RNS
Fastjet PLC

Fastjet PLC - Annual Financial Report

RNS Number : 7430D
Fastjet PLC
28 June 2019
 

fastjet Plc

 

("fastjet" or the "Company")

 

(AIM: FJET)

 

Final results for the year to

 31 December 2018

 

28 June 2019

 

fastjet, the low-fare African airline, announces its audited final results for the year ended 31 December 2018. The table below summarises the financial performance of the fastjet Group's (the "Group") continuing activities.

 

 

 

2018

2017

 

US$

US$

Revenue

38.5m

  14.4m

Group Operating loss

(25.5)m

(13.2)m

Loss from continuing activities after tax

(58.2)m

(11.2)m

Loss for the year after tax

(65.0)m

(24.5)m

Loss per share from continuing activities (US$)

(0.08)

   (0.03)

Cash balance at year end

6.6m*

20.0m

 

*Cash balance at 25 June 2019 US$2.6m (of which US$ 0.4m restricted in Zimbabwe). 

 

Strategic highlights

 

·    Completion of shareholding acquisition in Federal Airlines in October 2018.

·    Exit from Tanzania following regulatory challenges and uneconomic pricing by competitors.

·    US$12.0m loan facility agreement with Solenta Aviation Holdings Limited ("SAHL") to fund the exercise of the Company's option over the purchase of the three ATR72 aircraft with the balance to be used for general working capital purposes.

·    US$2.0m loan facility from SSCG for general working capital purposes across the Group on an interest-bearing loan at 6% fixed per annum, for an initial period of six months - $1.25m of this amount has been repaid post year-end.

·  fastjet Zimbabwe deposited RTGS$5.0m of its restricted bank balances held in Zimbabwe with Annunaki on an interest-bearing deposit at 4% fixed per annum, for an initial period of six months.  This deposit has been refunded in full post year-end.

·    Fundraising of US$ 10 million in July 2018 and additional refinancing of US$ 40 million in December 2018.

 

Financial and Operational highlights

 

·    Group revenue from continuing operations increased by 167% to US$38.5m (2017: US$14.4m). This was 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%.

·    Zimbabwe revenue increased 102% year on year to US$26.0m (2017: US$12.9m). This was achieved by an increase in available capacity of 30%, an increase in passengers of 45%, which included the start of Harare - Bulawayo route, a significant increase in yield of 40% and a further 5% increase in average load factors.

 

·    Mozambique revenue increased 642% year on year to US$8.9m (2017:US$1.2m). This was achieved by an increase in available capacity of 613%, an increase in passengers of 575% (based on full year of operations), an increase in yield of 10% and a 5% decrease in average load factors.

 

·    Costs from continuing operations before exceptional items increased by 132% to US$64.1m (2017: US$27.6m). This increase in costs is driven largely by the above-mentioned increase in capacity in both markets adding US$36.5m additional costs in the 2018 financial year.

 

·    Exceptional items of $ 22.1m impacting the increase in costs for the year included:

 

o  US$11.3m release of shares in lock-up transactions after the December 2018 capital raise and    following the acquisition of the E145 aircraft on lease;

the exercise of the option to purchase FedAir, requiring a purchase price allocation and valuation of FedAir to be performed, which resulted in a write down of US$4.6m;

o  the impairment of goodwill of US$1.5m;

the impairment of Air Operations Certificate of US$3.0m;

the impairment of brands US$1.3m; and

US$0.4m other costs.

 

·    The loss after tax for the year from continuing operations, excluding US$22.1m exceptional items mentioned above, and the Zimbabwe related exchange loss of US$8.5m was US$27.6m (2017: US$11.2m);

 

·    Total costs increased by 278% year on year to US$96.4m (2017: US$25.5m) of which exceptional items were US$22.1m (2017: US$ nil).

 

Discontinued Operations

The Group discontinued operations in Tanzania and reported a loss from discontinued activities net of tax and exchange differences on translation of US$6.9m (2017: US$13.3m) which related to:

·    a US$8.9m trading loss of Tanzania CGU;

·    US$16.9m gain on net liabilities no longer consolidated;

·    US$5.5m reclassification of foreign currency translation loss;

·    US$14.6m loss on disposal of the three ATR 72-600 aircraft acquired specifically for the Tanzanian business; and

·    US$0.3m relating to expenses accrued for forward sales liabilities for Tanzania.

 

Outlook

The encouraging performance of our continuing operations in the final quarter of 2018 is expected to continue into 2019, with a near break-even Group operating result in quarter 1 of 2019 (seasonally the weakest quarter of the year) supporting the Board's expectation of the Group achieving an operating profit for the 2019 financial year excluding the significant foreign exchange losses triggered in Zimbabwe specifically.

 

The Directors continue to adopt the going concern basis, notwithstanding the expected need for further funding and assumed the ability to extract hard currency funds from Zimbabwe in the foreseeable future.

fastjet, with a restructured balance sheet and optimised organisational structure, a refined operating model and having diversified its geographic revenue streams over the past two years is now better positioned to strategically deliver sustainable growth.

 

Nico Bezuidenhout, fastjet Chief Executive Officer, commented:

"2018 saw the successful completion of the stabilization process we embarked upon in 2016.  It was a year during which substantial changes were implemented which will have long-lasting, structural benefits for fastjet.  Most notably, fastjet withdrew from Tanzania - a market that had been consistently loss-making over a number of years - as well as completing its fleet transition, further reducing overhead costs, substantially reducing long-term debt, and replacing and enhancing our  financial and management information core systems.  2018 also saw a strong performance from fastjet's first full year of operations in Mozambique, the exercise of a purchase option that allows the Group entry into the South African market through the acquisition of a shareholding in a profitable business in this country, and increased seat occupancy rates and revenue levels in our Zimbabwean business. These efforts required commitment from all our stakeholders and significant time, effort and financial resource for which the Management and Board of fastjet is thankful to our employees, investors, suppliers and customers. 

"The fastjet of today is a fundamentally different business to that of eighteen months ago, as evidenced by the Group achieving operational profitability in two of its three markets for the last quarter of 2018.  We remain focused on managing the macro-economic challenges confronting the business and on improving fastjet's performance still further."

 

fastjet's report and accounts for the year ended 31 December 2018 ("2018 Annual Report and Accounts"), 

notice of a General Meeting ("GM") and the form of proxy are expected to be posted to shareholders on 28 June 2019.

 

A copy of the 2018 Annual Report and Accounts will be available to view and download shortly from the 

Company's website:  www.fastjet.com

 

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.

 

 

 

For more information, contact:

 

fastjet Plc

Tel: +27 (0) 10 070 5151

Nico Bezuidenhout, Chief Executive Officer

Kris Jaganah, Chief Financial Officer

 

 

 

Media - Citigate Dewe Rogerson

Tel: +44 (0) 20 7638 9571

Angharad Couch, Toby Moore, Nick Hayns

 

 

 

For investor enquiries please contact:

 

Liberum Capital Limited - Nominated Adviser and Broker

Tel: +44 (0) 20 3100 2222

Andrew Godber, Clayton Bush, James Greenwood,

Trystan Cullen, William Hall

 

 

NOTES TO EDITORS

 

About fastjet Plc

                                                                                                                   

Fastjet is a multi-award-winning value African airline that began flight operations in 2012. Their awards include, Leading African Low-Cost Carrier World Travel Awards 2016, 2017, 2018 and 2019, and Skytrax World Airline Awards Best Low-Cost Airline in Africa 2017. Today, Fastjet connects Zimbabwe by flying between Harare and Victoria Falls, Harare and Bulawayo, and from Harare to Victoria Falls. They also offer flights from Harare and Vic Falls to Johannesburg in South Africa. The airline also began branded domestic flights in Mozambique, using Embraer E145, a 50-seater aircraft operated by Solenta Aviation Mozambique, in November 2017. As part of a codeshare agreement entered with LAM - Mozambique Airlines, fastjet is able to offer its customers flights between Maputo, Tete, Beira and Quelimane.

Since commencing operations, fastjet flown over 3 million passengers and has established itself as a punctual, reliable, and affordable low-cost carrier.

 

 

Preliminary Statement

 

During the past year, the fastjet team has worked hard in a challenging trading environment to ensure the long-term sustainability of the Group. Several strategic initiatives were completed, most notably the re-evaluation of the entire group business by country of operation. This resulted in the very difficult, yet important decision, to dispose of the group's Tanzania business entirely. The Board also decided to decentralise the business and its commercial and financial management structures to ensure that the key areas of control and management effectiveness are attained in each business.

To implement the above, a capital raise was required in December, the result of which allowed the fastjet group to end the year with significantly stronger balance sheet, a complete exit from Tanzania and the elimination of significant long-term debt and lease obligations, together with the purchase of the remaining operational fleet.

The decentralisation has been implemented. The Board and the executive management team continue to focus on the significant work ahead of improving profitability and operating cash flow and that key areas of decentralised control and effectiveness are attained in all business units in 2019.

The year saw excellent growth in our Zimbabwe market and the first full year of operations in Mozambique. fastjet Zimbabwe, the country's only major private domestic carrier, saw growth in capacity of 30% and an increase in yields of 40%, as the company entrenched itself as a competitive non-State-owned carrier in the market. Market share on the Johannesburg to Harare route grew during the year to become the most frequented carrier with up to four daily return flights. The addition of a daily Harare to Bulawayo flight in July (and a second daily flight started in early January 2019) contributed to the capacity increase. fastjet Zimbabwe's route from Harare to Victoria Falls continues to do well and saw an increase in capacity of 52% year on year.

Whilst the fastjet Zimbabwe outlook remains positive and cash generating, Zimbabwe continues to be a difficult market in which to operate. This includes a monthly devaluing RTGS$ currency and rapid inflation in 2019.  Like other Zimbabwean businesses, fastjet Zimbabwe has experienced significant difficulties in obtaining access to foreign currency to settle foreign suppliers using restricted bank balances. Although the position has improved from October 2018, with the airline starting to access US$ funds to settle certain foreign suppliers based on allocations granted by the Reserve Bank of Zimbabwe. The company continues to pursue a strategy of increasing local currency spend through localising key supply chain elements into Zimbabwe such as the relocation of the call centre which previously were being performed in South Africa.

In quarter two of 2019, through monetary policy changes in Zimbabwe and the introduction of the RTGS$ local currency and separate US$ Nostro accounts, this has allowed fastjet Zimbabwe to start selling tickets in both RTGS$ and US$ currencies. Currently these changes have allowed fastjet Zimbabwe to generate more than 50% of its ticket sales in hard currency US$ which are being used to settle foreign suppliers. However, the rapidly devaluing RTGS$ currency, rampant inflation and reduced buying power of individuals and companies has impacted our overall load factors.

fastjet Mozambique had its first full year of operations, having commenced operations in November 2017. During 2018, despite increasing capacity, load factors remained weak as a result of lack of demand and competitive activities from the local state-owned carrier Linhas Aéreas de Moçambique ("LAM"). fastjet Mozambique ceased operating the Maputo to Nampula route on the 28 of October 2018 in order to reduce route losses. This lost capacity was immediately replaced with a new route from Maputo to Quelimane on the 29 of October 2018. In December, Ethiopian Airlines entered the Mozambique market putting further pressure on the route load factors. To compete effectively and profitably, fastjet made use of its commercial agreement with LAM to provide consumers with codeshare bookings. The Board continues to monitor this market closely and will adjust its strategy accordingly to changes in market conditions.

fastjet exercised its option to purchase Federal Airlines ("FedAir") on 7 October 2018, which saw FedAir now consolidated into the Group. FedAir performed well during the year and has contributed positively to the Group results. FedAir has a well-established market in the unscheduled safari business, carrying tourists directly to their destinations in the Sabi Sands, Kruger National Park and surrounding areas. In addition, its charter business continues to do well. The acquisition of FedAir by fastjet will allow operating synergies to be achieved and provides the group with an important foothold in the important South African market for the future.

During 2018, the Tanzania market remained an extremely challenging environment for fastjet. As a result of continued regulatory and operational difficulties, together with competitive pressures, in September 2018 the Board resolved to cease providing working capital to fastjet Tanzania. The group disposed of its stake in the Tanzanian holding company on 27 November 2018. Regulatory challenges had significantly delayed the importation and clearance of the ATR72-600 fleet. Domestic route right approvals for both the ATR72-600 and ERJ190 were stalled many months with unexplained delays. Furthermore, the national carrier began an uneconomic pricing policy on the two key routes operated by fastjet, where it began flying its newly acquired B787 Dreamliner (approximately 280-seater long-haul aircraft) on short domestic sectors and at sub-economical fares.

Although 2018 presented numerous operational and strategic challenges for the group, the balance sheet has been strengthened, the operations rationalised and excellent growth achieved in the Zimbabwean market.

 

Funding Activities

Shareholder Loan Facility

In April 2018, the Company entered into a US$12.0m loan facility agreement with Solenta Aviation Holdings Limited ("SAHL") to fund the exercise of the Company's option over the purchase of the three ATR72s aircraft with the balance to be used for general working capital purposes.

 

Loan from SSCG and loan to Annunaki  

Original transaction

In July 2018, fastjet Plc borrowed US$2.0m from SSCG for general working capital purposes across the Group on an interest-bearing loan at 6% fixed per annum, for an initial period of six months.

At the same time, fastjet Zimbabwe deposited RTGS$5.0m of its restricted bank balances held in Zimbabwe with Annunaki on an interest-bearing deposit at 4% fixed per annum, for an initial period of six months.

 

 Monetary policy changes within Zimbabwe

In October 2018, the Reserve Bank of Zimbabwe ("RBZ") announced a monetary policy change introducing a new and separate US$ bank account, which was called US$ Nostro accounts. In doing this, the RBZ separated US$ restricted bank balances ("RTGS$") and accounts into two identifiable and separate new bank accounts, whereby all US$ restricted bank balances effectively became domestic RTGS$ bank balances; thereafter all companies were required to open up the new US$ Nostro account for future hard currency US$ transactions.

By doing this, the RBZ informally recognised a parallel currency, and this resulted in the Zimbabwean market no longer recognising the official exchange rate of RTGS$ 1.00 = US$ 1.00.

Because of this, management took the decision to revalue all RTGS$ denominated financial assets held at year end at an exchange rate RTGS$ 4.6923 = US$ 1.00, which significantly affected the carrying value of the original US$5.0m Annunaki loan.

At 31 December 2018, the original RTGS$5.0m was valued at US$1.1m based on management's implied exchange rate of RTGS$ 4.6923 = US$ 1.00. An exchange loss of US$3.9m was incurred because of the significant devaluation of the RTGS$ currency against the US$.

Loan amendments

On 1 March 2019, the Company agreed with both Annunaki and SSCG that the terms of the unsecured loans will be extended to 31 March 2019. The terms of the Loan Agreements will remain the same except for the following changes:

·    The loan amount from fastjet Zimbabwe to Annunaki was increased from RTGS$5.0m to RTGS$7.0m due to devaluation of the underlying RTGS$ currency;

 

·    During the term of the Loan Agreement with SSCG, SSCG shall have the option to convert the US$2.0 m repayment plus any outstanding interest into ordinary shares in the Company (subject always to the shareholders of the Company granting the directors sufficient authority to allot and issue such shares on a non-pre-emptive basis) (the "Option to Convert") either (i) upon the happening of an event of default under the Loan Agreements, or (ii) after 28 February 2019; and

 

·    Any ordinary shares in the Company issued pursuant to the Option to Convert shall be issued at the higher of:

 

·    the volume weighted average price per ordinary share over the preceding 30 trading days on the London Stock Exchange ending on the date on which SSCG has given such written notice to convert; or

 

·    At par value.

 

Loan - second term extension

On 05 March 2019, the parties agreed to extend the Loan arrangements to 30 June 2019.

Loan - repayment and extension

On the 11 June 2019, an amount of US$1.25m was repaid to SSCG and the remaining US$0.75m was extended to 31 January 2020.

Additionally, between 12 June 2019 and 14 June 2019, Annunaki repaid the RTGS$7.0m to fastjet Zimbabwe together with all the accrued interest.

At the time of repayment, the RTGS$7.0m was valued at US$1.1m based on the Zimbabwean interbank exchange rate of RTGS$ 6.1200 = US$1.00. Between 31 December 2018 and the time of repayment, an additional exchange loss of US$0.7m was incurred because of further devaluation of the RTGS$ currency against the US$.

Shareholder Fundraising

On 05 July 2018, the company issued:

·    66,495,310 new ordinary shares of 1 pence each were issued at a price of 8 pence per share raising gross proceeds of £5.3 m (US$7.0m).

 

·    28,924,538 new ordinary shares of 1 pence each to SAHL at a price of 8 pence per share, raising gross proceeds of £2.3 m (US$3.0m).

 

·    On 27 July 2018, 2,824,504 new ordinary shares of 1 pence each were issued by way of an open offer to existing shareholders at a price of 8 pence per share, on the basis of one share for every 26 existing ordinary shares. This raised gross proceeds of £0.2m (US$0.3m).

 

On 13 December 2018, the company issued:

·    3,124,999,999 new ordinary shares of 1 pence each which were issued at a price of 1 penny per share raising gross proceeds of £31.3m (US$39.3m).

 

·    55,171,979 new ordinary shares of 1 pence each which were issued by way of an open offer to existing shareholders at a price of 1 penny per share, on the basis of 57 shares for every 10 existing ordinary shares. This raised gross proceeds of £0.6m (US$0.7m).

 

Of the above US$40.0m, US$15.1m was received in cash, and US$10.0m of the Shareholder Loan Facility above was converted into equity together with arrears interest of US$0.4m. US$11.5m was used to purchase the four Embraer 145 aircraft, US$2.5m was used to settle raising fees and legal costs and US$0.5 was used to settle the penalty relating to the early termination of the SAHL lease.

 

Of the US$15.1m cash raised, US$11.5m was used to settle obligations to allow the divestment from Tanzania and the balance of US$3.6m was retained by the Group as working capital.

 

In aggregate in 2018, the issue of shares raised gross proceeds of £39.7m (US$50.3m) (2017: US$90m).

 

The Board is grateful to all the loan providers and shareholders who participated in the fundraising exercises for their continued support.

 

Financial Performance

 

The Group recorded a loss for the year of US$58.2m from continuing operations (2017: US$11.2m loss from continuing operations). The results included the start-up losses incurred in fastjet Mozambique, the impact of the divestment of the Tanzanian business and exceptional items of US$22.1m.  The exceptional items, which are more fully described in Note 6, included inter alia the write-off of the equity settled share-based payment transaction of US$11.3m following the purchase of  four E145 aircraft from SAHL,  the impairment of US$4.6m  of the FedAir Brand License Agreement from the other financial asset as detailed in Note 13, an impairment of US$3.0m of the air operations certificate, an impairment of US$1.5m of goodwill, an impairment of US$1.3m of brands and US$0.4m of other. Included also in the current year loss for the year is US$8.5m relating to Zimbabwe foreign exchange losses on financial assets. Refer to Note 8 and Note 24 of the published Annual Report for further details.

When the company purchased the four E145 aircraft from SAHL, it agreed with SAHL to conclude the old share-based payment agreement, thereby creating the need to write off the remaining balance of the Equity Settled Share Based Transaction account of US$11.3m.

Group revenue increased by US$24.1m, of which US$13.0m was from Zimbabwe's much improved capacity, yield growth and passenger numbers, US$7.8m related to the first full year of operations in Mozambique, US$3.6m related to the FedAir subsidiary which was acquired in October 2018, and the balance offset by a reduction of US$0.3m in Central revenue.

Operating costs were relatively stable, increasing in line with capacity and as a result of the addition of fastjet Mozambique for a full year of operations added to the cost base.  Operating costs were also impacted by an increase in the fuel price during the year.

Discontinued operations of fastjet Tanzania and the resultant disposal of the three ATR 72-600 aircraft which had been purchased specifically for operations in Tanzania, triggered a loss of US$6.9m. This amount consists of an operating loss by fastjet Tanzania of US$8.9m, a gain on the deconsolidation of the net liabilities of fastjet Tanzania of US$16.9m, a reclassification of foreign currency translation loss reserve of US$5.5m, a loss on disposal of the returned three ATR72-600 aircraft of US$14.6m and US$0.3m expenses relating to forward sales liabilities.

The Directors believe that after the disposal of Tanzania and the balance sheet restructuring from the December capital raise, the current economic and trading outlook in fastjet's key markets of Zimbabwe and South Africa remains positive, whilst Mozambique remains challenging.  In 2019, the Group is expecting to increase market share in the Zimbabwean market, look at growth opportunities in the South African market, and will continue to monitor the health of Mozambique.

In preparing these financial statements, the Directors have concluded that the continued adoption of the Going Concern basis is appropriate. The key assumptions and risks that the Directors have considered in reaching this conclusion are set out in the Going Concern section within the Financial Review below and in Note 1 of the notes to the Financial Statements.

 

Strategic Developments

 

Stabilisation Plan

fastjet's Stabilisation Plan, which commenced in the second half of 2016, was designed to strengthen the commercial, cost management and financial aspects of the business.  This initiative has now been concluded, and the following achievements realised:

·     Network: Since 2016, fastjet has moved from being a business with more than 99% revenue exposure to one country, Tanzania, to a business with a more-balanced geographic exposure with operations in Zimbabwe, South Africa and Mozambique; 

·      Fleet: The Company has concluded its fleet transition, moving from larger Airbus A319 aircraft to a fleet of ERJ 145 aircraft that is now fully owned and unencumbered.  The fleet changes implemented have resulted in a better match between supply and demand, translating into load factors improving from 54% in 2016 to 72% in 2018;

·      Brand, Service and Reach: fastjet has continued to build equity in its brand, which it acquired from the easyGroup in 2017, and boast one of the largest social media followings of any airline on the African continent.  During 2018 fastjet was awarded Africa's Best Low-Cost Carrier award at the World Travel Awards, following award of the same accolade in 2017. Despite this, due to the exit from Tanzania which was a significant part of fastjet group revenues and passengers carried, management has impaired the carrying value of the fastjet brand acquired from easyGroup by US$1.2m (refer to Note 11);

·    Revenue and Distribution: During the course of the Stabilisation Plan, fastjet replaced its core reservations and revenue management platforms. It also implemented global distribution partnerships with travel agent platforms such as Travelport and Amadeus. Further fastjet added Interline Agreements with Emirates and Qatar Airways. In March 2018, a strategic cooperation agreement with LAM, Mozambique's National Carrier, was established. In May 2019, this strategic cooperation transitioned into a fully-fledged codeshare agreement.  The improved supply-demand match achieved through fastjet's re-fleeting exercise, combined with increased yields, has seen the Company increase its unit revenue (RASK) by 112% from US$0.0592 in 2016 to US$0.1254 in 2018 (see page 20);  

 

·    Cost: A key feature of the Stabilisation Plan was to achieve a reduction in costs across all areas of the business. Although costs are continuously under review, the plan has already resulted in a reduction in cost-drivers such as labour cost which reduced by 43% between 2016 and 2018 (immediately prior to the disposal of the Tanzania operation);

·      Support Systems: Substantial effort was applied during the Stabilisation Plan to improve decision support and control systems within the business, in addition to the sales and distribution system changes referred to above. fastjet in 2018 implemented a new financial accounting platform across all operating units and further implemented a revenue accounting and data warehouse solution, designed to equip the business with relevant and timeous information - we continue to develop and enhance these solutions.     

The Board is pleased with the results achieved by the Stabilisation Plan which have placed fastjet on a substantially firmer footing but recognises that there is still much to be done.

 

 Business Model Flexibility

 

Having gained full control of the fastjet brand together with the establishment of the requisite system support infrastructure, has enabled fastjet to develop and implement a refined business model that is premised on centralised support and oversight and decentralised operational deployment, with a level of equity participation/commercial risk assumption that varies from country-to-country. 

fastjet is now in a position where each of its prospective markets may be assessed based on market attractiveness, entry risk/complexity and fastjet's access to start-up capital for a new geography at a given point in time. The Company is now in a position to pursue geographic expansion by means of either a franchise, joint venture or owned operation deployment.  Importantly, the deployment model for a given country is not static and may change over time, as the FedAir example in South Africa illustrated (initially a brand franchise arrangement that has now progressed to an owned basis of operation).   

We believe that the flexibility of fastjet's refined business model will better equip the Company to pursue expansion across the African continent. Accordingly, the time, cost and management bandwidth associated with entering each of the 54 African countries on a wholly owned basis may be substantially lessened in this way.

Organisational Restructuring

With the Stabilisation Plan having been completed in 2018 and considering the implications of refinements made to fastjet's business model as outlined above, as well as the Group's exit from the Tanzanian Market, the Board embarked on an organisational restructuring at the end of 2018.  This organisational restructure has resulted in a further streamlined head-office infrastructure and headcount reduction, based in Johannesburg, South Africa, and separate funding allocations per operational country which supports ground-level performance accountability and investment management aligned to shareholder return optimisation. 

 

Board of Directors

On 02 July 2018, Mark Hurst - a SAHL representative - joined the Board as a Non-Executive director. On 01 January 2019, Mark was appointed the Deputy Group CEO of the company, thereby changing his role to an Executive Director. On 18 September 2018, Peter Hyde an independent Non-Executive director, resigned from the Board. Michael Muller, the Chief Financial Officer resigned effective 29 March 2019 and Kris Jaganah joined the Board as the new Chief Financial Officer on 05 April 2019.

 

SAHL is, under the terms of the strategic partnership agreement, entitled to appoint two Non-Executive directors. In addition, the Shareholder Loan Facility granted by SAHL to fastjet in April 2018 entitles SAHL to appoint a further director.  To date SAHL have nominated one director, being Mark Hurst.

 

Corporate Governance

We believe that good governance is integral to delivering growth in shareholder value.  In line with best practice and regulations. The Corporate Governance report is presented on page 26.

 Outlook for 2019

2018 proved to be a difficult year for African aviation, with airlines on the continent, according to the International Air Transport Association, realising net losses of approximately US$400m.  For fastjet it was a year that necessitated strategic decisions and decisive actions, which resulted in two (South Africa and Zimbabwe) of the Group's three operating countries delivering profits for the last quarter of the year, the exit from one market (Tanzania) and a sharp focus on the evolution of our newest market, Mozambique.

The encouraging performance of our continuing operations in the final quarter of 2018 is expected to continue into 2019, with a near break-even Group operating result in quarter 1 of 2019 (seasonally the weakest quarter of the year) supporting the Board's expectation of the Group achieving an operating profit for the 2019 year before the significant foreign exchange losses triggered in Zimbabwe specifically.

Further evidence for this expectation is relatively robust GDP growth expectations of 4.2% and 4.5% for Zimbabwe and Mozambique respectively, according to the African Development Bank. While South Africa is expecting a more modest 2.0% GDP growth, the sheer size of the aviation market (> 20 times that of Zimbabwe and Mozambique combined) represents an exciting growth opportunity for the Group that we will pursue in the future.

In the medium to longer term the committed implementation of open skies by several African countries as encompassed in the African Union's Single African Air Transport Market ("SAATM") initiative also bodes well, as access to growing aviation markets becomes less impeded by challenging regulatory constraints and restrictions.

The Group faces risk and uncertainty from the monetary policy changes implemented by the Zimbabwean government at the end of February 2019, increased occurrences of natural disasters and greater competitive intensity in Mozambique. In this regard, fastjet's geographic revenue diversification, our localisation of services in Zimbabwe, our flexible deployment model in Mozambique and FedAir's revenues weighted towards the second half of the year, all stand fastjet in good stead.    

An enhanced risk in Zimbabwe which needs to be managed weekly is the fast devaluing RTGS$ currency against the US$ and rampant inflation triggered by this, which is forecast to reach 100% in RTGS$ terms in the imminent future. To address this, management has focused on managing all revenues and costs against US$ baseline and operating target. The key direct risk is doing this is reduced load factors against receiving the right US$ per passenger carried revenue as well as retaining key in-country resources and employees.

 

fastjet, with a restructured balance sheet and optimised organisational structure, a refined operating model and having diversified its geographic revenue streams over the past two years is now better positioned to strategically deliver sustainable growth.

 

Financial Review

 

fastjet Group

 

The Group is subject to various risks, including those that derive from the nature of the aviation industry and from operating in Africa. Risk assessment and evaluation is an essential part of the Group's planning and an important aspect of the Group's internal control system. As more fully described in the Going Concern statement in the Financial Review below, there are a number of material uncertainties and risks including but not limited to the following that may cast significant doubt upon the Group's and the parent Company's ability to continue as a going concern.

§ Safety: A major safety incident could adversely affect fastjet's operations, financial performance and reputation. fastjet's quality and safety management systems ensure that there are appropriate safety resources and procedures. There is also additional assurance from the licenced post holders in Zimbabwe and Mozambique, and oversight from the fastjet Plc Board's Safety Committee;

 

§ Strategic: The continued operation of existing routes, the commencement of operations in new markets and the selection of fleet type can have a material impact on the Group's financial performance and future prospects. During 2018 the management team has fundamentally addressed the Group's services and fleet and introduced more rigorous criteria against which new services will be evaluated;

 

§ Political uncertainty: This is continuously monitored by the Board and actions taken if and when required. The group strives to have positive working relationships in the countries it operates in and operates according to domestic and international recognised standards and principles;

 

§ Regulatory:  The retention of regulatory approvals and licences is essential for services and operations to continue uninterrupted. The Group has the management and systems in place to ensure compliance with aviation regulations in its licenced markets - Zimbabwe, South Africa and Mozambique;

 

§ Oil price: The Group does not enter into fuel hedging contracts but ensures that where possible its ticket pricing strategy reflects current oil prices. There is a residual oil price risk in possible movements in fuel price for sold but un-flown tickets. However, this is naturally mitigated by the very short timeframe from the booking date to flight date. Most fuel purchases are currently priced on a fixed monthly basis to mitigate this risk;

 

§ Commercial: Network and fleet planning, and the need for effective competitor and market analysis and revenue management are important to ensure effective on-going revenue growth.  The Group has an experienced management and commercial team, which utilises in-house marketing tools and, where appropriate, external market analysis. In addition, the Group enters into and maintains contracts with related parties which underpin the Group's operations.  Group management and the commercial team regularly monitor the Group's compliance and that of the counterparties with respect to these contracts;

 

§ Operational: Maintenance of a safe, reliable airline is essential.  The Group has in place the necessary systems and internal controls to ensure sufficient crew levels to operate the schedule and effective contract management around key supplier relationships, such as aircraft lessors, maintenance providers and ground handlers. fastjet works together with the appropriate authorities to ensure that security measures are in place and effective, and performs regular audits;

 

§ Finance: The Group needs to ensure that it has the financial resources to continue operations and deliver its strategic objectives. The Group has appropriate budgeting, forecasting and cash management systems in place. The Company is in the process of further enhancing and strengthening its reporting and internal control environment;

 

§ Information Technology ("IT"): Appropriate IT security protocols have been put in place to ensure minimal breaches to the system. Regular backups are done, and appropriate failovers are in place.

 

The risk management and internal control systems encompass the Company's policies, culture, organisational behaviour, processes and systems.  The Group has a risk management framework and process that identifies and monitors its principal risks and regularly identifies mitigating actions to those risks.

The Board ensures, and intends to further enhance, its assessment of the risks and associated mitigating actions, in relation to the approved business model and strategy.

 

 

Financial Review

fastjet Group

In the second half of 2018 the Board undertook a comprehensive and major review and restructuring of the fastjet business and operations. This concluded with the decision to discontinue the Tanzania airline cash generating unit ("CGU"). At the time, Tanzania comprised more than half our revenues, but generated most of our losses, consumed most of the cashflow, and held significant long-term liabilities. Additionally, over the years, it had consumed most of our key management's time and was the most challenging political environment in which to operate.

Whilst all our markets in Africa have challenging environments, in Zimbabwe, South Africa and Mozambique, fastjet has been welcomed and supported at all levels of government and aviation authorities.

Continuing Operations

Group revenue from continuing operations increased by 167% to US$38.5m (2017: US$14.4m). This was driven by an increase in flown 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%.

Zimbabwe revenue increased 102% year on year to US$26.0m (2017:US$12.9m). This was achieved by an increase in available capacity of 30%, an increase in flown passengers of 45%, which included the start of Harare - Bulawayo route, a significant increase in yield of 40% and a further 5% increase in average load factors.

Mozambique revenue increased 642% year on year to US$8.9m (2017:US$1.2m). This was achieved by an increase in available capacity of 613%, an increase in flown passengers of 575% (based on full year of operations), and an increase in yield of 10% and a 5% decrease in average load factors.

In October 2018, the option to acquire a stake in FedAir was exercised resulting in the consolidation of FedAir. The revenue consolidated for the three months was US$3.6m with a positive contribution.

Costs from continuing operations before exceptional items increased by 132% to US$64.1m (2017: US$27.6m). This increase in costs is driven largely by the above-mentioned increase in capacity in both markets adding US$36.5m additional costs in the 2018 year.

Exceptional items impacting the increase in costs for the year included US$11.3m release of the equity settled share-based payment transaction after the December 2018 capital raise, the exercise of the option to purchase FedAir, necessitating a purchase price allocation and valuation of FedAir to be performed, which resulted in a write down of US$4.6m, the impairment of goodwill US$1.5m, impairment of Air operations certificate US$3.0m , impairment of brands US$1.3m and US$0.4m other.

Total costs increased by 278% year on year to US$96.4m (2017: US$25.5m) of which exceptional items was US$22.1m (2017: US$ nil).

The loss after tax for the year from continuing operations was US$58.2m (2017: US$11.2m).

 

Discontinued Operations

The Group reported a loss from discontinued activities net of tax of US$6.9m (2017: US$13.3m) which related to a US$8.9m trading loss of Tanzania CGU, US$16.9m gain on net liabilities no longer consolidated , US$5.5m reclassification of foreign currency translation loss, US$14.6m loss on disposal of the three ATR 72-600 aircraft acquired specifically for the Tanzanian business and US$0.3m relating to expenses accrued for forward sales liabilities for Tanzania(see Note 3).

Key performance indicators

The Directors consider the following to be the key performance indicators ("KPIs") when measuring fastjet's underlying operational performance. The KPIs reflect standard airline industry metrics which provide measures of efficiency and business performance. They provide a mechanism for the Group to track performance at both a Group level and industry level. They are indicative of how the business is achieving its strategy and objectives from an operational, cost and revenue perspective. These measures are now split between scheduled and unscheduled services, whereby the former relates to the combined operating performance of fastjet Zimbabwe and fastjet Mozambique, and the latter to the operations of Federal Airlines.

 

 Scheduled Airline Services (Continuing Operations)

Measure

2018

2017 (restated)

Movement

Passenger numbers

254,982

136,765

86%

Revenue per Passenger (US$)

134.0

101.0

33%

Revenue per Seat (US$)

96.6

69.5

39%

Seats Flown

354,650

199,109

78%

Available Seat Kilometres ("ASK")

305,173,450

174,134,053

75%

Load Factor

72%

69%

3pp

Revenue per ASK (US cents)

                  12.54

                        8.27

52%

Cost per ASK (US cents)

(excluding exceptional items)

20.99

                      15.87

32%

Cost per ASK ex. Fuel (US cents)

(excluding exceptional items)

                    16.72

                        12.84

30%

Aircraft Utilisation (Hours)

8,67

4,84

79%

Aircraft Utilisation at Year End (Hours)

6,01

6,36

-6%

 

Unscheduled Airline Services (3 Months)

Measure

2018

2017

Movement

Passenger numbers - Shuttle

8,168

-

n/a

Passenger numbers - Charter

2,321

-

n/a

Revenue per pax (US$) - Shuttle

 

276

-

n/a

Revenue per pax (US$) - Charter

 

581

-

n/a

 

Note: 2017 comparatives figures were restated to exclude fastjet Tanzania.
 

Funding Activities

Shareholder Fundraising

On 05 July 2018, the company issued:

·    66,495,310 new ordinary shares of 1 pence each were issued at a price of 8 pence per share raising gross proceeds of £5.3 m (US$7.0m).

 

·    28,924,538 new ordinary shares of 1 pence each to SAHL at a price of 8 pence per share, raising gross proceeds of £2.3 m (US$3.0m).

 

·    On 27 July 2018, 2,824,504 new ordinary shares of 1 pence each were issued by way of an open offer to existing shareholders at a price of 8 pence per share, on the basis of one share for every 26 existing ordinary shares. This raised gross proceeds of £0.2m (US$0.3m).

On 13 December 2018, the company issued:

·    3,124,999,999 new ordinary shares of 1 pence each which were issued at a price of 1 penny per share raising gross proceeds of £31.3m (US$39.3m).

 

·    55,171,979 new ordinary shares of 1 pence each which were issued by way of an open offer to existing shareholders at a price of 1 penny per share, on the basis of 57 shares for every 10 existing ordinary shares. This raised gross proceeds of £0.6m (US$0.7m).

In aggregate in 2018, the issue of shares raised gross proceeds of £39.7m (US$50.3m) (2017: US$90m).

 

Shareholder Loan Facility

In April 2018, the Company entered into a US$12.0m loan facility agreement with Solenta Aviation Holdings Limited ("SAHL") to fund the exercise of the Company's option over the purchase of the three ATR72s aircraft with the balance to be used for general working capital purposes.

 

Loan from SSCG and loan to Annunaki  

Original transaction

In July 2018, fastjet Plc borrowed US$2.0m from SSCG for general working capital purposes across the Group on an interest-bearing loan at 6% fixed per annum, for an initial period of six months.

At the same time, fastjet Zimbabwe deposited RTGS$5.0m of its restricted bank balances within Zimbabwe with Annunaki on an interest-bearing deposit at 4% fixed per annum, for an initial period of six months.

Monetary policy changes within Zimbabwe

In October 2018, the Reserve Bank of Zimbabwe announced a monetary policy change introducing a new and separate US$ bank accounts which they called US$ Nostro accounts. In doing this, they effectively separated US$ restricted bank balances and accounts into two identifiable and separate new bank accounts, whereby all current US$ restricted bank balances became domestic RTGS$ bank balances; thereafter all companies were required to open up the new US$ Nostro account for future hard currency US$ transactions. 

By doing this, the Reserve Bank of Zimbabwe informally recognised a parallel currency, and this resulted in the Zimbabwean market no longer recognising the official exchange rate of RTGS$ 1.00 = US$ 1.00.

Because of this, management took the decision to revalue all RTGS$ denominated financial assets held at year end at an exchange rate RTGS$ 4.6923 = US$ 1.00, which significantly affected the carrying value of the original RTGS$5.0m Annunaki loan.

At 31 December 2018, the original RTGS$5.0m was valued at US$1.1m based on management's implied exchange rate of RTGS$ 4.6923 = US$ 1.00. An exchange loss of US$3.9m was incurred because of the significant devaluation of the RTGS$ currency against the US$.

Loan amendments

On 1 March 2019, the Company agreed with both Annunaki and SSCG that the terms of the unsecured loans will be extended to 31 March 2019. The terms of the Loan Agreements will remain the same except for the following changes:

·    The loan amount from fastjet Zimbabwe to Annunaki was increased from RTGS$5.0m to RTGS$7.0m due to devaluation of the underlying RTGS$ currency;

 

·    During the term of the Loan Agreement with SSCG, SSCG shall have the option to convert the US$2.0 m repayment plus any outstanding interest into ordinary shares in the Company (subject always to the shareholders of the Company granting the directors sufficient authority to allot and issue such shares on a non-pre-emptive basis) (the "Option to Convert") either (i) upon the happening of an event of default under the Loan Agreements, or (ii) after 28 February 2019; and

 

·    Any ordinary shares in the Company issued pursuant to the Option to Convert shall be issued at the higher of:

 

·    the volume weighted average price per ordinary share over the preceding 30 trading days on the London Stock Exchange ending on the date on which SSCG has given such written notice to convert; or

 

·    At par value.

 

Loan - second term extension

On 05 March 2019, the parties agreed to extend the Loan arrangements to 30 June 2019.

Loan - repayment and extension

On the 11 June 2019, an amount of US$1.25m was repaid to SSCG and the remaining US$0.75m was extended to 31 January 2020.

Additionally, between 12 June 2019 and 14 June 2019, Annunaki repaid the RTGS$7.0m to fastjet Zimbabwe together with all the accrued interest.

 At the time of repayment, the RTGS$7.0m was valued at US$1.1m based on the Zimbabwean interbank exchange rate of RTGS$ 6.1200 = US$1.00. Between 31 December 2018 and the time of repayment, an additional exchange loss of US$0.7m was incurred as a result of further devaluation of the RTGS$ currency against the US$.

Going Concern

The Group has in recent years operated at a loss and incurred a further operating cash outflow during 2018. The Group reviewed its current operating model in 2018 and took the following initiatives to reduce cash outflow:

-     Divestment from Tanzania;

-     Downsizing and restructuring of Head Office;

-     Conversion of debt into equity;

-     Acquisition of leased aircraft for shares;

-     Restructuring of legacy debts;

-     Localisation of services in Zimbabwe;

-     Route optimisation; and

-     Increase in fares to match costs.

 

There are risks associated with operating in Africa including but not limited to political, judicial, administrative, fiscal and other regulatory matters. Many countries in Africa, including those in which the Group currently operate may in the future experience severe socio-economic hardship and political instability, including political unrest and government change.

The commitment of local business people, government officials and agencies and the judicial system to abide by legal requirements and negotiated agreements may be more uncertain, creating concerns with respect to licences and agreements for business which may be susceptible to delay, revision or cancellation, as a result of which legal redress may be uncertain or delayed.

In preparing these financial statements, the Directors continue to adopt the going concern basis, notwithstanding the expected need for further funding and assumed the ability to extract hard currency funds from Zimbabwe in the foreseeable future.

The Directors believe, based on current financial projections and funds available and expected to be made available, that the Group will have sufficient resources to meet its operational needs over the relevant period, being at least until June 2020. Accordingly, in preparing these Financial Statements, the Directors continue to adopt the going concern basis. However, the headroom of available cash resources is minimal and the projections are very sensitive to any assumptions not being met.

The matters described above represent material uncertainties that may cast significant doubt upon the Group's and the parent Company's ability to continue as a going concern and, therefore, to continue realising its assets and discharging its liabilities in the normal course of business. The Financial Statements do not include any adjustments that would result if the basis of preparation proved inappropriate.

The key assumptions applied by the Directors in the preparation of the detailed cash flow forecasts, which form the basis of this forecast are:

-      Load factors will average 74% for second half of 2019;

-      Introduction of new initiatives to drive ex South Africa passengers;

-      Focused, country-centric marketing by the commercial teams;

-      90% of revenue generated in US$ and ZAR;

-      Mozambique operating expenses reducing following revised terms with Solenta;

-      Exchange rates: fastjet cashflows are exposed to movements in the RTGS$ and ZAR. In its forecasting fastjet has assumed that the key exchange rates remain as at current levels.

 

The Directors have considered a number of risks in preparing these forecasts, including inter alia:

-      Not achieving forecast passenger numbers and load factors;

-      An increase in aviation fuel prices, which are currently not hedged;

-      Adverse currency exchange rate movements; and

-      Ability to successfully remit cash from Zimbabwe.

 

Non-trading financial performance

Post balance sheet events

Loan from SSCG and loan to Annunaki - first term extension 

On 1 March 2019, the Company agreed with both Annunaki and SSCG that the terms of the unsecured loans will be extended to 31 March 2019. The terms of the Loan Agreements will remain the same except for the following changes:

·    The loan amount from fastjet Zimbabwe to Annunaki was increased from RTGS$5.0m to RTGS$7.0m due to devaluation of the underlying RTGS$ currency;

 

·    During the term of the Loan Agreement with SSCG, SSCG shall have the option to convert the US$2.0m repayment plus any outstanding interest into ordinary shares in the Company (subject always to the shareholders of the Company granting the directors sufficient authority to allot and issue such shares on a non-pre-emptive basis) (the "Option to Convert") either (i) upon the happening of an event of default under the Loan Agreements, or (ii) after 28 February 2019; and

 

·    Any ordinary shares in the Company issued pursuant to the Option to Convert shall be issued at the higher of:

 

·    the volume weighted average price per ordinary share over the preceding 30 trading days on the London Stock Exchange ending on the date on which SSCG has given such written notice to convert; or

 

·    At par value. 

 

Loan - second term extension

On 05 March 2019, the parties agreed to extend the Loan arrangements to 30 June 2019.

Loan - repayment and extension

On 11 June 2019, an amount of US$1.25m was repaid to SSCG and the remaining US$0.75m was extended to 31 January 2020.

Additionally, between 12 June 2019 and 14 June 2019, Annunaki repaid the RTGS$7.0m to fastjet Zimbabwe together with all the accrued interest.

At 31 December 2018, the original RTGS$5.0m was valued at US$1.1m based on management's implied exchange rate of RTGS$ 4.6923 = US$1.00. An exchange loss of US$3.9m was incurred because of the significant devaluation of the RTGS$ currency against the US$.

At the time of repayment, the RTGS$7.0m was valued at US$1.1m based on the Zimbabwean interbank exchange rate of RTGS$ 6.1200 = US$1.00. Between 31 December 2018 and the time of repayment, an additional exchange loss of US$0.7m was incurred as a result of further devaluation of the RTGS$ currency against the US$.

Devaluation of Zimbabwe's domestic RTGS currency against the US$

During the second half of 2018, a parallel exchange rate market developed in Zimbabwe for RTGS$ to US$.  In October 2018, the g