Comair issued its annual financial results on Tuesday, reporting a 54% increase in profits to R297m and a 28% increase in cash generated by its operations.

Comair operates under its low-cost airline brand, kulula.com, as well as under the British Airways livery, as part of its British Airways license agreement.

Income generated by its non-airline brands now constitutes 20% of its earnings.

CEO Erik Venter told Fin24 the results, including the strong performance of the non-airline operations, supports Comair’s strategic focus.

Earnings per share was 63.6 cents (41.5c in the previous financial year) and headline earnings per share was 67.0c (36.5c in the previous financial year).Cash generated from operations grew by R257m (28%), resulting in a cash balance of R935m at year end (R1.12bn in the previous financial year), subsequent to a significant investment of R132m in pre-delivery payments towards new aircraft for delivery in 2019.

Dividends declared for the past 12 months increased by 5c per share from 16c in the prior year to 21c per share in the current year.

Venter told Fin24 the weak SA economy and narrow profit-margins in the airline industry have favoured the pursuit of growth from Comair’s non-airline businesses.

This approach has been rewarded with strong performances by the travel businesses, including kulula Holidays, the Comair Training Centre (CTC), the SLOW lounges and the Food Directions catering operation. All have performed well and justified further investment, in his view.

"We have seen quite a tough economic environment. There has been no growth on spend in the SA market, resulting in the SA aviation market being a bit stagnant. So, we are glad our airline operations have done quite well," said Venter.

"Due to the stronger rand, we did have the benefit of not being hit (as hard) this year by the exchange rate on a dollar-based aircraft loan account we have - which gave us a knock last year. So, we see a much more clean result of what the real airline business is doing at the moment."

The ongoing upgrades to the fleet will continue to improve operating efficiency, while at the same time enhancing the revenue potential per flight, he said.

PROFIT GROWTH
The 2017 financial year represents a return to Comair’s historic profit growth trend in the absence of the extraordinary costs of the comparative period that arose from losses on oil hedges and the revaluation of the dollar based aircraft loan.

The total domestic passenger market increased by 2.3%, while Comair grew passenger numbers by 2% resulting in an increase in airline revenue of 2%, which, for Venter, is testament to the brands’ strength as well as its ongoing commitment to service.The translation loss of the comparative period, that arose from the effect of the exchange rate on a dollar-based aircraft loan, was partly reversed as the currency made some headway to R13.044 against the dollar as at 30 June 2017 from the low of R14.765 against the dollar a year earlier.

This resulted in a gain of R41m in the current period on the loan value of $21.2m, compared to a loss of R74m on the revaluation of the loan at 30 June 2016. The dollar oil price remained relatively stable over the financial year and the oil hedges that gave rise to a loss of R71m in the comparative period all matured by 31 December 2015, with no subsequent hedges entered into.

NON-AIRLINE BUSINESS
"In the current environment we put a lot of focus on our non-airlines businesses. We have a lot of big capital spending plans and have opportunities coming up," said Venter.

These include putting up another pilot training facility near OR Tambo International Airport due to increased demand; exploring more opportunities on the catering side - including in areas which are not pure airline catering - and using opportunities on the inbound tourism to SA side.

"We want to compete with the best international tour oprerators. It will probably take another year and a half to be really up to speed, but then we will have something world class to service and attract international tourists," said Venter.

Comair is also working on expansion plans for its SLOW Lounges at airports. The one at OR Tambo, for instance, has increased capacity by 50%, while smaller ones are being rolled out at smaller airports. The first such smaller SLOW Lounge was launched at Lanseria and others at, for instance East London airport, are to follow.

OUTLOOK
"The airline is still the core of the business and we continue to upgrade the fleet. We should continue to see cost control on the airline side," said Venter."SA airlines have shown no meaningful revenue growth on the passenger side for a long time, yet there is big cost inflation in the airline industry. The fundamental issue is that airlines have to each year look at cost inflation. Those who can address cost inflation, do OK and the rest see losses grow bigger every year. This is the same for low-cost airlines in the country."

He explained that carriers not actively taking out cost over the last few years, would have kept growing without revenue growth to offset it. Despite inflationary pressure and a 5% increase in the rand price of fuel, Comair's costs remained contained with a 1% increase overall.

"You can't wait a few years and then fix it. Cost is about knowing the business and looking for innovation to improve fleet efficiency and using new tech in booking and call centres, for instance, and to grow the business without growing the head count," said Venter.

"Of course the airline itself has to make a profit too. We have to find efficiency every year to deal with inflation. Even our crew and airport staff come up with new ideas. It is a continuous cycle to take out inflation."

The ongoing upgrades to the company’s fleet mitigate the impact of fuel-price increases, while improving Comair’s customer proposition.

During the previous financial year, Comair took delivery of one new 737-800 from Boeing, being the last of the original order of eight 737-800 New Generation aircraft. The delivery of the next eight Boeing 737-8 Max aircraft remains scheduled for delivery between 2019 and 2022. Going forward, Venter said Comair will do a lot more on the non-airline side, because without economic growth in SA, the airline business won't really see growth. In his view the airline business will probably be flat, while there are a lot of opportunities on the non-airline side.

"It is critical to have knowledge of the airline industry. Comair has a long-serving management and a long-serving board as well as some big long-term shareholders. This brings enormous stability," said Venter.

"There is huge experience of the industry on our board of directors and huge experience among management and we have had a low turnover in both. We, therefore, know the issues in the industry and know how to deal with them. Institutional memory and long term skills are good for business."

CASE AGAINST SAA
Comair’s claim against SAA for damages, arising from anti-competitive conduct, and amounting to between R810m and R898m, was heard in the Gauteng South High Court in 2016. Judgment in this matter was handed down in February 2017.

In terms of the judgment, Comair was awarded damages of R554m, with a similar additional amount being awarded in respect of interest and costs, resulting in total damages of approximately R1.16bn.

SAA lodged an appeal against this judgment.

Comair lodged a cross appeal to recover the full amount of the damages sustained plus interest on the total amount, which, if successful, will increase the damages awarded to approximately R1.9bn.According to Venter, it is anticipated that the appeal will be heard in early 2018.