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Comair aims to keep costs down; revenue stable in ‘challenging’ year ahead

Latest financials are something to be proud of, says financial director Kirsten King.

NOMPU SIZIBA: Comair, the operator of Kulula Airlines and British Airways, has recorded a profit in its annual results. That’s despite a challenging year for the operator. In the 12 months ended June, the company reported headline earnings per share up 184% to 197.2 cents. This was boosted largely by South African Airways’s settlement paid to Comair following an anti-competition judgment, which ruled that the national carrier should compensate Comair with R1.1 billion plus interest. Profit before taxation, excluding the SAA settlement, actually declined by 82% from R471 million in the year prior to R86 million. Shareholders are set to get a dividend of 18c per ordinary share.

Well, to give us a sense of what’s been happening behind the numbers, I’m joined on the line by Kirsten King; she is the financial director at Comair. Thank you very much for joining us, Kirsten. On the demand side, what was the story with passenger growth, and did that assist in the 9% revenue increase that you’ve reported, or was that more a factor of price increases?

KIRSTEN KING: Well, it’s actually a combination of both. So, 4% came out of the increase in passenger volumes, and 2% in the average fare; and then the balance is owing to ancillary and non-airline revenues.

NOMPU SIZIBA: Apart from the boon afforded to you by the SAA fine, it sounds like the operational environment was tough in the year under review.

KIRSTEN KING: Most definitely. Despite having an absolute-record revenue performance, it was disappointing that we had to kind of give it all away in terms of fuel and currencies and the fluke issues that we’ve had with maintenance and of course the grounding of the [Boeing 737] Max. So, all of those have resulted in an extremely challenging environment. But, despite that, we still managed to deliver a profit. I think that’s something to be proud of.

Read: Boeing’s 737 Max may stay grounded until 2020

NOMPU SIZIBA: Yes. And shareholders got a little something-something.

KIRSTEN KING: Yes. In terms of returns to shareholders, that SAA board, the whole claim has been going on for the last 15-odd years, and so it’s great this time to be able to deliver something back to shareholders. That dividend was calculated as one-third of normalised earnings, so to speak, excluding the SAA award, and then one-third of what we’ve actually received in cash to date relating to the claim.

NOMPU SIZIBA: Right. And have you received all of the fine money from South African Airways?

KIRSTEN KING: No. There is an amount outstanding – there is a settlement term forward, and it’s repayable over two years, with a final payment in July 2022, I think. It will come in in instalments.

NOMPU SIZIBA: We understand that there have been challenges with the aircraft-maintenance scheduling with SAA Technical. How did that impact your operations, and is that on the mend yet?

KIRSTEN KING: That mostly impacted us in the first half of the financial year, and SAA has actually done a lot of work to remedy a number of those issues. There were planning issues, and inventory issues and they have actually remediated both. But, nevertheless, this effort cost us quite substantially; in the form of us having to send aircraft overseas now for heavy maintenance to relieve the capacity constraint on SAAT. And, of course, that necessitates – we’ve got 21-aircraft schedule and you’ve got to have enough aircraft to fly that schedule. So, we’ve had to enter into short-term add on leases, which do come at a premium.

NOMPU SIZIBA: Phew, that’s crazy. I’m trying to imagine having to send my Audi to Germany for it to be fixed. It’s very expensive indeed.

You are currently saddled with one of the two Boeing 737 Max 8 aircraft that you bought from Boeing. They’ve been banned from flight for now. What is the situation there? Any chance that you can send those aircraft back and get you money back?

KIRSTEN KING: No. Those purchase agreements are quite tight. Despite that, we have still got confidence in the equipment type itself, and we’re going to wait for the manufacturer for Boeing to re-certify the equipment. We have confidence that they will get it re-certified, together with the various authorities around the world, the SAA and the European authorities, and of course the South African Civil Aviation. So, as soon as those aircraft are re-certified – we’ve got one that is here, grounded, in South Africa, and then a second one that is parked in Seattle at the Boeing facility. Those two aircraft, as soon as they are re-certified, we will begin operating them. But yes, it has certainly come with substantial costs because we’ve got a very, very expensive piece of equipment that’s grounded and isn’t generating revenue. Of course we are incurring the finance costs and the various maintenance costs, and so on.

NOMPU SIZIBA: Phew, that’s hard!

KIRSTEN KING: In terms of return to service date, we don’t know. We know about as much as you do, or anybody else does. There is talk – and this is hearsay – that the equipment might be re-certified later this year and potentially be returned to service thereafter in December, or January next year. But that remains to be seen.

NOMPU SIZIBA: So, you are basically saying there is no opportunity for you guys to have any recourse in this matter, given the fact that this is not your fault?

KIRSTEN KING: There will be an opportunity for compensation, and we have opened those conversations with Boeing. Boeing has also disclosed that they have set aside certain funds for compensation to clients and customers in relation to the debacle. But nothing is going to happen until such time as the aircraft is actually returned to service. So, while we are talking about a claim, we don’t know what the quantum of that number will ultimately be, or when it will be paid out. Of course we haven’t accrued for that in any of our figures, and we won’t be able to until there is certainty around that.

NOMPU SIZIBA: Kirsten, let’s fast-forward to today. With all that’s gone down in Saudi Arabia, it means an elevated oil price. Do you have hedging strategies in place should the price of jet fuel also escalate?

KIRSTEN KING: We don’t actually hedge on fuel. We do have a natural hedge, because a lot of our fuel price is affected by both exchange rates and the dollar price of oil, the combination of the two. So, from an exchange-rate perspective we do have a natural hedge in place; about one-third of our revenue is generated in hard currency. On the Brent side, on the oil side, we are not hedged on that position.

NOMPU SIZIBA: I hear you. Given all these factors, and what we are seeing in the local economy, what’s the outlook for the current financial year?

KIRSTEN KING: I think we’ve got another challenging year ahead. There is a lot of excess capacity in the market, especially in the low-cast carrier market where Kulula operates with Safair and Mango, and I think we are going to continue to see that. So I don’t know that we will necessarily generate the same revenue increases. Hopefully we can at least keep revenue stable in the environment.

Cost-wise we’ve got to just keep trying to extract efficiencies wherever we can, in terms of new technology from the aircraft. If the Max comes on line, that will be absolutely fantastic, because we can get a lot of fuel consumption saving out of that particular type of equipment. And then just seeing where else we can extract the various efficiencies in terms of technology and better ways of doing things.

Then of course with the non-airline business or the diversification strategy we’ll continue to focus on that because it has higher margins, it’s far less capital-intensive than an airline, and of course it’s not subject to the same volatility. So, the more we can grow that business the better – we will mitigate some of the airline risk.

NOMPU SIZIBA: Thank you very much for your time tonight, Kirsten.

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