2nd UPDATE: Stelios-Backed Pan-African Budget Carrier Readies For Take Off

--easyGroup-backed investment company buys Lonrho's African airline assets

--Rubicon acquires Lonrho's aviation business for $85.7 million

--Lonrho will hold a 73.7% share in Rubicon; easyGroup will own 5%.

(Adds analyst comment in 10th, 11th, and 12th paragraphs and background detail)

By Simon Zekaria

LONDON--Airline entrepreneur Stelios Haji-Ioannou's easyGroup has taken a key step toward launching the first pan-African low-cost carrier, dubbed Fastjet, to tap growing demand for international travel in the continent's fast-growing economies.

EasyGroup has tied up with Rubicon Diversified Investments, a London-listed investment company, that on Wednesday said it has acquired the aviation business of Africa-focused conglomerate Lonrho for $85.7 million in an all-share deal. Lonrho will hold a 73.7% share in Rubicon's enlarged share capital.

EasyGroup, which runs ventures from car hire to hotels and gym membership and first said it would invest in Rubicon last December, will receive a royalty from Rubicon in return for the initial 5% investment, managerial advice, and use of the fastjet.com name.

Rubicon said Fastjet will use the existing route network of Lonrho's airline, currently operating as Fly540, in Kenya, Tanzania, Ghana and Angola as a platform for expanding in West Africa before adding more destinations.

"We think it is an optimum time to go into Africa with the low-cost model," said Fastjet Chief Executive Ed Winter, previously the chief operating officer of easyJet PLC (EZJ.LN), the budget airline Mr. Haji-Ioannou founded in 1995.

Easyjet, in which Mr. Haji-Ioannou's family remains the single biggest shareholder, has become Europe's second largest budget carrier by passenger numbers after Dublin-based Ryanair Holdings (RYA.DB).

Travel across Africa is still dominated by long bus and rail journeys, Mr. Winter said. "The market is amazingly under served. It is the last frontier for aviation," he said.

Political uncertainty in many African countries, where transport infrastructure is often in a poor condition and incomes remain low, might make it harder for Mr. Haji-Ioannou and his fellow investors to match easyJet's success in Africa.

"Despite the best efforts of [Lonrho], the airline business has tended to be a source of disappointment," said Damian McNeela, an analyst at brokerage Panmure Gordon. Lonrho's aviation business, which reported total assets of $83.5 million at Dec. 31., made a loss after tax of $19 million last year.

Lonhro blamed the losses predominantly on start-up costs but Andrew Charlton at the Geneva-based Aviation Advocacy said Fastjet, like rival airlines, will encounter the same infrastructure problems which have long stifled African air travel.

"First, there are not very many airports and they are not as efficient and well-resourced [as in other parts of the word]. Secondly, it is often quite difficult to get to the airports which makes the catchment area quite restricted," Mr. Charlton said.

Safety issues related to a lack of skilled staff for air-traffic control and maintainance also make Africa a challenging place to operate, he said.

"Maybe with a low-cost mentality and a hard attitude [Fastjet] will get over some of [these] issues, but I don't think it is going to be an easy road," Mr. Charlton said.

Fastjet is yet to finalize its business plan or financing. "An appropriate fleet of modern jet aircraft may require the raising of additional funding," Rubicon said. Rubicon has cash GBP8.8 million available for investment following completion of the deal, Lonrho said.

Fly540, which carried over half a million passengers in the 15 months to 31 Dec. 2011, flies 10 aircraft, including two Bombardier CRJ 100 jets and eight 50-seat to 60-seat turboprop planes. For Fastjet, Rubicon intially intends to lease larger and more modern narrow body jets with around 100 to 150 seats such as the Embraer 190, Airbus 319 and Boeing 737-700.

Fastjet plans to start with up to three such jets, operated in parallel with the Fly540 fleet for a while before the Fly540 brand is phased out.

EasyGroup's move may yet be challenged by easyJet which for some time has had fractious relations with its founder, Mr. Haji-Ioannou. The two sides signed a "comfort letter" in October 2010 that prevents the businessman from setting up a rival airline or becoming a holder in another carrier under certain conditions. EasyJet, which has recently started flying passengers to North African destinations from Europe, declined to comment.

Rubicon shareholders will meet on June 29 to approve the deal.

At 1402 GMT, Lonrho shares were up 4.2% at 10 pence, while Rubicon shares fell 4.2% to 3 pence.

Write to Simon Zekaria at [e-mail]