Fuel price clips wings

The 60% nosedive in the share price of low-cost airline 1time Holdings [JSE:1TM] over the past month is a reflection of shareholders’ lack of faith in its ability to maintain margins, given the current levels of the oil price. Brent prices have increased 21% so far this year and the group’s positioning as a low-cost carrier is prohibitive to passing on the cost increase to passengers.

“Another problem is 1time’s fleet,” says one asset manager. “The aircraft are old and consuming too much fuel and the cost of running them is uncompetitive compared with Comair.” He added the company could suffer severe financial implications if the oil price moved to US$140/barrel. In the year to December 2010, 1time reported that the average fuel increase of 9,7% over the period cost it an additional R36m.

Chief executive Glenn Orsmond maintains that the fall in share price reflects general market sentiment that airline profits will decline across the industry this year, on account of the oil price, and do not reflect any operational difficulties at the company.

“Any claims that our planes are not fuel efficient are simply not based on fact,” Orsmond told Finweek.

“We are a smaller company and negative sentiment is simply hurting us harder.”

Compromise in the cash-generating ability of 1time was evident during its 2010 financial year. The group generated R145m from operations, against R233m over its previous year.

Another concern expressed by the market is the level of depreciation of 1time’s aircraft, which some market commentators believe doesn’t reflect their true value, and a sizeable depreciation charge could be on the cards over its coming financial year, which may indicate current levels of profits are inflated.

The decline in the airline’s share price is disproportional to the 11% fall in the share price of competitor Comair, which operates kulula.com and British Airways’ local routes, with market commentators attributing it to the oil price.