Comair keeps flying high, marks 72 years of profit

While state-owned carrier SAA is hoping for a R21.4bn bailout from taxpayers, Comair, which operates the BA brand in SA, has delivered an unbroken 72-year profit record.

SA’s only JSE-listed airline, which also runs kulula.com, defied a weak economy, rising fuel prices and an oversupply of seats in the SA market by keeping a lid on its costs and introducing newer and more efficient planes.

State-owned SAA, on the other hand, has not been able to renew its fleet, meaning it has not been able to close the gap between costs and revenues per unit. This gap grows exponentially with each year as aircraft age. New aircraft burn 14% less fuel by volume, while carrying more passengers.

Comair’s performance is in stark contrast to some of the state-owned enterprises that are operating in the same field, which are desperate for cash injections from the government, posing a danger to the country’s sovereign credit rating. SA Express has asked for R1.74bn.

Adverse domestic conditions were reflected in Comair’s airline operating costs, which rose 7%. The biggest cost driver was a 14.2% increase in the price of fuel, the company said. Fuel represents one of the biggest expenses for the industry.

Brent crude reached a threeyear high of more than $80 a barrel in May. At the same time, the rand declined 17% against the dollar in 2018, after the optimism that initially accompanied the inauguration of President Cyril Ramaphosa evaporated.

A weaker rand increases the price of imported goods.

“The weak economy will maintain pressure on consumer spending, while the oversupply of seats in the domestic market suppresses pricing across most routes,” Comair CEO Erik Venter said on Tuesday.

The company’s airline passenger revenue nevertheless rose 7%, resulting from a combined increase of 4% in passenger volumes and a 3% increase in the average fare per passenger. Its seat capacity over the period rose 3%.

Comair reported revenue of R6.5bn in the year to June, from R6.064bn a year ago on Tuesday, which yielded a profit of R325.6m from R296.97m a year earlier — the highest after-tax profit in the company’s history.

Headline earnings per share of 69.8c were up 4% from a year ago. SA’s lacklustre economy kept seat occupancy at 76%, below the global average of 80%.

The International Airline Industry Association said this week it expected the global airline industry to grow for a fourth consecutive year in 2018. It expected passenger volumes to increase more than 6%.

This, however, would not be the case for SA, Venter said. Comair would increasingly rely on its non-airline businesses.

Comair’s non-airline businesses, which include training facilities extended to other airlines, an IT development and its hospitality lounge businesses, contributed 25% to combined revenue over the year, the company’s statement shows.

Aviation analyst Joachim Vermooten said it was a “clever” decision by Comair to adjust its operations to the conditions in the transport market, which was distorted by state aid to SAA.

“Margins are better in the non-airline ancillary businesses where interference by the state does not affect business.”

Venter said there was further room for improvement at Comair. “While profit for the year was good, we’re still not achieving the margins that will allow for the optimum pace of upgrading our fleet.” Comair was well placed due to its “strong brands”, cost management and diversification strategy.

Political as opposed to economic factors are the major downside risks to the airline industry and many carriers will continue to grapple with politically driven objectives, says Kapil Kapa, the CEO at the Centre for Asia Pacific Aviation.

Uncertain global politics and rising oil prices are expected to generate challenges for carriers, including SA Airways, and the sector could see a big shakeup over the next three years. A tougher outlook for the global aviation sector comes as SAA grapples with a financial crisis that poses a risk to the fiscus, and SA’s sovereign credit rating.

SAA reported that its 2017/2018 financial loss was R3bn worse than expected, at R5.7bn. SAA saw sales plunge 21% on domestic routes, 11% on international routes and 6% on regional routes.

SAA, which has recently undergone a board revamp and the appointment of a new CEO, is pursuing a turnaround strategy that includes rationalisation of routes, and may lead to the introduction of a strategic equity partner and job cuts.

GM of operations at SAA Zuks Ramasia said route rationalisation was beginning to show results, while the carrier also found success in its offering of cabin crew and pilots to other airlines on contract.

“What we had was a market that was overly saturated. What we need to do is price correctly and find the right routes. We are starting to see green shoots as a result of this,” he said.

SAA has indicated it will need an injection of R21.4bn over the next three years, and finance minister Nhlanhla Nene is expected to give further details on the state of the airline in the medium-term budget policy statement in October.

Globally, the industry is still expected to be profitable in 2018 for the fourth consecutive year in a row, but Africa is expected to buck the trend and post a loss due to high operating costs, International Air Transport Association (Iata) head of industry analysis Andrew Matters told an Aviation Day conference in Mauritius.

The industry was being squeezed by rising costs and an increasingly uncertain operating environment.

Iata CEO Alexandre de Juniac said rising interest rates in the US and EU were not yet having any effect on airline financing.

Currency volatility and oil prices were “far more overwhelming factors”, he said.