Foreign Investment Eagerly Participates In African Startups

By Cathy Buyck, Jens Flottau
Source: Aviation Week & Space Technology
May 27, 2013
Credit: Air Cote d'Ivoire

There has been lots of foreign, mostly European investment in African startups lately. Yields in Africa are high and the market is growing at above average rates, so the potential for handsome profits is real. But progress can be painstakingly slow.

FastJet is probably the most high-profile example that the reality of setting up an airline in sub-Saharan Africa is much more difficult than the dream. The low-cost carrier (LCC) launched in November 2012 with three leased Airbus A319s operating two daily flights from Tanzania's capital Dar es Salaam to Mwanza and Kilimanjaro, in the north of the country, and grand ambitions to provide a true pan-African service in a short timeframe. The set-up received a lot of media coverage due to the involvement of Stelios Haij-Ionnau, who founded EasyJet and is chairman of EasyGroup. His group holds 4.1% in the new venture, and FastJet is already listed on the London AIM exchange. FastJet's business plan includes expanding its fleet to at least five A319s by June and deploying 15 by the end of the year, with five aircraft operating in Tanzania and 10 in Kenya. The airline plans to operate up to 40 aircraft across several countries within three years. But a series of lawsuits have slowed down this lofty goal—the LCC operated on just two routes in Tanzania in mid May. These legal battles, which are complex and difficult to judge without insider knowledge, are related to the way FastJet was set up. It took on existing regional air operators' certificates and bought into defunct local airlines, bound together by a string of licensing agreements (EasyGroup has licensed the FastJet brand for 10 years). The new airline hoped this would be a good way to speed the process of becoming established, but hindsight shows that starting from scratch would have been easier.

Yet, Democratic Republic of Congo (DRC)-based Korongo Airlines proves that launching a new airline is also no guarantee for quick success. Korongo was originally founded in 2009 as a joint venture between Brussels Airlines, George Forrest International Group and local investors. The startup finally secured all necessary licenses and approvals from the DRC authorities in March 2012 and launched commercial operations one month later with one Boeing 737-300 and one BAe 146-200. Flights are operated by Brussels Airlines, which has an aircraft, crew, maintenance and insurance (ACMI) contract with Korongo Airlines. In February the carrier reduced its fleet to one aircraft after returning the BAe 146-200 to Brussels Airlines, casting doubt on Korongo's survival. The carrier promptly denied that it was in financial difficulty, with CEO Christophe Allard saying that its market share keeps increasing on its two routes and emphasizing that the 737 is better suited for the local market than the BAe 146. Korongo operates flights between Lubumbashi Luano International Airport and Johannesburg Oliver Reginald Tambo International Airport and six weekly flights between Lubumbashi and Kinshasa N'Djili Airport, three of them via Mbuji-Mayi. Korongo Chairman George Forrest in August 2012 announced plans to also add Goma and Kisangani in the DRC as well as international routes to Cameroon, Kenya, Uganda and Zambia by the end of 2012, but there has been no further word on progress.

Last month, Brussels Airlines CEO Bernard Gustin admitted that a one-aircraft operation is not sustainable. While pointing out that 10-15% of Brussels Airlines' passengers on the Brussels-Kinshasa route connect onto Korongo, Gustin remains tight-lipped on the future of the Congolese venture and whether the shareholders are committed to continue funding it. The company declines to comment on rumors that Korongo has not paid its ACMI contract since the launch and that Lufthansa, which controls 45% of Brussels Airlines, has ordered management to end the financial drain on Brussels Airlines' own struggle for profitability or pull out of Korongo.

Air Cote d'Ivoire started operations in November 2012 replacing Air Ivoire, which collapsed in March 2011. The new incarnation is 65% government owned, while Air France-KLM holds 20% and the Aga Khan Fund for Economic Development 15%. The airline launched after five months of delay but it is keeping pace with its growth plans. Air Cote d'Ivoire already serves 11 destinations in West Africa from its base in Abidjan's Port Bouet Airport with two former Air France Airbus A319s and one 70-seat Embraer 170. “In a couple of months the airline has succeeded in creating a mini-hub with two waves and a flight reliability of 95%. The feedback from passengers is very positive,” says Air France-KLM Senior Vice President for Middle East and Africa Pierre Descazeaux. “This proves that it can work when the concept is good, the business model is good and the product is good.”

Descazeaux reckons that the cost of participating in African startups can be quite high, but these are not short-term investments, he notes. “It has to be seen in the long term-strategy of strengthening our position and growing a market. Traveling inside Africa is not easy, but we think this demand will grow as the local economies grow. “There is a need for efficient regional airlines, and we are convinced this is possible,” he says.

“The main target is to serve regional routes, not only to feed Air France or KLM. Also, when you invest in a local airline or a national airline you create a strong link with that country,” Descazeaux adds.

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