NOMPU SIZIBA: JSE-listed aviation company Comair came out with their half-year results for the six months ended December 2019. The company reported revenue rising by 3% to R3.8 billion. However, they did record a headline loss of R564 million. While the company celebrated a victory over SAA last year, when the embattled airline was told by a court to pay Comair for damages due to non-competitive behaviour, Comair has yet to receive the full settlement from SAA. The board has resolved not to disperse an interim dividend this time round.
Well, to tell us more about what’s been going on with its operations and more, I’m joined on the line by Wrenelle Stander, the CEO of the Comair group. Thanks very much for joining us, Wrenelle. You operate the Kulula and British Airways airlines in the region. Tell us about the fundamentals of the two airlines, and how they’ve been doing on the routes that they operate on.
WRENELLE STANDER: I think operationally the airline has done very, very well. In fact, we have increased our revenue by 3% in a very difficult market. So operationally the airline is doing well. However, we have seen a number of additional costs that have been added to the business.
NOMPU SIZIBA: Yes, of course. That 3% – you do indicate that it’s quite a difficult environment that you’re operating in, but to what extent is that also a factor of competition?
WRENELLE STANDER: At the moment there is a 30% over-capacity in the market. There are some very strong competitors in the market. I think that to have grown 3% is quite a good achievement.
NOMPU SIZIBA: Fair enough. It’s not that long ago that you guys were being celebrated for being consistently profitable for several decades. But now you’re registering losses. Tell us some of the factors that are behind this.
WRENELLE STANDER: There are a number of very, very strong headwinds that we’re navigating, the first of which is adding cost into the business. The first very big one is the impact of the Boeing Max grounding, and I think that you’re aware that the Max has probably been grounded coming up for 18 months now. With the aircraft being on the ground, fully paid for, not generating any income, I think that’s quite that’s quite hard for any business to absorb.
In addition to the Max being grounded, we’ve also had to lease in, big leases, from different suppliers so that we could operate our current schedule.
What has also amplified the situation is that we’ve ordered eight aircraft, and we have a schedule of pre-delivery payments, so we’ve got about R1 billion with cash locked up in Boeing as a result of these pre-delivery payments, and the full settlement of the first Max. So that’s one big set of issues.
A second set of issues, of course, is the fact that we are transitioning our fleet from South African Airways Technical to Lufthansa Technical. So by ’20 and by ’21 we will probably see the business having to pay for two separate maintenance providers, and that is something that we hoping that the last of our aircraft that belong to our fleet will be transitioned by the end of 2020. Having said that, often there are operational conditions that could result in that being extended. That’s the second set of big issues.
A third issue is that the SAA claim ……[will put] the organisation into a temporary difficult period.
NOMPU SIZIBA: Let’s itemise each of the issues that you’ve raised. Let’s start on the SAA claim. Just remind us how much it was that they were supposed to pay you, and how much they’ve paid so far, and whether you are one of the creditors in line to speak to the business-rescue practitioners about possibly getting full settlement.
WRENELLE STANDER: Well, SAA owed us R1.1 billion, and what is outstanding at the moment is R790 million. We have had conversations with the business-rescue practitioner on a whole range of issues. But of course it was prudent on our part to impair the claim. However, we will be continuing to try and get all or most of that money owing paid to us.
NOMPU SIZIBA: Yes. Just explain to us – we’re not technical people – when you impair something, it doesn’t necessarily mean that you’ve given up on—?
WRENELLE STANDER: No. It doesn’t mean we’ve given up. If the money comes in, you can bring it back into your books.
NOMPU SIZIBA: When it comes to the Lufthansa guys, where you are going to ultimately have all of your aircraft maintained, where are they based? Are they based here in South Africa, or in Germany?
WRENELLE STANDER: Lufthansa Technical is in fact based in South Africa. They have their main hangers on Johannesburg, but they also have facilities to support our operation from Cape Town and in fact Durban. They’re quite a well-functioning organisation already. By FY19 they were established, and by FY20 we have already transitioned eight aircraft across to Lufthansa Technical.
NOMPU SIZIBA: For those of us who don’t know the background, why have you taken the decision to completely transition from SAA Technical to them?
WRENELLE STANDER: I think it’s very well documented what some of the challenges have been. We have experienced some challenges in relation to the availability of our fleet. That related primarily to when SAA Technical was going through a very difficult time in terms of supply chain, and in terms of being able to turn our aircraft around as quickly as we needed. We’ve never, ever had a safety concern with SAA Technical. Our concerns were purely based on the availability of our fleet, and obviously the resultant cost associated with having the aircraft on the ground for longer.
So that is the reason we’ve taken the decision. We still believe it’s the correct decision, and we should have our fleet transitioned fully by the end of this calendar year.
NOMPU SIZIBA: So, coming to the Boeing issue, you’ve laid out very clearly what the challenges are – and they are huge. But any hope about when the aircraft can begin to resume service, what’s Boeing saying in this regard, and what about the losses that you’ve incurred? Are you going to be able to sue Boeing for this?
WRENELLE STANDER: A lot of very weighty questions there. On the first question about when the Boeing will fly, we do not have an indication of when the Boeing Max 8 will fly. This puts us into a very difficult situation, because essentially we are in limbo with respect to the composition of our fleet.
Having said that, we have entered into negotiations with Boeing, and there’s obviously a range of scenarios that could play out in that regard, ranging from cancellation to compensation. We have been running an ongoing tally of what it is that they owe us, so it is lots of revenue, it is …… a whole range of different criteria that we’ve used to account for the losses we’ve incurred. This has been tabled with Boeing and we are busy negotiating at this moment. I am cautiously optimistic that we will be able to reach some sort of settlement during the course of this financial year.
NOMPU SIZIBA: SAA’s future is uncertain, and of course the business-rescue practitioners have cut a number of its domestic routes. Are you looking to muscle in on some market share, on some of those routes at all? Would that be quite an easy thing for you to do?
WRENELLE STANDER: Now we certainly are. We have already put flights into the system, starting in March, because traditionally January and February are months with low demand, so to fly during the period of low demand would be very bad for the airline.
During January and February we withdraw cruise services as with other airlines, but in March we’ve ramped up our offering to the market, and we do look forward to leveraging the market opportunity that has been created by South African Airways, particularly as it relates to our British Airways brand. I think you are aware that we operate both the British Airways and the Kulula brands, but we are ramping capacity in our British Airways brand on the Cape Town-Durban markets, so we will obviously be leveraging those opportunities.
NOMPU SIZIBA: Operationally you sound good, but in terms of the rest of your financial year, what is your outlook, given that you are having to deal with a lot of unknowns in terms of time?
WRENELLE STANDER: Well, we have to be positive and we are doing everything possible to mitigate each of the different risks. I’m hoping that the headwinds will change to tailwinds, and that we will we will see some positive outcomes on one or two of the different risks that we are managing at the moment. Obviously we, apart from flying more and looking at where best to deploy our fleet, we are also going to be looking at more profitable routes, more regional routes. We are wanting to refresh our brands, we are wanting to move towards a more digital experience. We are looking at increasing our ancillary revenues.
So, very importantly, we also looking at ongoing cost reduction, making cost reduction a part of our business philosophy, particularly in ways to get some increased efficiency as well.
NOMPU SIZIBA: Our thanks to Wrenelle Stander.