Price wars cannot be sustained – Comair
SAA bailout case dropped
LOW-COST airline Comair will not challenge the Treasury’s recent decision to grant SAA a R5bn guarantee.
The company said during the presentation of its results for the year to June that it had tried to fight the government bailouts to the national carrier to no avail.
Comair had previously bemoaned the government’s continued financial support to SAA, saying the move tilted the proverbial playing field in favour of the national carrier.
Last year, the airline lost a high court challenge to the R5bn government guarantee for SAA in 2012.
Comair owns low-fare airline kulula.com and is also the operator of the southern African franchise of British Airways.
Comair financial director Kirsten King said the company would now concentrate on protecting its market share as low price wars and the weakness of the rand had hampered its profits.
“We tried to challenge the guarantee. We had our say,” she said.
King warned that the price wars that had come as a result of the entry of new players into the South African market had become unsustainable.
She said kulula.com had been forced to lower its fares and to adopt a “volume-based” strategy which entailed increasing the volumes of passengers at relatively low prices in order to protect its market share.
“But that is not sustainable. We all have the same cost base. We all have to buy fuel and have to adhere to the same safety standards,” said King.
Financial results
“The entry of a new airline with cheap fares is not a problem if there is no response from existing players. It really does not matter. But if one or more of the existing players respond, the whole market gets dragged (into a price war).”
Recent entrants to the local lowcost airline market include FlySafair and cash-strapped Skywise.
Recent entrants to the local low-cost airline market include FlySafair and cash-strapped Skywise, which suspended its operations last November.
Comair said South Africa’s low-cost carrier segment experienced overcapacity during the period under review, resulting in a 10 percent volume growth in the domestic passenger market.
But it said profits after taxation for the year declined by 12 percent from R218.8 million in the prior year to R193m while headline earnings a share had come down from 47.9c a share previously to 36.5c a share.
In the past financial year, Comair also battled a weakening of the rand to the dollar.
King said while the company reported in rands, some of its costs were denominated in dollars. The dollar-denominated costs included fuel costs because they are linked to the dollar price of oil. “Fuel is 18 percent to 20 percent of our costs,” she said.
The company was also exposed to the dollar through the so-called distribution costs.
Low oil price
“These are costs associated with being linked to a global distribution system,” she said. King said that 30 percent of Comair’s costs were dollar based. “Last year, they were at 40percent. They went down because of the fall in the oil price,” King said.
She added that the low oil price had prompted Comair to ditch its policy of hedging a portion of its fuel requirements to mitigate oil price fluctuations. “We are not hedging at the moment and we will not be hedging in the foreseeable future,” she said. “High crude oil prices lift airlines’ input costs.”
In the past financial year, Comair took delivery of three new Boeing 737-800s, with another scheduled for delivery in November.
The company has also ordered eight Boeing 737-8 Max aircraft for delivery from 2019 to 2021.
The airline said these upgrades would continue to improve operation efficiency and customer comfort, while enhancing potential revenue per flight.
Comair shares were unchanged at R3.30 yesterday.