Comair profit recovers on the back of reduced competition and successful transformation programme
South Africa’s Comair has bounced back to report a ZAR227.5 million (USD22.8 million) net profit for the financial year to 30-Jun-2013 as the benefits begin to flow from reduced domestic competition and an 18 month transformation strategy, including the implementation of the Sabre IT platform, a freeze on all non-critical costs and the arrival of next generation 737-800 aircraft.
The Johannesburg Stock Exchange-listed carrier has benefited from the demise of domestic LCC competitor 1time in Nov-2012 which significantly reduced capacity and has allowed fares to increase substantially as the market returned to a two-group duopoly with South African Airways (SAA). The competitive reprieve looks to be short lived, however, with SkyWise and FlySafair both poised to launch services on the golden Johannesburg-Cape Town route.
Comair CEO Erik Venter remains confident that the investments over the past 18 months have taken the carrier to a new level of efficiency and built a sustainable foundation.
“Our much improved infrastructure as well as our reputation and on-going focus on safety, customer service and efficiency have built a sustainable foundation to accommodate growth opportunities and ensure that Comair continues to play a major role in the Southern African aviation and travel industry,” Mr Venter said.
Comair profit bounces back from its toughest year in history
Comair’s tax-paid profit of ZAR227.5 million (USD22.8 million) for FY2013 marks a strong recovery from the ZAR7.7 million (USD772,500) profit achieved in FY2012, which it had labelled as “the toughest financial period in the company’s history”. The result was achieved on a 29% increase in total revenue to ZAR5.4 billion (USD541.1 million).
The improvement in revenue was largely driven by increased ticket prices in response to exchange rate related cost inflation, as well as improved inventory management.
But operating costs of ZAR4.8 billion (USD480.9 million) were impacted by high fuel costs and the rapidly devaluing ZAR.
“The escalation of the dollar oil price since 2011 was exacerbated by the rapid devaluation of the rand against the dollar, impacting on the rand fuel price as well as various hard-currency based maintenance, lease and distribution system costs. The fuel efficiency of our new 737-800 aircraft, as well as the termination of some dollar-based leases on aircraft that they replaced, helped to marginally reduce exposure to the currency and fuel price,” Mr Venter said.
The exit of LCC competitor 1time also helped to restore load factors to prior year levels, as the Comair and SAA groups gradually increased capacity by only about half of the approximately 43,000 one-way seats per week operated by 1time in Jun-2012.
Strong cash generation resulted in a cash balance of ZAR778 million (USD77.9 million) at 30-Jun-2013 and earnings per share turned around from just ZAR1.6c (USD0.16c) in FY2012 to ZAR47.0c (USD4.7 million) in FY2013. Investors will be paid a gross cash dividend of ZAR10c (USD1c) per ordinary share.
However, Comair states that despite the improved earnings, its net profit per passenger of ZAR45 (USD4.51) remains low relative to the capital investment required.
Comair said it held about a 39% share of the domestic market, split between Kulula with about 21% and British Airways about 18%. The SAA Group held the remaining 61% including its LCC Mango, SA Airlink and South African Express Airways.
Comair profit summary: FY2013 vs FY2012
Transformation strategy pays off
Comair’s profit improvements were driven by an 18 months transformation project launched at the end of 2011 to address higher operating costs associated with rising fuel prices and the effects of the falling ZAR. The measures included a freeze on all wages and non-critical costs.
The carrier also implemented a new IT platform from Sabre which has improved revenue integrity, inventory management and optimised ticket pricing, as well as improved productivity.
Four new 737-800 were also delivered towards the end of 2012 and were providing a 24% improvement in fuel costs compared to the 737-400s they replaced.
Kulula and British Airways expand Comair’s African footprint
Comair expanded its route network with Kulula launching Johannesburg-East London with 13 frequencies per week against 40 frequencies offered by SAA. Kulula replaced 1time on the route.
Johannesburg to East London (seats per week, one way): 19-Sep-2011 to 2-Mar-2014
The full service British Airways franchise launched nine times weekly Johannesburg-Maputo services in May 2013 competing with SAA and LAM Mozambique who joust for the top position on the route. Qatar Airways will compete directly on the route from late Oct-2013 when it receives fifth freedom rights on its existing three times weekly Doha-Johannesburg-Maputo service.
Comair expected the new British Airways services to be popular with business travellers, while Mozambique was also becoming an increasingly attractive tourism destination.
Johannesburg to Maputo (seats per week, one way): 19-Sep-2011 to 2-Mar-2014
The route additions take Comair’s combined brand network to 12 destinations.
Comair route map
SkyWise and FlySafair plan to enter the domestic LCC market by the end of 2013
Comair and SAA face a return of competition on the prized Johannesburg-Cape Town route with SkyWise and FlySafair both planning to launch services by the end of 2013.
Domestic fares rose sharply after former operator on the route, 1time, was placed in liquidation, but SkyWise has reportedly said it will reduce fares by about 25% when it commences services on the Johannesburg-Cape Town route. The cheapest return fares on the route are about ZAR1,800 (USD180) offered by Mango and Kulula.
SkyWise has already loaded schedules into the GDS dating back to mid Aug-2013, offering 3,840 one-way seats per week, after it was awarded its AOC, but it has not yet actually started operations. The carrier has previously stated it plans to launch with three times daily services using two leased 737-300 aircraft. But based on the capacity listed by Innovata, a four times daily services appears more likely using the aircraft type.
SkyWise was founded by former 1time executives Rodney James, Glenn Orsmond, Michael Kaminski and ex-Sun Air MD Johan Borstlap soon after 1time ceased operations.
See related reports:
- South African Airways and Comair could face new LCC competitor following demise of 1Time
FlySafair fends off Comair’s attempt to block the start-up airline's plans to launch domestic services
FlySafair has successfully fended off an attempt by Comair to scupper its plans to launch 10 times weekly frequencies on the Johannesburg-Cape Town route with two 737-400s by the end of 2013.
Comair reportedly issued an objection to award FlySafair's licence to operate domestic services claiming FlySafair exceeded the country's limit of 25% foreign ownership and alleged its licence application contained "inconsistencies." But South Africa's Air Services Licensing Council has dismissed objections.
FlySafair is an LCC subsidiary of long established broad-based South African aviation company Safair which has been in existence over 40 years, providing aircraft leasing, charter operations, maintenance and training services.
Safair has previously been contracted by other South African carriers as a back-up provider to operate schedules when their own aircraft were out of services for maintenance or crew shortage reasons.
Safair CEO Dave Andrew said FlySafair represented a "natural evolution" of the company's business and it was expected to stimulate growth in the South African domestic market.
Mr Andrew said the airline would announce a launch date once its call centre and website were operational.
Comair signals further fleet orders for delivery beyond 2018
The next year will be the first full year of operations of the new 737-800 fleet and Comair has signalled it may place further fleet orders for aircraft deliveries beyond 2018.
Comair took delivery of four 737-800s for the Kulula fleet in the first half of the financial year and expects to take delivery of the remaining four on order in late 2015. The 189-seat aircraft are also bigger than the 737-400 they replace, offering greater revenue generating potential and lower maintenance costs.
Comair also received on 09-Sep-2013 the first 737-800 to be deployed with its British Airways operation. The carrier plans to replace six 737-300s and nine 737-400s currently operated under the British Airways brand with 737-800s. The new aircraft is configured with 158 seats in two classes and will be deployed on Johannesburg-Cape Town service. Another 737-800 is due in 1Q2014.
Comair (South Africa) Fleet Summary: as at 13-Sep-2013
Comair is not resting on its laurels in what remains a difficult operating environment
Despite the strong financial result, Comair remains cautious about the strength of the South African market, particularly in light of relatively weak GDP growth forecasts. Monthly domestic passenger numbers also remain 5% down on last year, and have yet to recover to 2008 levels.
The challenge to industry profitability is highlighted by the fact that the average domestic fare has increased by only 14% since 2001, while operating costs have risen by 163% and the consumer inflation index by 98%, according to Comair.
The carrier has also moved to damper what it regards as unrealistic growth expectations for air travel within Africa, as well as its own regional expansion.
“We are still of the opinion that there are substantial challenges to overcome before Africa achieves the economies of scale that will adequately address the risks of operating in many parts of the continent. We will therefore remain pragmatic in our assessment of opportunities for expansion into Africa,” the carrier stated.
But Comair’s work over the past 18 months to reduce costs and improve systems together with the arrival of a modern fleet means it should be well placed to take advantage of opportunities as they arise and cope with a return of domestic LCC competition as it emerges.