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Comair manages cash earnings of R382m despite challenging market conditions

‘There is not a lot we can do to change the level of competition and the level of pricing’ – Erik Venter, CEO – Comair.

SIKI MGABADELI: Comair came out with interims today, reporting that revenue decreased by 5% to R3 billion, while passengers carried increased by 4%, Operating costs declined by 2% during the period. Profit from operations at R157.1 million and the group declared a dividend of 5c/share.

Erik Venter is CEO of Comair and joins us now. Erik, thanks for your time this evening. Would it be fair to call it turbulent times right now for you and other airlines as well, with the fuel prices?

ERIK VENTER: Yes. Certainly a bit of a see-saw ride. We’ve obviously seen quite a big drop in the oil price, but particularly in the second quarter of our year we obviously saw a massive reversal in the rand as well, which offset a lot of that benefit.

And then at the same time looking at a year-on-year comparison, we’ve got a lot more capacity in the market, new competitors in the market, and some incredibly aggressive pricing, which we don’t believe is sustainable. But in the meantime we’ve got to make the best we can in the circumstance.

SIKI MGABADELI: In the meantime are you able to do anything with fares at all? Can you increase or would that just be counter-productive, given the reputation that you have in the market?

ERIK VENTER: It’s incredibly aggressive, the competitive market, on pricing and the consumer market is incredibly fickle about their price sensitivity. So we really have to remain in that competitive space. There is not a lot we can do to change the level of competition and the level of pricing. Having said that, in the current economic climate maybe it’s not such a bad thing anyway. I think going for more volume with lower air fares is also driven by the economic situation we are in at the moment. So maybe it’s the right time to be sitting with this sort of high-volume, low-fare strategy anyway.

SIKI MGABADELI:  The concern of course is that the consumers are coming under increasing pressure on their own pockets at this point. What impact do you think that’s going to have on overall passenger volumes?

ERIK VENTER: I think definitely the pressure is increasing. But interestingly enough in December we saw quite a significant increase in domestic air travel, and I suspect that that’s been driven by lots of people not going overseas on holiday. So, as much as there is an impact on the consumer, definitely also it’s driven a lot of people from international travel to domestic travel.

SIKI MGABADELI: Other variables are oil price, rand exchange rate – what’s been the effect of that on your business?

ERIK VENTER: Well, the biggest issue really has been that we’ve got one aircraft that was financed in US dollars, with a loan of about US$27 million, and we’ve had to revalue that because of the 23% drop in the rand. So that’s in our income statement a R91 million revaluation, and that loan will continue for another seven years, so it’s quite possible in the future that R91 million will reverse again.

But in terms of the impact on the income statement, that becomes a thing that catches you out, because you can’t predict what the exchange rate is going to be on the day that your financials are produced.

But also over and above the 30% oil price, we have another 20% of cost that is also dollar-denominated. So thank goodness the oil price has come down because without that I think it would be very tight indeed.

SIKI MGABADELI: And let’s hope the rand continues to strengthen a little bit from its current levels. Are you still hedging the oil price? What’s your current status on the hedge?

ERIK VENTER: No, we are out of the hedges completely now. The forward curve is actually quite aggressive on the oil price at this point. If we now want to buy oil six months or twelve months ahead, the forward price is sitting at over $40/barrel. So one is taking a bet against the oil price being higher than $40/45 a barrel, which is quite a risky bet. So if we could buy oil for 12 months ahead at the current prices we’d be thrilled, but unfortunately that’s not possible.

SIKI MGABADELI: Could you take us through the fleet upgrade. How far is it and how will this impact on mitigating your costs?

ERIK VENTER: On the Kulula side we’ve done the entire fleet now. It’s all the 737-800s. We’ve started now on the BA fleet. We’ve retired all of the 737-300s. We are now getting 800s in there. So we’ve already got three 737-800 in the BA fleet. We received another brand-new aircraft from Boeing on Sunday, which is going into BA. We get another aircraft in around May, and then we get another brand-new one in for BA in October. So we are moving aggressively into upgrading the BA fleet at his stage.

There were questions about the timing and people said, well, the oil price is low, why are you doing it? But it’s not the kind of thing you can do on the spur of the moment. We’re preparing for when the oil price will rise, which we think is inevitable. It’s probably 18 months or so I think before we see a pickup in the oil price again, but we want to be ready for that.

SIKI MGABADELI: Alright, we’ll leave it there. Thanks for your time today, Erik Venter.

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