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Comair shows strong profit growth

‘We’ve got to contain costs, we’ve got to focus on growing the aviation allied businesses,’ says Comair financial director Kirsten King.

NASTASSIA ARENDSE:  I had a discussion with Kirsten King, who is a financial director at Comair. They put out their numbers today. You may know them as the operator of Kulula. Their HEPS were up 83% for the year. They managed to grow their passenger numbers by 2%, and this resulted in an increase of airline revenue of around 2% up as well.

This is my conversation with Kirsten King.

KIRSTEN KING:  I think we’ve actually had a fantastic performance this year. If you take a 2% increase on revenue and a 3% decrease in pure operating expenses before depreciation and interest, etc, we’ve increased ebitda by 28%, which I think is a really good performance, considering the economic climate prevailing.

NASTASSIA ARENDSE:  A lot of CEOs who’ve delivered results over the past few weeks continue to talk about the absence of GDP growth, especially in this environment. I think the comment yesterday at the Tax Indaba from the finance minister was that we are likely to miss our growth target for the year. How do you see that impacting you and perhaps even consumer demand?

KIRSTEN KING:  In the absence of significant GDP growth perhaps exceeding even as much as 2%, we are not going to see the passenger market in South Africa grow. We might even see a decline in the passenger market. I think to that end our diversification strategy is an important aspect of our overall strategy. So the airline will remain the core business, but our allied aviation businesses do warrant further investment in order to mitigate that risk.

Read: Potential of Comair non-airline businesses ‘unlimited’

NASTASSIA ARENDSE:  In your results presentation you mention that the total domestic passenger market increased by 2%, while Comair grew passenger numbers by 2% as well. In terms of how you manage to get these figures right, what do you think you are doing differently compared to your competitors, for instance?

KIRSTEN KING:  I think we’ve got a really great product. Our fleet replacement is an important part of that strategy. So the new aircraft come with much better fuel consumption, much better maintenance expense containment, and a higher seat capacity, so we’ve increased our overall capacity just by the addition of seats on those new aircraft, while maintaining a consistent load factor of around 75%. So I think that’s how we’ve actually managed to increase those volumes and thereby achieve the 2% increase in revenue.

NASTASSIA ARENDSE:  Will you be planning on purchasing new aircraft any time soon, or are you taking a wait-and-see approach in terms of watching what happens with GDP growth?

KIRSTEN KING:  We do have an order for eight 737-800 Max aircraft, which are due for delivery in 2019 – between 2019 and 2022. And it think it’s a significant capital investment, but it’s important to continue the cycle of fleet replacement consistently over time. You don’t want to have significant gaps between your fleet replacements in order to contain costs.

If you look at the average fare over the last ten years, that may have increased by about 4% over ten years, we know that inflationary costs have way outstripped 4%. And that cost containment has essentially been achieved by the new technology in the form of new aircraft. That process needs to continue in order to keep up with the inflationary costs and managing those inflationary costs.

Although we’ve got this order for eight 737 Maxes, I don’t think we would go over and above that in terms of additional aircraft, because I don’t think that the market would grow enough to sustain that. But a continual fleet replacement is definitely essential.

NASTASSIA ARENDSE:  In terms of the dollar oil price, taking into consideration what’s happening globally, geopolitical tensions here and there, and then there was the hurricane that took place, where do you see the oil price going and perhaps even affecting you?

KIRSTEN KING:  It’s hard to say. I actually expected the oil price to have increased already. So I would say we could expect it to go up to about $65/barrel. I thought we’d be moving up towards that point already. I think it is still coming. I think we are well placed to manage that and that it may even be a competitive advantage for us again because of the new technology that we’ve got with the new aircraft. So we save about 10% in terms of fuel consumption with our existing fleet, and that can be increased to about 15% with the Max aircraft that are due for delivery from 2019 onwards.

NASTASSIA ARENDSE:  Earlier on you were talking about the non-airline side of the businesses, which include your travel business, SLOW lounges, etc. What is the percentage of contribution to these current earnings that you receive from those businesses?

KIRSTEN KING:  Overall they contribute 19-20% of profit before tax. We would like to get that to around 50% within the next three to five years. And their performance has warranted additional investment in those businesses. The margins are higher than the airline, and with the airline we are currently getting a margin of around 7%. These other businesses are achieving way higher margins, but of course contributing overall 20%. Part of the strategy is to definitely increase those allied businesses.

And to that end the lounges – there seems to be continual demand for lounges. So we are looking at expanding the OR Tambo lounge, we are looking at putting a light version of the existing lounge into some of the smaller airports, perhaps East London. We’ve just opened one at Lanseria.

The training centre, we are investing in the building in order to house additional simulator equipment, but then also just looking at our overall internal IP to expand that entire training business into potentially a full training academy. 

The travel business is doing really nicely and we are looking at investing in technology to look at increasing inbound tourism.

So ja, I think there is a lot of opportunity in that area of the business.

NASTASSIA ARENDSE:  There was that claim that was instituted against SAA for damages that arose from the anti-competitive conduct. Where are you sitting in terms of that?

KIRSTEN KING:  We were awarded 60% of our initial claim. SAA appealed the claim, so we have lodged a cross-claim for the full amount of the damages. But I suspect we’ll only hear about that sort of in the early 2018 calendar year.

NASTASSIA ARENDSE:  And what are your prospects going ahead for the future?

KIRSTEN KING:  I think we’ve got to keep doing what we are doing. We’ve got to contain costs, we’ve got to focus on growing the non-airline business or the aviation allied businesses. And I think we’ve got a good product in a tough market, but we got a good product and the right technology with the right people. So I think we are well placed to hopefully continue this growth trend.

NASTASSIA ARENDSE:  Kirsten King, thank you so much for your time.

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