Who would invest in an airline? The industry is facing a lot of challenges right now with escalating fuel prices, reduction in passenger volumes caused by the global recession and arguably the growth of technology that allows people to communicate and confer without the need to travel. These are things that affect airlines all over the world, but in South Africa life is even more challenging for a private sector airline operator that has to compete with the heavily subsidised national carrier South African Airways (SAA) and its low-cost brand Mango. The government, by taking a largely anti competition stance and allowing SAA to increase capacity in a shrinking market, has done no favours for the industry.
Such is the environment in which Comair operates. Dating back to 1946 the JSE listed company has been successfully operating in southern Africa for nearly 70 years. Since 1991 it has been operating local and regional services under a licence agreement with British Airways, and in 2001 it launched South Africa's first no frills airline kulula.com. Erik Rudolph Venter, a chartered accountant, joined the company 20 years ago and has been the Chief Executive Officer of Comair Ltd since 1 December 2011. He is a pragmatist, and entirely sees the point of the banks and investors who tell him they would never invest in the airline industry. “I wouldn't invest in a fund of airlines either!”
So is he in the wrong job? Not a bit of it. Comair not only outperforms other airlines but a lot of other industries that are not seen as high risk. It has an astonishing record of declaring an operating profit in every one of its 68 years of existence, remarkable enough in itself but quite extraordinary in the South African climate of the last few years. So think again, investors, he says. Look at the company not the industry!
The chief explanation he has for Comair's success is its people. “We hold on to people for a very long time. Long service awards for ten years service or more are held by about 25 percent of our staff at any one time. There is a lot of experience here compared with our competitors in the market.” And the reason they stay is related to the flexibility and adaptability to change that is at the heart of the corporate culture. In the aviation industry more than most, he believes, it is essential to build that flexibility into people's contracts and instil a continuous improvement mindset: “Everyone is used to the fact that things are always evolving, and we don't have to go through major change management programmes every time we want to make an improvement!”
People and the flexibility they bring to the company are probably the two main reasons Comair has dealt so well with the volatility of the airline market says Venter. The cost environment has imposed a harsh discipline on airlines and not all have been able to adapt. “Look at our 14 year history since 2001: costs have risen by about 168 percent against a consumer price index rise of around 98 percent in South Africa over the same period. At the same time the average air fare has increased only by 37 percent, so we have had to close that gap and that requires constant innovation and improvement.” More efficient aircraft, better route planning, working with air traffic management to improve landing patterns, saving weight on the aircraft – these are all strategies that have been adopted.
Comair's full service offering is flown in the livery of British Airways (BA) under a licence agreement dating back to 1996. The British Airways brand brought with it a rich heritage of stylish travel, reputation for service excellence and a wide range of products such as the prestigious Executive Club frequent flyer programme. Some years ago there were a number of similar franchise arrangements round the world, though now Comair is one of only two airlines to remain in the scheme. “It has been a very successful arrangement both for Comair and for BA in South Africa – we are able to make all the operational decisions and tailor the service to local requirements, while benefiting from the reputation of the top brand in the business.”
In 2001 Comair added another brand, the low-cost, green-liveried kukula.com (slogan: Full-on Travel). Today most of the popular domestic routes in South Africa are served by both carriers. The major routes are Johannesburg to Cape Town (the tenth busiest route in the world with 4.5 million passengers a year), Johannesburg to Durban, Durban to Cape Town and Johannesburg to Port Elizabeth. “After these,” says Venter, “the numbers get smaller, especially when we look at the various African destinations we serve, though some, like Harare, Mauritius and Victoria Falls are quite busy.”
He is constantly looking for new opportunities. There is undoubtedly a lot of growth taking place within many economies of sub-Saharan Africa, but it is growth from a low base, he warns, and even respectable percentages resolve into low volumes. “I don't think Africa is quite there yet in terms of potential for passenger volume growth. A lot of hurdles remain to be overcome.” A cautious approach to expansion that will sustain the company's profitability record.
More immediate returns are being generated in certain aspects of diversification. Taking a travel business approach Comair is developing its revenue streams from car hire, hotel bookings and other value added services. “That segment of the business is starting to grow quite nicely. We have done a successful job of developing our airline lounges and we see possibilities in developing conference facilities and dedicated lounge facilities for other partners.” The company has also set up its own catering facilities at Johannesburg and Cape Town and is applying for licences to do third party catering for other airlines, he adds. “We are finding we can run a much more efficient catering operation than some of the legacy catering businesses were able to provide.”
Another important revenue stream over the years has been third party pilot training. With simulator facilities for Boeing aircraft as well as ATR regional jets, Comair can offer training at a much better rate than anything available in Europe or the USA. This is a service with potential for expansion. But Comair understands training. “We have to train almost everyone ab initio for Comair whether front line staff, finance staff, or cabin crew.” Extensive facilities at the Comair training centre next to O.R. Tambo International Airport provides the knowhow and instils the soft skills vital to the Comair culture.
As with any airline Comair needs to keep its assets up to date, and this is the largest area for investment, with an ongoing programme to completely renew the 26 strong Boeing fleet, or at least the 18 that it owns rather than leases. Though it's a big balance sheet item the replacement of Boeing 737-300s with the larger 800s resulted in a 15 percent increase in capacity that was a major factor in the 23 percent rise in revenue over the first half of the current financial year. Being more fuel efficient these aircraft also offset escalating fuel prices. Four new Boeing 737-800s were introduced into the kulula fleet last year, and four more will be delivered by the end of 2015 followed by further orders by 2020, he says.
Another important ongoing investment is in the migration to a new enterprise solution platform. Says Erik Venter: “We have implemented the Sabre airline solution system, which has already delivered benefits both in revenue and cost efficiency. The basic inventory hosting went live in July 2012, though that in itself does not deliver huge benefits. It's the bolt-on modules that bring measurable efficiencies. We have been continually adding improvements and new functionality over the last 24 months and will continue to do that.” As with any ERP platform, there's huge suite of upgrades and new products to choose from – Comair will avail itself of the most relevant functionality.
These days TV and newspaper advertising are in rapid decline, with the rise of instant access to news and the ability to skip ads when watching programmes by satellite. Social media have stepped into the resulting space, and Comair is determined to make full use of the new platforms. “It's essential to keep up to the minute with what is happening in that space especially in Africa with the reliance of so many people on mobile devices to stay in touch. It is a whole new way of thinking and requires a very different strategy. You get instant response from customers and instant feedback compared with the old ways of communicating with customers.” It has meant getting social media addicts onto the marketing team, who understand the dynamics of the twittersphere: “People respond at 3.00 on a Sunday morning, and by 8.00 you have a trend growing across social media channels – if you are not alive 24/7 you will miss it!”
As the last remaining independent privately owned domestic scheduled airline operator in South Africa Comair has a responsibility to its employees, customers and shareholders to secure a level playing field in what is after all an over-traded market, concludes Erik Venter. While in no way challenging the position of SAA nor arguing it should not be subsidised, he feels that it should share the risk as well as the rewards, and be subject to the same rules of competition that protect the industry in other jurisdictions. Things may change after the general election in May but even in the present climate the message is loud and clear – Comair is a great investment, as proved by its confident declaration of an interim dividend based on its results in the half year to December 2013 – resulting in a ten percent rise in its share price.
Written by John O’Hanlon, research by Stuart Platt