Comair shows strong profit growth in tough trading conditions

• Profit after taxation for the year rose by 54% to R297 million (prior year R193 million), yielding earnings per share of 63.7 cents (prior year: 41.5 cents) and headline earnings per share of 67.0 cents (prior year: 36.5 cents);
• The non-airline businesses - travel, pilot and crew training, lounges, and catering - now contribute 20% of earnings;
• Cash generated from operations grew by R257 million (by 28%), resulting in a healthy cash balance of R935 million at year end (prior year: R1.12 billion).

Comair Limited (JSE:COM) today issued its annual financial results, reporting a 54% increase in profits to R297 million and a 28% increase in cash generated by its operations.

The company also reports that income generated by its non-airline brands now constitutes 20% of its earnings. CEO Erik Venter says the results, including the strong performance of the non-airline operations, supports Comair's strategic focus.

"In the continued absence of meaningful GDP growth in South Africa, our domestic airline-passenger market has yet to expand into its surplus seat capacity, which constrains industry occupancy levels at below the global average. Average global seat occupancy is 80.6% as per IATA, while Comair has an average of 75%.

"Despite inflationary pressure and a 5% increase in the rand price of fuel, our costs remained well contained with a 1% increase overall.

"Our new Boeing 737-800 aircraft continue to contribute positively towards this efficiency through their lower fuel burn and maintenance demands. And in line with our promise to constantly deliver on improved service delivery, we met our threshold target on-time performance of 85%, achieving 89% over the last six months."

Venter adds that the weak economy and narrow profit-margins in the airline industry has favoured the pursuit of growth from Comair's non-airline businesses. This approach has been rewarded with strong performances by the travel businesses, including kulula Holidays, the Comair Training Centre (CTC), the SLOW lounges and the Food Directions catering operation. All have performed well and justified further investment. Examples he cites:

• Acquisition of a fixed-base flight simulator to expand the CTC's Boeing 737-800 training capacity and commenced with the construction of a third training facility with the potential capacity for a further two fixed-base simulators and two full-motion simulators. CTC now trains pilots from 34 airlines and air forces;
• Substantial investments in expansion and upgrade of the SLOW Lounge in the Domestic terminal at OR Tambo International Airport and completion of a new concept lounge at Lanseria International Airport. The concept lounge will be expanded to some of the smaller airports where Comair does not yet have a lounge presence.
• The group's Food Directions catering operations and its stores facility operate from the Anchor Park industrial park on the East Rand. Comair has bought the industrial park to provide capacity for expansion, and is awaiting transfer of the property. Comair has also constructed its own offices, catering facilities and storage at Cape Town International Airport.

Regarding the financial year ahead, Venter says the current weak economy is expected to maintain pressure on consumer spending. "As a result, we'll see continued pressure on margins, particularly in the airline industry, combined with a possible decline in passenger volumes.

"Fortunately, Comair is well positioned to operate in these conditions, with strong brands, dedicated staff, effective equipment, an efficient cost base and strong cash reserves."

Venter adds that the ongoing upgrades to the company's fleet mitigate the impact of fuel-price increases, while improving Comair's customer proposition. During the previous financial year, Comair took delivery of one new 737-800 from Boeing, being the last of the original order of eight 737-800 New Generation aircraft. The delivery of the next eight Boeing 737-8 Max aircraft remains scheduled for delivery between 2019 and 2022.

The ongoing upgrades to the fleet will continue to improve operating efficiency while at the same time enhancing the revenue potential per flight.

"The management of talent is also considered to be a key differentiator of the group and continues to be a core focus. The group values its talent and continues to make a significant investment to support the management of its skills base. Talent management practices support decision making in terms of building capacity now and into the future, with the dual benefit to employees of having information that supports their careers within the group," Venter adds.

He notes that Comair's claim against SAA for damages, arising from anti-competitive conduct, and amounting to between R810 and R898 million, was heard in the Gauteng South High Court between 18 April and 24 August 2016. Judgement in this matter was handed down on 15 February 2017. In terms of the judgement, Comair was awarded damages of R554 million, with a similar additional amount being awarded in respect of interest and costs, resulting in total damages of approximately R1.16 billion. SAA lodged an appeal against this judgement.

Comair lodged a cross appeal to recover the full amount of the damages sustained plus interest on the total amount, which if successful, will increase the damages awarded to approximately R1.9 billion. "It's anticipated the appeal will be heard in early 2018," he concludes.

More on the results

The 2017 financial year represents a return to Comair's historic profit growth trend in the absence of the extraordinary costs of the comparative period that arose from losses on oil hedges and the revaluation of the dollar based aircraft loan.

The total domestic passenger market increased by 2.3% while Comair grew passenger numbers by 2% resulting in an increase in airline revenue of 2%, which is testament to the brands' strength as well as our ongoing commitment to service.

The translation loss of the comparative period, that arose from the effect of the exchange rate on a dollar-based aircraft loan, was partly reversed as the currency made some headway to R13.044 against the dollar as at 30 June 2017 from the low of R14.765 against the dollar a year earlier. This resulted in a gain of R41 million in the current period on the loan value of US$21.2 million, compared to a loss of R74million on the revaluation of the loan at 30 June 2016. The dollar oil price remained relatively stable over the financial year and the oil hedges that gave rise to a loss of R71 million in the comparative period all matured by 31 December 2015, with no subsequent hedges entered into.

Profit after taxation for the year increased by 54% to R297 million (prior year R193 million), resulting in earnings per share of 63.6 cents (prior year: 41.5 cents) and headline earnings per share of 67.0 cents (prior year: 36.5 cents). Cash generated from operations grew by R257 million (by 28%), resulting in a healthy cash balance of R935 million at year end (prior year: R1.12 billion), subsequent to a significant investment of R132 million in pre-delivery payments towards new aircraft for delivery in 2019. Dividends declared for the past 12 months increased by 5 cents per share from 16 cents in the prior year to 21 cents per share in the current year.