The one chart Comair shareholders will not want to see.

Comair’s debt is reaching for the sky.

The company’s policy to run the latest and efficient planes is risky.

Interest on loans threatens to break a consecutive 73 years’ operating profit history.

The chart above shows the growth in the debt* and operating profits** of Comair in recent years.

Debt has in the past 7 years risen faster than operating profits and amounted to R3.3 billion on the 30th of June 2019.

*debt refers to long term loans (non-current and their current portions).

**operating profits exclude the R1.1 billion award of damages to be paid to the company by SAA.

Debt levels shot up after...

Comair replaced its old Boeing 737-400 planes with newer and more efficient 737-800 planes in 2012 using debt.

Each costing around R400-500 million.

The Debt will increase by another R3.8 billion...

Comair’s latest plan is to upgrade to eight of the newer Boeing 737-Max planes; one unit costing R750 million.

The eight planes will cost the company about R3.8 billion at current USD/ZAR exchange rates.

These will again be financed with debt.

FlySafair, a competitor of Comair, does things differently.

When airlines upgrade to the latest models, the old fleet gets sold to cargo haulers and smaller airlines.

FlySafair purchases older planes cheaply from other airlines.

Some of the FlySafair fleet has been purchased Comair and SAA.

Both Comair and FlySafair exclusively run Boeing planes.

  • A 737-MAX plane carries 20 more passengers per flight and consumes 15% less fuel than the 737-800.

  • A 737-800 in is 7% more efficient to a 737-400 and carries 20 more passengers per flight.

Competition is heating up locally.

Since FlySafair’s introduction;

Ticket prices have dropped on a year-on-year trend on routes where Comair and FlySafair flew as per "Barriers to entry in the Low Cost Airlines sector" by Anthea Paelo.

FIGURE: Barriers to entry in the low cost cost airlines sector-Anthea Paelo

FlySafair is gaining ground and is estimated to be operating 25 000 flights per year.

The drop in ticket prices is expected to reduce profit margins industry-wide.

Comair's debt will rise to R6-7 billion after receiving the remaining seven Boeing 737- Max planes.

At an interest rate of 8%,
Comair’s  interest expense could rise to R480 million which is more than its current operating profit**.

And that could be the beginning of the end for Comair.

Just like 1time airlines 7 years ago...

1time airline was a South African low-cost carrier that folded in 2012.

The airline was easily identifiable with its red-livery.

At its peak the airline had 12 McDonnell Douglas MD-80 aircraft and ran over 1 300 flights a month.

1time airline collapsed in 2012 after not being able to repay its debt.

So what led to 1time’s demise?

In 2010 the biggest low-cost airlines in South Africa were Kulula (run by Comair), Mango (owned by SAA) and 1time.

The local aviation industry experienced low growth from the 2008 financial crisis through to 2010.

FIGURE: Sales growth of 1time and Comair (2006-2011)

From 2009 price wars ensued with the airliners pricing as low as possible.

Kulula was at an advantage as

(1) They had a stronger balance sheet and could stomach losses and

(2) Saved on fuel costs as they ran more efficient planes compared to the 1time's McDonnell Douglas MD-80 aircrafts.

1time, sinking into trouble, could not compete at those price levels.

Margins were so low that it:

Was unable to pay interest on its growing debt andBills remain unpaid and piled up.

It was said that 1time had racked up a bill of R147 million with Airports Company South Africa.

Not long after the airline was grounded and that was the end.

High debt and declining operating profits, and the inability to pay interest on debt led to the collapse of 1time.

FIGURE: 1time and Comair debt and operating charts side by side.

Comair's debt is piling up and starting to look like 1time.

I hope the Comair board of directors are looking sincerely at the situation and realizing the risks they are putting the company in.

Lightning does strike in the same place twice.

The current joint-CEO of Comair Mr Glenn Wayne Orsmond was CEO of 1time airlines.

I sincerely hope that his past job has taught him some few tricks on how to survive walking around with a high debt load and decreasing profitability.

Lawrence Michael Madire

The South African Investor


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