HIGH AND MIGHTY

How Co­mair stays prof­itable de­spite try­ing times

Financial Mail - Investors Monthly - - Front Page -

The cycli­cal na­ture of air­lines not­with­stand­ing, Co­mair has main­tained an un­bro­ken record of 72 years of prof­itabil­ity — which is thought to be unique glob­ally, and some­thing the Trea­sury and be­lea­guered tax­pay­ers wish SA’s na­tional car­rier could achieve.

How has the com­pany man­aged this, most no­tably in a decade in which the avi­a­tion sec­tor has shown al­most no growth and over­ca­pac­ity in the in­dus­try has per­sisted?

The an­swer is twofold. Man­age­ment has been rig­or­ous in con­tain­ing costs at every level; and the group was di­ver­si­fied into other, non-air­line, rev­enue streams. These non­air­line busi­nesses now con­tribute 27% to Co­mair’s net profit af­ter tax­a­tion.

Co­mair con­sists of four units: air­lines, hos­pi­tal­ity & tourism, avi­a­tion train­ing and avi­a­tion IT so­lu­tions.

Re­cent in­terim re­sults showed air­line pas­sen­ger rev­enue grow­ing 11% (a 5% rise in pas­sen­ger vol­umes and a 6% in­crease in av­er­age fares per pas­sen­ger). But av­er­age seat oc­cu­pancy re­mained be­low the global av­er­age of 85%, high­light­ing the ex­cess ca­pac­ity that ex­ists in the do­mes­tic in­dus­try.

Air­line op­er­at­ing costs in­creased 17%. It was af­fected by a 35% hike in the rand fuel price, which added R263m to costs, and an un­bud­geted-for R34m that arose from the back­log in main­te­nance ca­pac­ity at SAA Tech­ni­cal. This source is still a hin­drance at the be­gin­ning of the sec­ond half.

About R253m was spent on heavy main­te­nance of the fleet, much of it done over­seas.

Be­cause the main­te­nance back­log re­duced avail­abil­ity and util­i­sa­tion, Co­mair switched the main­te­nance con­tract of the new-gen­er­a­tion Boe­ing 737’s to Lufthansa Tech­nik at OR Tambo.

It will be cost neu­tral from a main­te­nance per­spec­tive, but will cut un­bud­geted-for ex­pen­di­ture on the ad­di­tional lease of air­craft to en­sure the fleet num­ber is not com­pro­mised.

Fuel ac­counts for about 30% of op­er­at­ing costs. Main­te­nance, staff, dis­tri­bu­tion and air­craft fixed costs were re­spon­si­ble for about 15% each.

Co­mair is em­bark­ing on a fleet re­newal pro­gramme to re­duce ex­po­sure to fuel price volatil­ity and im­prove prof­itabil­ity. The de­ci­sion to take de­liv­ery of two new Boe­ing 737-800 Max air­craft in Fe­bru­ary and March and to lease four Boe­ing 737-800 air­craft for fi­nal de­liv­ery by Septem­ber was based on the need to re­place older 737-400 mod­els.

Af­ter the Ethiopian air­line tragedy ear­lier in March Co­mair grounded the one Boe-

“Co­mair con­sists of four units: air­lines, hos­pi­tal­ity & tourism, avi­a­tion train­ing and avi­a­tion IT so­lu­tions

ing 737-Max 800 it was us­ing. There will be some cost im­pli­ca­tions in the sec­ond half, but these will be very slight.

But it is the non-air­line busi­nesses that high­light how far-think­ing man­age­ment has been. Food Di­rec­tions was launched to cater for the air­line’s two brands and has since been ex­panded to of­fer re­tail­ers health and other food prod­ucts. It was re­cently granted a li­cence to pro­vide third-party ca­ter­ing ser­vices at Air­ports Com­pany SA (Acsa) air­ports as well as to third-party air­lines. Bri­tish Air­ways’ in­ter­na­tional lounges at OR Tambo and Cape Town were the first clients.

The group al­ready has the largest dig­i­tal travel dis­tri­bu­tion net­work in SA, an in­vest­ment that con­tin­ues to de­liver good mar­gins. Co­mair has also in­vested in a dis­tri­bu­tion plat­form for lux­ury in­bound tourism — glob­ally the fastest-ex­pand­ing travel seg­ment, with sub-Sa­ha­ran Africa grow­ing faster than the world av­er­age.

Co­mair has al­ways in­vested heav­ily in train­ing in­ter­nal crew. Re­cently it has ex­tended this to em­brace its vi­sion of hav­ing an ex­ten­sive avi­a­tion train­ing academy with a global cus­tomer base. An A320 sim­u­la­tor was in­stalled, with another to come later this year.

Me­taco Hold­ings was ac­quired as Co­mair in­creas­ingly fo­cused on strate­gic de­vel­op­ment, or­gan­i­sa­tional de­sign and change man­age­ment.

Its client base in­cludes boards, lead­er­ship teams and in­di­vid­u­als span­ning mul­ti­ple in­dus­tries in both the pri­vate and the pub­lic sec­tor.

This is an in­ter­est­ing ac­qui­si­tion in the cur­rent cli­mate, and one that may pro­mote and un­der­pin Bri­tish Air­ways’ growth in the cor­po­rate and pub­lic sec­tor mar­ket.

The group has con­sis­tently fo­cused on us­ing tech­nol­ogy so­lu­tions to drive op­er­at­ing per­for­mance, cus­tomer ser­vice, rev­enue gen­er­a­tion and, by def­i­ni­tion, prof­itabil­ity. Given the suc­cess it has had over a long pe­riod, a de­ci­sion was made to en­ter into a joint ar­range­ment with an IT soft­ware de­vel­op­ment com­pany to com­mer­cialise Co­mair’s ex­pe­ri­ence and ex­per­tise in the avi­a­tion sec­tor. The ven­ture, Na­celle, is still in its startup phase and is yet to con­tribute to prof­its. Per­haps SAA will be their first ma­jor client?

Turn­ing to non-op­er­a­tional mat­ters, Co­mair’s dam­ages claim against SAA for an­ti­com­pet­i­tive be­hav­iour was made an or­der of court by the Supreme Court of Ap­peal in Fe­bru­ary. In terms of the set­tle­ment SAA was in­structed to pay Co­mair R1.1bn plus in­ter­est, with pay­ments start­ing that month and con­tin­u­ing un­til July 28 2022 or ear­lier.

When asked how this pay­ment might be de­ployed, man­age­ment in­di­cated pay­ment to the SA Rev­enue Ser­vice would

“Co­mair has also in­vested in a dis­tri­bu­tion plat­form for lux­ury in­bound tourism — glob­ally the fastest-ex­pand­ing travel seg­ment

be set­tled, af­ter which the com­pany would prob­a­bly de­clare a div­i­dend and use the rest to re­duce debt. It’s worth not­ing that Co­mair’s debt-toe­quity ra­tio has climbed to 86% as a con­se­quence of the fleet re­place­ment pro­gramme.

IM would be happy to see the group pass on the spe­cial div­i­dend and re­duce its debt lev­els, but oth­ers may dis­agree.

Sec­ond-half earn­ings should ben­e­fit from a drop in Co­mair’s largest op­er­at­ing cost: fuel. The re­main­ing un­bud­geted-for cost as­so­ci­ated with the main­te­nance back­log is not ex­pected to be of the same amount as the first half. In the mean­time, grow­ing re­turns from non-air­line in­come streams con­tinue to shield the com­pany from a stag­nant do­mes­tic mar­ket.

Bar­ring a sharp hike in the oil price or a fall in the rand, IM judges that sec­ond-half head- line earn­ings should be bet­ter than the 27.2c a share re­ported at the in­terim. This places the share on a for­ward earn­ings mul­ti­ple of less than 10.

Strate­gi­cally, Co­mair is in an ex­tremely pow­er­ful po­si­tion. Its fi­nan­cial abil­ity and de­ci­sion to in­vest in new, or newer, air­craft makes it the most fu­el­ef­fi­cient do­mes­tic fleet.

Ad­mit­tedly, the cur­rent eco­nomic cli­mate and over­ca­pac­ity of seats is a head­wind for all, but it is a much stiffer one for SAA and other op­er­a­tors with more aged fleets.

SA can no longer af­ford to bankroll our na­tional car­rier, and at some point some tough calls are go­ing to have to be made. Some pric­ing power may re­turn to the sur­viv­ing do­mes­tic car­ri­ers depend­ing on what de­ci­sions are taken. But Co­mair would cer­tainly be a big ben­e­fi­ciary.

For a do­mes­tic com­pany with a sub­stan­tial ex­po­sure to cur­rency fluc­tu­a­tions, to have posted earn­ings growth in what many are call­ing the “lost decade”, is a phe­nom­e­nal achieve­ment.

It bears tes­ta­ment to a man­age­ment team that has not only sweated every last drop out of its as­sets, but has pos­sessed the lat­eral vi­sion to mod­ernise its fleet and di­ver­sify into com­ple­men­tary in­come streams, mit­i­gat­ing the low mar­gin and cycli­cal na­ture of the in­dus­try.

If the coun­try’s eco­nomic growth pro­file picks up with a con­comi­tant im­prove­ment in our rat­ings and cur­rency, the sky is the limit for Co­mair.

IM be­lieves Co­mair is al­most a free call on a re­cov­ery in the do­mes­tic econ­omy, a bet­ter rand price of fuel and the pos­si­bil­ity of some pric­ing power re­turn­ing to the do­mes­tic mar­ket (through growth, a re­duc­tion in the num­ber of seats or both). IM thinks in­vestors should not wait too long to book their seats.

“Strate­gi­cally, Co­mair is in a pow­er­ful po­si­tion. Its fi­nan­cial abil­ity and de­ci­sion to in­vest in new, or newer, air­craft makes it the most fuel-ef­fi­cient do­mes­tic fleet

Pic­ture: 123RF — PETER TITMUSS

Fuel ac­counts for about 30% of Co­mair’s op­er­at­ing costs.

Co­mair’s Boe­ing 737-800 in the liv­ery of Bri­tish Air­ways (op­er­ated by Co­mair), leaves the Boe­ing fac­tory in Seat­tle for SA

Co­mair has al­ways in­vested heav­ily in train­ing in­ter­nal crew. Re­cently it has ex­tended this to em­brace its vi­sion of hav­ing an ex­ten­sive avi­a­tion train­ing academy with a global cus­tomer base. An A320 sim­u­la­tor was in­stalled, with another to come later this year.

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