Comair FD discusses how diversification will help the aviation company to deliver wider profit margins.
Comair yesterday announced its results, with a record profit of R326 million after tax for the year ended 30 June 2018.
“We increased profit by 10 percent, and it took blood, sweat and tears to get there,” says Kirsten King, FD of Comair.
The company’s airline business saw a seven percent increase in revenue, which King says arose from a four percent increase in passengers and a three percent increase in fares.
“This was a really good performance, considering the excess capacity in the market, particularly in the low-cost segment that includes Flysafair, Mango and Kulula.”
She attributes Comair’s success in this segment to their aggressive fleet replacement cycle:
“We invest in aircraft and that’s starting to yield results. The aircraft are starting to pay for themselves, there’s a fuel burn saving of between 11 percent and 15 percent on a 737-800 vs a 737-400. This means that Kulula can keep its average fare down, putting pressure on other airlines in terms of fuel costs. In fact we have our most profitable years when the oil price is high.”
Headline earnings per share increased by four percent to 69.5c a share, from last year’s 67c per share. Kirsten said:
“After 72 years of trading profitability our share price doesn’t seem to change. It’s the result of two things: there’s the perception of risk around aviation, and we’re just too small. We have to grow our business, but we can’t grow our business because there’s already excess capacity in the local market.”
Because of this, Comair is turning to its non-airline business to deliver growth because it is “less risky and less capital intensive”. The non-airline business is made up of the lounges, the travel business, a training division and an IT venture, and is contributing 25 percent to Comair’s total profit before tax. Kirsten says that they are hoping to get that contribution up to 50 percent with a number of targeted expansions and investments.
Growth in the non-airline business will allow Comair to do the capital-intensive work that they are hoping to on the airlines side. “The airline is achieving a margin of five percent after tax, which is a thin margin, hence the diversification into the non-airline business, which can deliver 30 percent. If we want to keep our fleet replacement cycle at its optimum, we need to be closer to a 10 to 15 percent margin, which is hard to crack, no matter how hard we work,” says King.