Getting that Jet off our Back

By Travis Johnson, Stock Gumshoe, June 13, 2012

Africa is probably the last great frontier for regional air travel, with a hugely underserved and increasingly urban population, but that doesn’t mean that investing in airlines is necessarily a lot more profitable in Africa than it is anywhere else … the list of failed airlines, or companies that get bogged down in the massive capital costs, is a long one.

So it’s been with some concern that I’ve watched my favorite African conglomerate, Lonrho (LONR in London, LNAFF on pink sheets), churn cash into building up their still very small Fly540 airline — it’s been very hard to picture a small company achieving any kind of profitable scale without huge capital expenditures to buy a lot more airplanes and develop more airport space. They’ve arguably done pretty well — it’s not profitable, of course, but they have set up operations in four countries and gotten through some bureaucratic headaches to get approval to operate in key hubs, and they are flying a discount airline with a few turboprops and one small jet.

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But now, finally, they’re moving forward with partnering with an airline expert, getting a better name, and offloading some of that capital cost onto new investors — Lonrho is selling Fly540 to the related blank check company Rubicon in London, and Fly540 and Rubicon are both likely to be renamed FastJet, which will partner with veteran budget airline investor Sir Stelios Haji-Ionnou (who founded easyJet) and will be able to raise funds and debt as a dedicated low-fare airline for Africa. It’s still going to be controlled by Lonrho, which will own roughly 74% of Rubicon/Fastjet, and the deal was made for stock, not cash, so it’s not an instant boon for Lonrho — but it does move some of my concerns over airline investment off to the side of the plate a bit. This was basically a reverser merger into a shell company, combined with a spinoff, so they also ended up probably enriching their overpaid CEO a bit as well during the dance with Rubicon which has now been going on for about six months, which is a concern (and part of the reason one of the Lonrho directors is resigning), but I still think the fundamental business of the company is solid. Do keep an eye on Lenigas and the management team, though — they’ve a ways ...

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