Financial Mail - Investors Monthly
HIGH AND MIGHTY
How Comair stays profitable despite trying times
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