Alarm as profits nose-dive
Irish budget airline Ryanair last week posted record net profits of $715-million for the year ending March 31, but it is an anomaly in a global industry that is taking major knocks as demand slows and fuel prices remain sky high.
The Emirates Group reported a 61% drop in annual profits as soaring fuel costs ate into increased sales, even though it raked in $629.4-million for the year ending March 31. And the latest United States federal statistics showed the profits of the largest airlines falling to $7.1-billion last year, compared with the $10.5-billion generated in 2010.
Australia’s top airline, Qantas Airways, recently announced it would separate its loss-making international business, which has been hit by weak travel demand and rising costs, from its profitable domestic operations. And Reuters reported this week that Finnair was embarking on an overhaul after net losses totalled about €250-million over the past four years.
Ryanair’s profits were attributed to ticket prices being 16% higher on average. Sales rose by 21% to €4.39-billion, although the number of passengers carried rose by just 5%.
The profits of South Africa’s low-cost airlines have also been knocked hard and the recent provisional liquidation of local budget airline Velvet Sky is just one of several bad news stories in the local aviation industry.
In February this year Comair, which operates British Airways locally as well as low-fare carrier Kulula.com, reported a loss for the first time in more than 60 years. It attributed the R10.7-million loss to the disposal of three aircraft that were retired from operation early last year.
Posting a loss
SAA and its low-cost operator Mango also warned that they would post a loss for the past financial year and have requested a R6-billion state recapitalisation.
Listed airline operator 1time last month showed a R157-million loss for the year to December.
The losses have fuelled an overhaul of the budget airline industry.
Blacky Komani, chief executive of 1time Holdings, said the high fuel price and the need to modernise the 1time fleet were major concerns. “People think owning an airline is sexy, but it’s really tough.”
He said that 70% of the costs incurred by an airline, such as fuel, landing fees and passenger fees, were fixed and beyond the airline’s control. Any fat had to be cut from the 30% that the airline could control.
For 1time this included withdrawing all flights from Lanseria Airport trimming management, implementing a more flexible flight schedule and adjusting smaller revenue-generating operations such as catering. At one stage, 1time was losing R70000 a month on unsold sandwiches.
As part of a three-year turnaround strategy, 1time aims to refinance its aircraft over a longer period to bring down the interest rate, now at 28%. It will also look at expanding and modernising its fleet to move into Africa.
Komani said the new strategy would save 1time about R50-million a year. Linden Birns, managing director of Plane Talking, an aviation consultancy, said: “Everybody is reviewing their business model at the moment. I’d be worried if they didn’t.
“What you’re seeing in the industry is people trying to think outside of the box and looking to monetise every service, like low-fare offerings have done overseas.”
He said neither public nor privately owned airlines were at an advantage. “There are enough examples of failed operations for both … They both face the same challenges and they all pay the same fuel price.”
Doomed from the start
Velvet Sky’s choice of aircraft was pivotal to its downfall, said aviation consultant Linden Birns. The Boeing 737-300 had a significantly higher fuel consumption than the latest generation of Boeing and Airbus aeroplanes flown by South African Airways, Mango and Kulula.
It was 30% to 40% heavier on fuel and more maintenance-intensive, Birns said, and the intervals between maintenance were shorter.
“It’s something a lot of start-up airlines did before 2008. You could pick up cheap planes and that would offset the rising fuel price,” Birns said. But with current fuel prices there was no longer any saving from operating such planes.
The second factor, Birns said, was a lack of economy of scale.
The key is to have mass volume, low margins and enough capacity to salvage a flight schedule should one plane be out of service.
Not enough to be competitive
“You have to have enough aeroplanes. You can’t do it if you start with one aeroplane [as Velvet Sky did]. Similarly, you can’t do it with three aeroplanes – it is not enough to be competitive,” Birns said.
It seems that from day one Velvet Sky was unable to get on top of this problem when even its maiden flight was delayed.
By its own admission, Velvet Sky got the numbers horribly wrong. A business consultant for the airline, Thulani Ngubane, recently said that the airline’s costing was inaccurate from the very start.
“For us, it would have cost R42 000 from Durban to Jo’burg per trip. But when we rechecked the figures, it was R110 000 a trip. Whoever did our costing never did it right,” the South African Press Association reported him as saying. Blacky Komani, the chief executive of 1time Holdings, said Velvet Sky was wrong to fly out of Durban.
“To depart from Johannesburg is key. You need those full flights in the morning.”
He also said that it was wrong for an airline to enter the market with such low ticket prices while oil prices were so high.
“To win market share with those kinds of prices you would need deep pockets.”
BP South Africa brought a liquidation application forward when, as Velvet Sky’s biggest creditor, it was owed R26-million.
Once the liquidation was final, BP said, it would decide on further recovery steps to be taken. In the meantime, BP will enforce any final cost orders awarded by court.
“BP is prepared to work with a suitable liquidator and other creditors to take whatever steps necessary to recover from the company and any other persons, including directors, liable for the losses suffered,” BP’s attorneys said.
Directors and company officers can be held personally liable should their company be liquidated or if a third party sues for company failure. If there is litigation, a judge can attach their personal assets.
The possibility of rescuing the business required creditor Umzamo Transport Services to submit further plans to the court in support of its initial business rescue application.
However, this was not forthcoming and so there was nothing for the court to endorse, BP South Africa said.
The liquidation is provisional and BP is waiting for confirmation of the court return date of June 21.
The Air Service Licensing Council said Velvet Sky and the liquidators were still intending to salvage the company and the court would determine whether to accept what was presented.
In terms of refunds, the procedure to distribute the money from a consumer-protection fund safeguarded by the council will be outlined after the court date. – Lisa Steyn