Friday, 30 November 2012

How Fastjet is refining the LCC model for Africa

Fastjet, the new pan-African low-cost carrier (LCC) which launched operations in Tanzania this week, has a stated goal of "democratising" air travel on the continent by introducing affordable, reliable and safe no-frills flights. Rather than taking market share from existing regional carriers like Precision Air and Air Uganda, its business model has the grander aspiration of catalysing a regional LCC boom and enticing Africans away from road travel.

In pursuit of this goal, Fastjet has no qualms about adopting core LCC principles in its business model - charging passengers for non-essential, ancillary services such as baggage and on-board refreshments. But at the same time, it has identified areas where the European LCC model is not well suited to the African marketplace, necessitating some refinement. In the words of chief commercial officer Richard Bodin: "We have to adapt and mould the model to fit the environment, culture, market [and] distribution channels."

Fastjet's fee structure starts modestly, charging $5 for one piece of checked luggage, for example, or $1 for an in-flight coffee. The fees ramp up quickly - as is the norm in Europe - with a steep $5 per-kilo charge applying after the 20kg baggage allowance is exceeded. Allocated seating charges will also soon be introduced, says chief executive Ed Winter, though he rules out Ryanair-style measures such as charging to check in.

While European travellers have long been accustomed to ancillary fees - and how to avoid them - most Africans have little familiarity with this staple feature of the LCC model. Fastjet's $20 starting fares have therefore prompted incredulity from the Tanzanian public, resulting in misconceptions about the safety of the fleet and scepticism about the fairness of a tiered cost structure. One local reporter in Dar es Salaam asked whether the airline will charge passengers to use lavatories, as Ryanair once jokingly promised.

Winter accepts that there are cultural challenges associated with introducing the LCC model to Africa, but he insists: "We've been very clear about the ancillary side of things. We're being very clear on the website, in all of our press conferences, on Facebook, on Twitter, everywhere. I suspect there will be some misunderstandings. If you look back to the 1990s in Europe, people didn't understand at the start...But people will very rapidly get educated, and we will be sympathetic to people as they adapt and learn how to use us."

In regions such as the Middle East and Asia-Pacific, similar misgivings have prompted carriers to water down their LCC ethos, moving towards hybrid models the straddle low-cost and full-service provision. Africa's high aviation taxes make such compromises difficult for Fastjet, though Winter accepts that the African model requires some non-traditional features. Cargo, for example, is a no-go area for European LCCs due to strict turnaround targets and competition from dedicated freight providers. In Africa, this is not the case.

"At the moment we're not doing cargo, but I think you need to look at the particular market you're in," Winter explains. "Margins on cargo in Africa are a lot bigger than they would be in Europe. We haven't made a decision yet, and to start with I don't want to complicate the model. But I'm not saying no forever to cargo. If the margins are right and if you control it properly so that it doesn't destroy your turnarounds, then it's potentially worth doing."

While some strategic details have yet to be fleshed out, the logistical challenges of operating in Africa have already made their mark on Fastjet's Tanzanian distribution channels. Low internet and credit card penetration rates across Africa pose problems for the online booking processes favoured by European LCCs, so a mixture of mobile channels, sales offices and travel agent partnerships have been rolled out alongside Fastjet's website in order to broaden access.

Mobile payment systems M-pesa and Airtel Money allow Tanzanians and Kenyans to transfer money and pay for goods through the balance on their mobile phones, rather than using a credit or debit card. Setting up an account is comparatively easy for ordinary citizens - no bank account, address or proof of salary is required - and this has sent the popularity of such systems soaring. Some 20% of Kenya's GDP now flows through M-pesa alone.

"A huge amount of money goes through it, because it really suits the African market," says Winter. "If you have a credit card you need a bank account. If you need a bank account, you need an address, you need a salary. A lot of Africans just don't have all of that. It's very much a cash society in most ways. But in order to use M-pesa or Airtel Money, all you need is a pay-as-you-go phone. You go down to the local store, and you put cash on your phone, and then you can spend it."

Bodin says M-pesa payment functionality will go live in early December, while the mobile version of Fastjet's website is already up and running. The airline's call centres also give customers the option of holding seats, he notes, before paying with cash at a sales office. One channel not currently being considered is partnering with retailers and grocers - a strategy favoured by South African LCC Mango - but Bodin does not rule it out in the future. "We're picking the low, heavy fruit," he says. "The things that we know will work."

Alongside the cultural and socioeconomic challenges of operating in Africa, by far the biggest threat to Fastjet's expansion plan comes from government policy, or lack thereof. Aviation taxes in Africa are notoriously high due to the perception that only wealthy individuals can afford to fly - precisely the mindset Fastjet and future LCCs must unseat - and capital injections for airport infrastructure are conversely low.

Even in launch country Tanzania - selected ahead of Kenya, Ghana and Angola because of governmental cooperation - it is clear that the authorities could yet scupper progress. Deputy transport minister Charles Tizeba highlighted this at a press conference in Dar es Salaam before the launch, singing the praises of Fastjet with the one hand, while refusing to lower taxes and raising questions about ancillary charges with the other. Fastjet's majority stakeholder Lonrho PLC may be an effective lobbying agent, but it does not have a silver bullet.

Accepting the challenges ahead, Winter concludes: "If we came into Africa expecting on day-one to do 20min turnarounds, our punctuality would go right out the door. We've been very practical and very sensible about what we can achieve. But that doesn't mean we'll sit with it. It means that over time we'll try and help the infrastructure change; we'll help change work practices; and we'll get to the point where things can improve."