BUSINESS DAY TV: How Comair plans to navigate the coming year
Comair CEO Erik Venter speaks about half-year results from the airline, which rose sharply on the back of a firmer rand.
Erik Venter is Comair CEO.
BUSINESS DAY TV: Comair has managed to lift its interim revenue by 6% as it increased ticket prices rather than passenger numbers during the period. But with consumers likely to remain under pressure, how does the company plan to navigate the coming year. CEO Erik Venter joins us now in the studio to discuss this further.
Erik, so a much better first half for you and we will, I guess, talk about some of the factors there, including losses on foreign denominated loans. But as far as passenger numbers and passenger growth is concerned, it doesn’t seem that you’re seeing any.
ERIK VENTER: No, passenger growth in aviation is generally very closely linked to GDP growth and we have seen over the last few years that that has really contained the market growth very severely, the poor economic growth.
And we do expect that to continue for a while, so we’re really in the environment of efficiency at the moment and how to deliver more efficiency to overcome inflation as opposed to expecting to get any kind of significant revenue growth, which is fine. We’re on quite a good programme in that regard in terms of peak placement, etc. We don’t have any shortage of opportunities in terms of efficiency right now which is great. But yes, there’s – unfortunately, we could be doing both. If our economy was a bit stronger we could be getting the revenue growth and the efficiencies which would be wonderful.
BDTV: Barring a few anomalies that didn’t occur in this period as we highlighted at the top, the growth in earnings that we are seeing [is] a result of raising ticket prices and not those passenger numbers. How nervous does that make you in the current environment because that can only carry you so far?
EV: No, it’s more a little bit of a bounce back from extremely depressed ticket prices last year. We’re still not even back to the sort of 2015 ticket prices, it’s just that last year we had an extreme price war going on with the entry of other competitors into the market and it’s been a little bit of a bounce back relative to that.
Ticket prices are still quite depressed and that’s a factor of the economy and the fact that we can’t really push pricing as a method of overcoming inflation because the market will just shrink further. So we have to balance it very carefully, we don’t want to see market shrinkage. At the moment, the overall market growth in the last six months was about 0.6% in passenger numbers.
BDTV: And yet Acsa comes out with a report today saying that they’ve seen a record amount of passengers pass through the airports and the aviation barometer says the number of passengers that used its nine airports last year came to 39.7-million, an increase of 5.4% over 2015.
EV: Most of it is a bit of a pick-up in international tourism again. The whole visa issue has been a little bit mitigated by the fact that there are now more points to apply for visas in both China and India. You can now get a long-term visa out of China, for example, so business people coming into SA from China can actually do so continuously rather than having to apply every single time. And again, the exchange rate did boost the tourism a little bit from the likes of the UK. But we’re still quite far behind where we were three years ago, in terms of inbound tourism. The bulk of what we’ve seen in growth has really been through a lot of exploitation of our exchange rate, which is wonderful, and that is a great motivation to get foreigners into SA.
BDTV: So when you talk surplus capacity in the market, what are we looking at versus international standards right now?
EV: The average occupancy in SA is around 75% on aircraft, whereas globally, where on short haul it’s typically 85%. So that gives us a fairly good indication of how far behind we are in terms of where we should be in terms of occupancies on flights.
BDTV: Does that mean that essentially Comair’s growth is capped? You talked about you could get more efficiencies — where would you get more efficiencies, because if an investor is looking to Comair as a growth story, it doesn’t seem that there is that much on the table?
EV: There’s always a lot more to come. Even if you just look at the launch of Kulula in 2001, since then the CPI index has gone up by over 100%, about 110% index, and at the same time airfares on average have only gone up by 24%. So the difference has been made up by efficiencies every single year. It just never ends. There’s always new technology, there’s always new opportunities.
The new 738 MAX that we have on order now come in at 15% greater efficiency than the latest aircraft we just got delivered, and they come at about 20% greater efficiency than the aircraft they’re replacing. So there’s just a continuous flow of projects that deliver efficiency, it really doesn’t end, but you have to work at it. You have to find the opportunities continuously, because it’s not going to come through revenue. And globally, air travel has declined by 70%, the cost of air travel has declined by 70% in real terms over 40 years.
BDTV: Talk about the opportunity that’s not going to come through from a revenue, doing you some favour over the period has been that relatively stable oil price. Is a hedging strategy one you’re potentially looking at, or steering clear from given past experiences and how severely you have been burnt?
EV: Hedging is really more about one’s own view on where the oil price is going versus the market view, because at the moment if you look at the forward prices for hedging, they’re pretty much in line with where we expect fuel prices to go. So there isn’t any sort of disparity between what the market thinks the price is going to do and what we think the price is going to do. So if we hedge now, we’re buying at $65, $70 for the future, which is where we think it’s going to be anyway. So there’s no real advantage there.
BDTV: So it would just be a cost basically. To take out a hedge...
EV: It would just be an insurance policy and we expect we’re going to achieve that price anyway, so what’s the point? There has to be a sort of fundamental shift between where the market thinks things are going versus your own opinion on where things are going before you start hedging. So at the moment, we don’t really see a point in it, but I think, yes, the oil price will be going up. We don’t really doubt that ... some of the production that’s been coming out over the last three years or so, particularly in the shale gas areas where, typically, the wells only last for two or three years, there’s been very little exploration since the drop in the oil price, so the volumes outside of the Middle East are going to start tapering off a little bit in the near future.
We’ll probably see a slow increase in the oil price, but actually, it’s almost a benefit to us, which sounds a bit bizarre, but having the most efficient aircraft in the market, we’re actually gaining a competitive advantage by the oil price going up.
So it’s a little bit odd in the market, it’s not the kind of thing I would have thought of years ago when we were flying at the same sort of efficiency levels as all the other competitors in the market, but today we can actually get a ... as the oil price goes up, our relative cost receipt actually comes down compared to our competitors.
BDTV: Okay. And then lastly, talking about there are some growth opportunities for you and they’re outside, though, of the airline business for you per se, its lounges, its catering, how’s that going because the trend does seem to be on the up.
EV: It is, the trend is actually going very well and typically with these things it does tend to have a bit of a compounding effect, so you start off at a very low base and as you grow, your percentage growth, it’s quite high, but in the beginning the actual numbers don’t really amount to much, and as you grow the compounding takes effect and you get to a point where your percentage growth translates into really big profit numbers.
We’re just starting to see that really coming through now, so our pilot training is going really well. We’re looking at putting in more flight simulators now. We’re training for 36 airlines, international airlines now already. The lounges are doing brilliantly, we’re looking at expanding the lounge business further. Catering has just taken off at quite a rate in the last six months, so we’re looking at a whole range of products outside of the airline catering.
BDTV: So that’s some of the prospects we’ll have to track you on at a later time...