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Airfare price wars a drag on Comair earnings

As the company battles to retain marketshare.
Comair CEO Erik Venter.

Aggressive competition from newbies Skywise and FlySafair, in an already constrained domestic airline industry, is causing headaches for Comair.

Comair, the British Airways franchisee that operates kulula.com, has learnt the hard way that battling competitors for market share can come at a cost.  

Comair reduced its airfares in response to the aggressive pricing by competitors. This put pressure on revenue, which  remained flat at R5.89 billion for the 12 months to June 30 2015, compared with R5.9 billion in the previous year.  

It also put pressure on its profit, which declined by 17% to R219 million.

CEO Erik Venter says airfares were cut on the most competitive routes. On average over the last few months, prices in the market have been cut by 15%, he says.

“It [airfare reductions] is driven by new competition and market revenue that is not growing. We had to drop prices to hang on to our share of revenue,” Venter told Moneyweb.

The recent international oil price decline should, in theory, have given Comair some respite; given that fuel costs account for 30% of its expenses. But this was not the case.

The collapse of the oil price resulted in a jet fuel drop from a high of R9.50 per litre to R7.30 by December 2014. By June this year, it had dropped further to R6.50 per litre.

Comair would have seen a R300 million saving year-on-year. But the air carrier’s hands were tied as it fought to maintain and grow its 40% market share, derived from British Airways and kulula.com operations.

In response to the uncertainty in oil price movements, most airlines hedge fuel purchases to offset rising fuel costs.

Due to hedging 26% of fuel prices at US$82/barrel during the early decline from highs of US$150, Comair was not able to achieve the full benefit of the lower cost of fuel. The glut of oil in the market continues to drive the price down to US$44.

“We will stay away from hedging for now until we see any change in the market,” says Venter.

Consumer affordability pressures have led to tepid passenger volumes. “Comair has made 4% margins when things are going well and other carriers have been negative. We are seeing passenger growth in the market, probably 5% or 6%,” he says.

Even on the profit per passenger, Comair is feeling the pinch. Currently the profit per passenger is R42, down from the previous year’s R50. Says Venter: “The question is how long that can be sustained before prices are adjusted or somebody goes out of business?”

Increasing fares is seemingly not an option. Since launching low-cost carrier kulula.com in 2001, operating costs have skyrocketed but the average airfare has increased by 27%.

Aviation economist Joachim Vermooten says another problem is the additional capacity created by new airlines and existing ones. “There is quite a lot of capacity in the domestic market. All in all new carriers bring in new capacity but not that much as Mango Airlines did after the demise of 1time Airline,” he says.

In response to market pressures, Comair has invested R147 million into its fleet with the acquisition of previously leased Boeing 737-400 and two pre-owned Boeing 737-400s. The new aircraft is fuel efficient and offers passengers more leg room. Comair is also focusing on growing its catering and slow lounge businesses, investing in technology and driving distribution costs down.

“Comair still makes a reasonable profit. It has actually done a lot to improve efficiencies,” says Vermooten.  

A cash dividend of 10 cents has been declared.

Comair was down 0.3% on the day to R3.05.

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