Low cost regional airline for passenger and cargo

by Pussen Joachim Tabengwa
(Cape Town, South Africa)

In South Africa market factors favour inauguration of a new low cost regional airline to meet the demand for additional, higher quality passenger and cargo service linking South Africa with the rapidly expanding markets of Southern Africa Development Community (SADC) region and West Africa, and linking Eastern and Central Africa destinations, via OR Tambo International and Cape Town International Airports hubs, to domestic, regional and international destinations.

Destiny Airways (Pvt) Ltd a private company in Cape Town, South Africa trading as Destiny Airways has plans to develop and launch a low cost regional airline for domestic South Africa and African regions. Mr Pussen Joachim Tabengwa, Founder and Director of the company and associated companies and advisors, local and international has developed a Business Plan, Marketing Plan and Financial Projections for the proposed airline. Mr Tabengwa has been working towards setting up the airline since 2009 and now feel able and prepared to launch the airline enterprise. The process has taken many years of planning, or re-planning for the correct approach to be taken in the first instance.

This new airline Destiny Airways will base its business and marketing strategies on achieving high, and profitable, load factors through absorption of unmet demand in three key air-traffic categories: unserved and under-served routes on which high unmet demand currently exists or can be readily developed; serving key niche markets where demand is either unmet or poorly served; and meeting peak traffic demands on certain key regional, seasonal, and variable routes where very high load factors can be predicted despite existing but lower-quality competition, or where competition cannot meet the demand.

In addition, Destiny Airways will be designed around, and operated utilizing, the most up-to-date electronic, informational, and aviation technologies to ensure low operating and marketing costs, maximum efficiency in deployment of its resources, and a high level of customer service and convenience. And it is this final element - dedicating the airline, its staff, and its organization to providing a high level of customer service and convenience, and efficiently meeting the needs, wants, comfort, and safety of the passenger - that will assure the proposed airline's rapid acceptance in the marketplace and its long-term growth and success.

Destiny Airways will maintain a "mean-and-lean" operation while still meeting the needs and desires of the traveling public, with the right fares. In short, the goal of this new airline is to be known to the passenger and the cargo customer by its proposed motto: "Connecting Southern Africa!" ‘Connecting people, places and events’.

Primary financial results anticipated during the first year of operations include:
▪ Average passenger load factors in the 60-80 percent range, depending on route and season, reached within the first year of flight operations, and increasing thereafter to the 75-90 percent range.

▪ Revenues approaching R390,000,000 (30 million USD) within the first six months of flight operations, exceeding R845,000,000 (65 million USD) by the end of the first year, R1,079,000,000 (83 million USD) in the second year of operations, and nearly R1,222,000,000 (94million USD) in the third.

▪ A gross operating margin of close to 10 percent achieved within the first year of operations, reaching more than 10 percent by the third year, and with steady growth enabling rational expansion of the airline thereafter. Even in the first year of operations, a pre-tax profit of R85,267,000 (6,559 million USD) is anticipated. This is applying a very conservative business model, and is achieved on an initial investment of less than 9 million USD, yielding a return on equity of 18 percent.

A key element contributing to the success of Destiny Airways will be its organizational and management team. Leading this team is XYZ Consulting an Associate Member of Oliver Wyman Consulting based in Washington D.C. and host of companies in the aviation industry and which knows the region and its business needs. Destiny Airways together with its partner companies and associations throughout the countries of SADC region and beyond, identifies business and profit opportunities and develops projects and strategic partnerships to implement and benefit from them.

Funding Proposal
Destiny Airways Corporation is seeking Senior debt (52%) of the project costs as a direct loan as initial funding amounting to (US$8,8M) ZAR114,400,000. Small Enterprise Finance Agency (SEFA) is requested to provide Bridging Finance to cover Professional fees and Due Diligence consisting of Preapproval Services and Transaction Services for Senior Debt.

Destiny Airways' interest and ownership in the proposed airline will transfer first to a yet to be identified foreign equity partners a 25% equity stake in the company (US$4,00M) ZAR52,000,000. Further funding will be sought from National Empowerment Fund (NEF)/Public Investment Corporation (PIC) as subordinate debt/equity valued at ($4,00M) ZAR52,000,000 which is 25% of Overall funding requirement of ($16,80M) R218,400,000 (Rate 1:13). Nedbank is already providing banking services and will be requested to provide working capital (US$1,00M) ZAR13,000,000 including property, equipment and vehicle facilities. Insurance services will be provided by Old Mutual.

Due to current South Africa requirements that South African nationals hold the majority interest in a South African-flagged carrier, and the importance of a South African Air Operators Certificate (AOC) to the new airline's overall business plan, a majority ownership stake in the new airline, either directly or through "Destiny Airways," must be by South African nationals.

Joining the Destiny Airways team are aviation, finance, and marketing experts with long and successful track records, including extensive experience organizing and managing other start-up airlines of both a regional and global scope. This organizational and management team, which is described in greater detail in the section of the business plan dealing with the Management Team, will help reduce the risk and ensure the success of the proposed new carrier.

Market research and projections indicate that air travel to and from Johannesburg O.R. Tambo International Airport (ORTIA} and Cape Town International Airport (CTIA) is sufficient to provide a new carrier with excellent revenues in its first full year of operation, utilizing 6 Boeing 737 aircraft and selected short and medium-haul routes. These sales figures are based upon average load factors of 70%. We propose lease of aircraft from Boeing Capital Corporation and other reputable aircraft Lessors.

Destiny Airways is targeting both leisure and business travellers in South Africa, SADC and other African regions. Annual air travel data from the Airports Company of South Africa estimate 39.7 million people departing and arriving through South Africa’s airports in 2015/16. Destiny Airways is targeting 1,000,000 passengers, about 3% of the air travel market in South Africa, in the first year of full operation 2018.

We are looking for annual revenue targets of more than R845M (US$65,00M). Our strategy is to identify several exit points for funding and investment from “seed” to “bridge” to “IPO” progression. Projected sales figures will produce respectable net profit in the first operational year followed by steady-state operational profit targets of 8% and 11% in the second and third years respectively.

The accompanying chart illustrates the growth and profit potential

Profitability Statistics
EBITDA (USD) 6 559 6 777 9 990 14 743 19 126
EBITDA (%) 10% 8% 11% 13% 15%
Net Income (USD) 2 482 2 367 4 885 8 328 12 685
Net Income (%) 4% 3% 5% 8% 10%

Return Statistics
Project IRR 29%
Project NPV 24214
Equity IRR 19%
Equity NPV 658

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