tight and keep our seat belts fastened and hope for a smooth landing.