/ 17 September 2015

Headwinds slow Comair down

Kirsten King
Kirsten King

The country’s new visa regulations have added to the already tough environment faced by South African airlines, hurting some carriers’ regional routes.

This week Comair released its results, reflecting the intensity of new competition in the industry and the increasing slowdown of the economy, which the airline expects to continue well into 2016.

The aviation firm, which operates the budget airline Kulula and is the franchise partner of British Airways locally, saw profits decline by 17% in the past year and no revenue growth.

Although competition in the sector has intensified, with two new airlines entering the market and a third on its way, the new visa regulations further weighed on the firm’s bottom line, particularly damaging passenger volumes and revenues on its regional routes.

According to Comair’s chief financial officer, Kirsten King, average revenues on the airline’s routes to Mauritius, Windhoek and Victoria Falls were down by 19%. Passenger numbers had declined by 7% for Mauritius, 18% for Windhoek and 15% for Victoria Falls.

Considering the weakened rand, foreign visitors should be pouring into the country, she said, but the visa regulations were having a dampening effect.

“There is an opinion that it could be the after-effects of the Ebola outbreak, but I think that has died down. I don’t think there’s that much concern about [Ebola], and what we are seeing now is more to do with the visa requirements,” said King.

The changes are among several made to immigration regulations and require children travelling to and from South Africa to carry an unabridged birth certificate.

They also require foreigner travellers seeking visas for South Africa to apply in person to provide biometric data. The department of home affairs introduced the new rules to curb child trafficking and to better secure the country’s borders. This week the Reserve Bank said in its quarterly bulletin that the visa regulations had resulted in a notable slowing of travel receipts, potentially hurting the country’s balance of payments.

According to the bank, preliminary estimates showed a 9% decline in travel receipts in the second quarter of 2015.

King said that, although discussions between the tourism industry and the government had made little apparent headway, Comair was committed to finding a way to address the matter.

But competition has been the major factor affecting Comair’s results, with the arrival of newcomers Skywise and FlySafair. The latter recently launched a one-year birthday promotion, selling tickets for R1, including airport taxes. The overwhelming demand from customers led to its website crashing.

For Comair it has meant a battle to maintain market share. “In order for them to maintain volumes [and] just get bums in seats, they have obviously gone in at a very aggressive low fare, and we have got to compete … otherwise we start losing market share,” King said.

In its results announcement, Comair said a “correction” in the current overcapacity in the domestic market was likely, which King said would come from increased fares. “They are unsustainable and, at some point, somebody has to put their fares up,” she said.

But when this is likely to happen is the million-dollar question. Nevertheless, Comair was in a “fairly good position, cash wise”, King said, with a relatively strong balance sheet and dollar-denominated assets – its new aircraft – and the airline could continue to offer lower fares for some time.

Despite the sharp drop in the oil price, Comair said it was not able to reap the full benefits thanks to its hedging policy. The airline hedged 26% of its fuel demand early on during the decline in the fuel price at an average of $82 a barrel. By year end, 160 000 barrels remained, 10% of its fuel demand for 2016. The company realised losses of R61-million because of this, and it would cost the company another R40-million until those hedges were closed, King said.

The weakness of the rand had also eroded some of the savings the company could have made on fuel, but its hedging positions were fairly conservative by industry standards and the firm still realised a 14% fuel saving, she said.

In the coming year Comair would continue to save on costs, focus on maintaining passenger volumes and market share, and improve its on-time performance, King said.