Comair navigates strong headwinds

Main points

Headline loss of R564 million for the six months ending 31 December 2019. R450 million is attributable to the increase in the IFRS9 loss allowance on the SAA damages claim.
Earnings per share (EPS) declined by 543% to a loss per share (LPS) of 120.5 cents per share (prior period EPS: 27.2 cents per share).
Headline earnings per share (HEPS) decreased by 546% to a headline loss per share (HLPS) of 121.2 cents per share (prior period HEPS: 27,2 cents per share).
Revenue continued to perform well, increasing by 3% to R3,8 billion (prior period: R3,7 billion)

Comair Limited (Share code: COM) today (SUBS: Wednesday, 26 February 2020) reported a headline loss of R564 million in its interim results for the six months ending on 31 December 2019. R450 million of that loss is attributable to the increase in the IFRS 9 loss allowance on the SAA damages claim.

Comair is the only JSE-listed airline operator, with two airline brands: the low-cost carrier (LCC) kulula.com, and British Airways, which it operates under licence in Southern Africa.

Comair Group CEO Wrenelle Stander says, “Comair Limited is facing strong headwinds as a result of its fleet renewal program, the transition of its fleet from South African Airways Technical (SAAT) to Lufthansa Technik Maintenance International (LTMI), the impairment of the SAA claim as well as the extended grounding of the 737 MAX 8.

“We have taken decisive steps to implement far reaching cost-cutting measures and to increase revenue through improved ﬂeet availability and aircraft utilisation. In addition, negotiations with Boeing are underway to mitigate the impact of the grounding of the Boeing 737 MAX 8 and to pursue the full outstanding settlement amount owed by SAA, notwithstanding the provision made by Comair for the full amount. We are also divesting from non-performing investments.”

Stander continues, “A new board is in place which fully understands the challenges and opportunities the business is facing. The board will support the executive management team, to successfully navigate the challenges and leverage the opportunities that lie ahead. It is a great time to reposition the business.”

Earnings Review

Earnings per share (“EPS”) declined by 543% to a loss per share (“LPS”) of 120.5 cents per share (prior period EPS: 27.2 cents per share). Similarly, headline earnings per share (“HEPS”) decreased by 546% to a headline loss per share (“HLPS”) of 121.2 cents per share (prior period HEPS: 27.2 cents per share).

Operating expenses (excluding lease expenses reclassiﬁed in accordance with IFRS 16) increased by 5% (R171 million) to R3.3 billion (prior period: R3.1 billion).

However, excluding the accounting impact of IFRS 16, operating expenses have increased by 13% to R3.6 billion (prior period: R3.1 billion) as a result of the following:

Aircraft maintenance costs increased by R215 million arising from the replacement of ﬁve owned Boeing 737-400 aircraft with ﬁve leased 737-800 aircraft, as well as additional line maintenance costs arising from the transition of the ﬂeet from the transition of the ﬂeet from SAAT to LTMI.
Hard currency costs contributed to an increase of R51 million into operating expenses and inﬂationary escalations added a further R70 million.
Short-term wet-lease costs increased by R16 million to R48 million (prior period: R32 million). These cost escalations were oﬀ set by a R40 million fuel cost saving despite having increased ﬂown sectors by 4%. The savings were largely due to the decrease in the dollar price of oil from an average of USD72/barrel to USD62/barrel despite the average Rand/Dollar exchange rate weakening from an average of R14.20 to R14.70/dollar.
An incremental increase of R101 million in lease costs relating to ﬁve new long-term leases.
Comair continues to incur substantial losses, as a result of the grounding of the Boeing 737 MAX 8, without generating the commensurate revenue or contribution.
Depreciation and amortisation of property, plant and equipment and intangible assets increased by R55 million mainly from a change to the expected remaining useful life of engines following major maintenance events.
Cash generated from operations increased by R175 million, however, this is oﬀ set by the incremental increase in aircraft lease payments of R101 million, now disclosed as “financing activities” in the Statement of Cash Flows, for IFRS 16 purposes.
An amount of R265 million (2018: R314 million) which pertains to aircraft pre-delivery debt is classiﬁed in current liabilities but will be reﬁnanced into long-term debt on delivery of the next two 737 MAX 8 aircraft (subject to regulatory approval by the SACAA).>

Dividends

In view of the Group’s current ﬁnancial status, the Board has determined that no dividend should be declared for the 2020 ﬁnancial year. It is also envisaged that no dividends will be declared until such time as the ﬂeet has transitioned from SAAT to LTMI, the matter of the 737 MAX 8 has been resolved and targeted aircraft utilisation has been achieved.

SAA Damages Claim

On 15 February 2019 the Company entered into a full and ﬁnal settlement agreement (“Settlement Agreement”) with South African Airways (SAA) and which Settlement Agreement was made an order of Court by the Supreme Court of Appeal.

In terms of the Settlement Agreement, SAA would pay Comair a settlement amount of R1 108 040 000 plus interest (“Settlement Amount”). The Settlement Amount would be made in accordance with a payment schedule commencing 28 February 2019 and terminating on 28 July 2022.

SAA failed to make the payment of the capital and interest amount due on 28 December 2019. Consequently, SAA is in breach of its obligations in terms of the Settlement Agreement, and the full outstanding amount of R790 million, as of 31 December 2019, became due in terms of the Settlement Agreement.

SAA was placed in voluntary Business Rescue on 5 December 2019. The Business Rescue Practitioner is required to determine whether or not there is a reasonable prospect of a successful business rescue. If not, SAA will be placed into liquidation.

The future recoverability of the amount outstanding from SAA remains uncertain. Comair recorded a loss allowance of R285 million in terms of IFRS 9 against the SAA damages claim receivable as at 30 June 2019. Following the SAA Business Rescue Process, the Board of Directors of Comair has decided to increase the IFRS 9 loss allowance as at 31 December 2019 by R505 million to the full value of the outstanding Settlement Amount of R790 million.

Transition of the fleet from South African Airways Technical (SAAT) to Lufthansa Technik Maintenance International (LTMI)

The transition from South African Airways Technical (SAAT) to Lufthansa Technik Maintenance International (LTMI) for the ﬂeet’s line maintenance has been accelerated as far as is feasible, while maintaining the ﬂight schedule and on-time-performance targets. Seven of the 26-strong ﬂeet are already being maintained by LTMI, with signiﬁcant improvement in aircraft availability. The transition requires grounding the aircraft to extract historical maintenance records. This is timed to coincide with a major maintenance event, minimising disruption to the ﬂight schedule. The complete ﬂeet transition is due by the second half of the 2020 calendar year. LTMI recovers initial set-up costs and scales up its facilities to coincide with the transition, so Comair will not see any meaningful cost beneﬁts until FY22.

Grounding of the 737 MAX 8

Operations of the Boeing 737 MAX 8 aircraft were suspended on 13 March 2019 by the US Federal Aviation Administration. No re-certification date has been forthcoming from Boeing, but Comair continues to incur cumulative losses and disruption to ﬂeet availability. The grounding hampers the Group’s ability to forecast future ﬂeet requirements.

Comair has also contributed USD45 million (USD26 million in cash and USD19 million funded) in pre-delivery deposits towards the 737 MAX 8 order. The ongoing uncertainty surrounding re-certification as well as the prescribed return-to-service processes of the 737 MAX 8 has led Comair to accelerate compensation negotiations and explore the legal and ﬁnancial consequences thereof.