As Comair’s profit soars over the horizon are there lessons to be found for SAA?
In a year in which two big European airlines (Alitalia and Air Berlin) went bust and in which our own South African Airways (SAA) is so insolvent and so cash-starved that it’s struggling to pay suppliers, it’s quite startling to see a soaring 54% increase in profit from an airline company.
That is the number that JSElisted Comair reported for its year to end-June, a year in which its earnings before interest, tax, depreciation and amortisation (ebitda) went beyond R1bn for the first time, and cash generated increased by 28%.
Admittedly, much of the bounce came from a return to normality after 2016’s foreign currency losses on a dollar loan and the closing out of its oil hedges. But the underlying results weren’t too bad either, with the group again increasing its revenue faster than its costs to boost its narrow profit margins and lifting the contribution from its nonairline businesses to 20% of earnings.
In a tough industry, Comair is one of the few with an unbroken record of profitability. Asked for the recipe, CEO Erik Venter emphasises, first, that since 2008, SA’s domestic airline market has shown, to all intents and purposes, no growth. Domestic passengers are still sitting at the 13.5-million to 14million a year they were in 2008, despite the occasional brief blip. Second, Venter goes back to 2001 benchmarks. Since that date 16 years ago, Comair’s average airfare has increased by 27% in total but consumer price inflation (CPI) has been 106% over the period and airline inflation has totalled 240%.
In other words, revenue increased 1.5%, while airline costs increased about 9% a year. For Comair, then, the crucial ingredient to maintain its (slim) profit margin is to take out costs equivalent to the CPI inflation rate “every single year”, says Venter.
So, that is what Comair does. It has the same headcount of 1,950 people it had in 2001 and flies the same number of aircraft. However, it has 68% more capacity because the aircraft are bigger — and crucially, they are much more efficient, thanks to their larger size, which enables costs to be spread over more seats and their ever-increasing fuel efficiency. Comair buys one or two new aircraft each year. Its new Boeing 737-800s are 26% more efficient than the 737400s they replaced — and the next generation of aircraft will use 15% less fuel than even the current generation.
In addition, Comair, which has about 40% of SA’s domestic market to SAA’s estimated 23%, constantly seeks efficiencies in areas such as information technology and data capture.
And while it expects the airline business to stand on its own two feet, the growth, says Venter, has to come from elsewhere — which is why Comair has in the past two to three years started to look to its nonairline businesses for growth. The businesses — in flight and crew training, catering, travel, and socalled SLOW airport lounges — offer plenty of opportunities and Comair will see which of them takes off, says Venter.
So, what does the Comair story have to tell us about SAA and its woes? Leave a gap between revenue and cost inflation for a few years, and you get losses doubling each year as they have at SAA in recent years. Venter reckons that five or six years ago, it might have been possible to sell the state-owned airline and/or turn it around. Now it’s not clear how it would be possible to close the enormous gap between revenue and costs, which would involve politically unpalatable decisions, as well as the kind of restructuring that was necessary, for example, to fix KLM-Air France, which had to shed about a third of its workforce.
As it is, SAA employs about 12,000 staff but has little more than double the number of aircraft that Comair has, and on average, SAA pays 50% more than anyone else in the SA industry, in the case of pilots sometimes double or triple that. Even so, Venter reports Comair doesn’t lose people to SAA, despite the lure of money.
He doesn’t expect SAA’s losses to be stemmed anytime soon and Comair has already tried to challenge the billions of rand of guarantees the government has made available to SAA on the grounds that these are subsidies which discriminate against Comair and other competitors.
With SAA unlikely ever to be able to pay back its loans and the government now having to activate those guarantees and cough up the cash, taxpayers will increasingly have to foot the bill for the state-owned airline’s huge efficiency deficit. Meanwhile, if SAA starts cutting back on its flight schedules, rivals such as Comair will benefit.
COMAIR HAS IN THE PAST [FEW] YEARS STARTED LOOKING TO ITS NONAIRLINE BUSINESSES FOR GROWTH