Airport plans in holding pattern

But care needs to be taken in choosing where to put your money-market cash

● Anyone remember the new Lanseria smart city project that President Cyril Ramaphosa highlighted in his February state of the nation address?

It’s still there on the presidency’s list of infrastructure investment projects. But for the airport that is to anchor the new development, the environment has changed pretty fundamentally, and it’s waiting for the aviation market to settle before it embarks on the five-year infrastructure plan it had in mind, which includes building a new 4km runway that could land the largest jets.

Nor is it alone in putting infrastructure expansion plans on hold. The Airports Company SA (Acsa) has responded to the ravages wrought by the Covid crisis on the aviation industry by cutting the investment spending it had planned between 2022 and 2026 from more than R7bn a year to less than R1bn, according to a presentation to stakeholders seen by Business

Times.

Like the rest of the industry, airport operators are eagerly awaiting the opening of

SA’s international borders — as well as the resumption of flights by airlines that are in business rescue. Acsa has warned that if the borders are not reopened by October, the important northern hemisphere winter airtravel season will be lost.

For Lanseria, one of only two privately owned airports in SA with international status, the issue is even more urgent — its international status was revoked by the department of transport at the start of the lockdown. That means that even though it has always been a leading player in the “general aviation” market for international and local charters and private flights, it has missed out on the international cargo and medical evacuation flights that have been allowed, with non-scheduled special repatriation, medivac and other authorised flights flying out of Acsa’s OR Tambo.

Domestically, though activity levels in its general aviation business have picked up strongly, Lanseria is still flying just two scheduled commercial flights daily — by FlySafair. It used to do 23-24 flights a day prelockdown. South African Airways-owned Mango pulled out earlier this year and Comair — the first airline to fly scheduled domestic flights out of Lanseria in 2006, under the Kulula brand — is still in business rescue.

But unlike rivals, Lanseria, which has strong shareholders in the form of the Harith-managed Pan African Investment

Businesses are still very nervous about the economy

Fund, the Public Investment Corporation and a BEE consortium led by Nozala, is not complaining of liquidity troubles.

Lanseria CEO Rampa Rammopo said it is pressing ahead with plans to extend its terminal building and grow from just under 3million passengers a year to 6-million by 2028. It’s also building a multi-storey parking lot. In the long term, if the smart city project comes off and plans to extend the Gautrain go ahead, it could grow to 40-million passengers a year.

But passenger numbers are not expected to get back to pre-crisis levels for another four years — which is one reason Lanseria and Harith were keen to buy Comair, as Business Times reported last week. Rammopo said it was a strategic move on Lanseria’s part and would have established a base for the airline and airport to launch new routes.

“It’s unfortunate that we didn’t get to preferred bidder status, but we are still going to explore opportunities,” he said.

The crisis has presented new opportunities for Lanseria’s general aviation business. “We are seeing right now that more people who can afford it prefer charter services — people are still hesitant about flying and there’s a move away from commercial. Once international borders open, the charter guys will do well,” Rammopo said. “And most international private jets come to us.”

There are also opportunities in maintenance, as well as in pilot training, once international borders open. SA offers some of the world’s best pilot training, much of it out of Lanseria, Rammopo said.

Since the current owners bought the airport in 2013 they have increased from 1.7million passengers a year to just under 2.4million in 2019, giving them 15%-20% of the domestic market. The airport will continue to focus on attracting low-cost carriers.

Its model is different to Acsa’s in that Lanseria itself provides all the ground handling, maintenance and fuel supply services that elsewhere are outsourced. It controls its own slots, and its charges are not regulated as Acsa’s are.

Meanwhile, the National Union of Metalworkers on Thursday applied to the labour court in Johannesburg for an urgent interdict to compel the management of Comair to pay outstanding salaries and to continue to make medical aid contributions. Comair has not paid salaries since June 1, shortly after it went into business rescue in May, and the business rescue practitioners last week told employees they would be without medical cover from September 1, Numsa said.

● South Africans have about R420bn — or 20% of all the money invested in unit trust funds — in money-market funds.

Recent interest rate cuts have, however, taken money-market yields down to between 3.8% and 4.9% this week — not far above the 3.2% inflation rate for July. Investors who have used their interest exemptions also need to pay tax on this interest.

You can park savings in a money-market fund for emergencies, for living costs or because you plan to spend it soon, but longerterm savings now need to shift to higherearning funds.

The income-focused funds that claim they can hunt around for the best returns are the multi-asset ones that make calls on which part of the fixed-income market offers the best yields or move up or down the yield curve. They can also invest up to 10% in shares — typically those delivering stable dividends — and up to 25% in listed property.

Marriott, Sasfin and Absa Investments all spoke at the recent Meet the Managers conference for financial advisers about the need to make these tactical decisions about fixedincome investments to earn inflation-beating returns.

The returns of these funds, however, show that the calls many managers made have not worked well over the past five years, and their average returns over many periods are worse than those of money-market funds.

Duggan Matthews, investment professional at Marriott, says among the more than 70 income funds and multi-asset income funds with a five-year track record to the end of June, the best performer delivered on average 9.8% a year and the worst 1.3% a year.

Only 19% of these funds beat the average money-market return by one percentage point, he says.

James Turp, head of fixed income at Absa Investments, says the key to choosing a good income fund is to understand your fund and its manager’s “credit signature”, whether it moves up and down the yield curve as it changes, the issuers thP e Rfund is investing in, how diversified the fund is and how liquid the issuers’ assets are.

Your manager should have experience in managing fixed income through various economic cycles, and responding to shorterterm volatility, he says.

Turp says banks will now only pay you 3.75% for a one-year deposit as there is a lot of cash in the system.

However, 10-year bonds have yields of 9.3% and you can get another two percentage points if you take a bond with a term of up to 20 years.

This makes the yield curve very steep, but as juicy and attractive as the yields are for longer-term bonds, there is significant risk of a failure to repay debt over 20 years, Turp says. But there are opportunities with less risk lower down the curve, as yields start to rise sharply when the maturity date is longer than three years, he says.

For example, there are good yields on longer-dated subordinated bank debt. It is likely that banks will continue paying as they are well regulated and healthy enough to see the crisis out, Turp says.

Absa’s Tactical Income Fund has delivered 8.7% a year for the past three years without losing money over 12 months.

Marriott’s Core Income Fund is one of the few funds that has beaten money market returns by more than 1% a year over five years.

Matthews says the fund’s success lies in its two-year investment horizon and its flexible mandate to move along the yield curve.

Over the past five years, the fund seized opportunities such as that to invest about two-thirds of the fund in fixed deposits from the five big banks in 2015, when yields were on average 9.4% and interest rates were 6%.

Matthews says that banks were paying well because they wanted to be well capitalised heading into an expected credit rat

ings downgrade.

Selling some of these investments when yields fell after Cyril Ramaphosa became president locked in capital gains, he says.

The fund has returned 8.65% a year over the past five years, according to Morningstar, and has not had negative returns over any two-year period for the past decade.

Matthews says the Covid-19 pandemic corresponding with ratings agencies downgrades of the country’s bonds led to panic selling and one of the best opportunities in the bond market in 20 years. In particular, the yield on the government’s R186 sevenyear bond has increased from 8% to 12%, he says.

While the country’s debt is on a very unsustainable path, there will be a good period of time before a debt default, as the government will be obliged to implement a number of measures from increased taxes to freezing government salaries and selling of state assets before it can default, he says.

Bonds with a maturity of less than 10 years, and in particular the seven-year bond, therefore offer great opportunities that could even deliver double-digit returns if bond prices recover, he says.

Philip Bradford, chief investment officer at Sasfin, says the local bond market that allows you to lock in returns of inflation plus 9% is our best investment export, while the outlook for local and global equities is uncertain. As global equities are expensive, returns are likely to be low, he says.

Bonds have traditionally outperformed inflation by 1.9% a year, but over the past five years they have been able to outperform by 2.5% and have beaten equities by 5% a year for the past five years.

Bradford says bonds are well positioned to continue to outperform and offer a unique opportunity despite the risks and the noise. He says investors in cash are giving up 6% relative to bonds.

The Sasfin BCI Flexible Income Fund has returned 9.86% a year over the past five years and has never had a negative annual return despite the two worst sell-offs in the bond market, Bradford says.