Johannesburg - Despite very challenging market conditions in the first half of the 2016 financial year, Comair delivered cash earnings - before depreciation and foreign liability translation losses - of R382m, compared to R481m in the comparative period.
The impact of the collapse of the rand to record lows against the dollar was one of the biggest challenges.
Comair operates under its low-fare airline brand, kulula.com, as well as under the British Airways livery, as part of its British Airways license agreement.
Announcing its results for the interim period leading up to December 2015, Comair reported a cash balance of R972m at the end of the year, compared to R688m in the prior period.
Comair CEO Erik Venter told Fin24 that most of the company's fleet upgrade programme has now been completed, making the fleet more efficient.
Our cash earnings were also consistent with last year.
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The fall of the rand to R15.54 to the dollar by December 31 2015 required that Comair revalue the dollar-denominated loan of $27m on one of its aircraft, thereby negatively affecting profits by a non-cash flow, pre-tax amount of R91m.
Consequently profit for the period was R84m compared to R164m in the prior period. Earnings per share were 18.0 cents compared to 37.6c in 2014 and headline earnings per share were 13.1c compared to 37.6c in 2014. Revenue declined by 5% due to a 10% decline in average yield, while passengers carried increased by 4%.
Operating costs declined by 2%, mainly as a result of the suppressed dollar price of oil. The significant reduction in the dollar price of oil has not been fully realised in South Africa due to a 23% devaluation of the rand relative to the comparative period. Furthermore, dollar oil hedges, contracted in mid-2014, cost Comair R71m (pre-tax) during this reporting period. The last of these hedges expired in December 2015.
"It was only the revaluation of one dollar-based loan on one aircraft that impacted our results. This does not affect our cash flow and it simply depends on what the exchange rate is on December 31 each year," explained Venter.
"If you take that impact out, you will see that we had a good first half."
Venter emphasised that, because all Comair's aircraft are dollar based assets, its actual net asset value is double its book value rate. The net asset value in dollar terms is about R5 per share, yet the share price has halved.
"I think one must just see this in context," said Venter.
"We are happy that it went well. Last year we had our best first half in our history and without the impact of that loan we would still be in line with that."
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Looking ahead, Venter said the current weak economy was expected to maintain pressure on consumer spending. Continued diminished margins in the industry were likely, despite the growth in passenger volumes arising from surplus capacity and aggressive competitor pricing.
“This level of discounting is ultimately not sustainable in the industry, but Comair is well placed to operate in these conditions, with strong brands, committed staff, the right equipment, and adequate cash reserves,” he said.
"There is an over-supply of seats in the market, so it is basic Economics 101. This leads to the discounting of the extra seats. You must have credibility and it would be difficult to enter the market with older planes, for instance."
In his view, either airfares will increase again in the low cost airline industry in the country, or more players will have to exit - especially new entrants.
"Yes, there is an untapped market at those kinds of low airfares, but it is unsustainable at those prices - that is the reality. If you give away seats there will also be a big market," he said.
"The race is on. It is a small market at the end of the day. As long as prices are low, we have to stay competitive. It is at a level that is not sustainable, but if we have to compete, we will."
Venter predicted that both the oil price and the exchange rate were likely to remain volatile.
“The forward price of oil reflects an expected increase, but this also makes it unappealing to take out any further hedges at these forward rates, despite the low spot price. With the expiry of the historic fuel hedges, we will not see further losses of this nature in the second half of the financial year," said Venter.
"Whether we require further revaluation of the dollar-denominated loan will depend on the exchange rate at the end of the financial year.”
Following on the strong cash earnings of the first six months, a gross interim cash dividend of 5 cents per ordinary share was declared.
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