Comair battles amid tough airline market

NEW entrants to the domestic airline industry are giving Comair a run for its money and eating into its market share, which analysts say is partly responsible for an expected drop in earnings for the year to June.

This week, Comair forecast an earnings decline of between 12% and 26% compared to last year, which analysts blame on a weaker rand, greater competition and rising costs despite declining fuel prices.

Comair shares slid close to 10% this week before closing at R3.30 on Friday.

Joachim Vermooten, a transport economist, said studies on the profitability and loss-making of airlines showed that fuel was not a big factor.

“Airlines, especially the dominant airlines, have the ability to pass on costs in pricing or fuel surcharges to their customers. Fuel price on its own shouldn’t really make a difference,” he said.

A Cape Town analyst said Comair — which operates British Airways and kulula — had lost market share over the past few months, particularly during the second half of its financial year. “Passenger growth markets have been up 5% and that’s just probably the leisure market coming back and going to the low-cost airlines, which now has collectively 9% of the market,” she said.

However, aircraft flying in and out of OR Tambo and Cape Town international airports had increased by 7%. “So supply would exceed demand and you’d have pressure on load factors coming through.”

She added: “Operationally the company is still strong; it invested in a new system to manage yields. I think this time it’s been a function of market share. It did benefit massively when 1time left the market . . . but now with the others coming back, the barriers to entry have dropped with the fuel price coming off.”

Comair’s competitive advantage was that it operated fuelefficient planes, she said.

Over the past year, the domestic market has seen additional capacity in the form of new airlines Skywise and FlySafair, which last month offered a promotional fare of R1 for a ticket, including airport taxes.

The latest entrant, Fly Blue Crane, which has former SAA CEO Siza Mzimela among its shareholders, launched its first commercial flights on Thursday. Chief operating officer Theunis Potgieter said the airline would not focus on the golden triangle routes — Durban, Johannesburg and Cape Town — where Comair and SAA, among others, compete. It will focus on routes to cities such as Bloemfontein and Nelspruit.

“There’s been very little additional capacity deployed into the secondary markets in the past few years, but the fare has continued to move up. We think we’d be able to generate some traffic. We don’t see ourselves as a low-cost carrier, but we’re positioning ourselves around 20-30% below the current incumbent carrier,” he said.

“There’s a restructuring of the market that’s taking place. Average fares have come down. Carriers will have to adjust their cost structures to be able

Operationally [Comair] will have to sit tight . . . and reinvent themselves

to have a cost structure that you can operate at lower revenue level.”

Vermooten said the International Air Transport Association reported record profits, as a mismatch between capacity in the global market and demand had been reversed. The opposite was true in South Africa.

However, smaller entrants were expanding well “where they seek routes that are underserved”, he said.

The market is expected to remain tough.

The analyst said: “With consumers under pressure it’s hard to know. Kulula is transforming into a more business-type airline as well. In difficult times, people are going to scale down, so kulula might benefit from that perspective. Operationally [Comair] will have to sit tight . . . and reinvent themselves.”

Comair will publish its fullyear results on September 14.