in Air Transport / Features

Blow by blow - Comair in crisis

Posted 17 August 2020 · Add Comment

Wrenelle Stander became co-CEO of South Africa’s Comair in July 2019 and was promoted to group CEO in December that year, succeeding industry veteran Erik Venter. She took the helm at a turbulent time, with a series of exceptional events taking a harsh toll on finances. Now, as Victoria Moores reports, Covid-19 has proved to be the final straw, pushing Comair into business rescue.

Things were going well. Comair had an unblemished financial record, its fleet renewal was progressing, it had won legal damages from South African Airways (SAA), was transitioning to a more reliable maintenance provider, and had diversified through a series of acquisitions.

Unfortunately, the tide was about to turn.

Comair, which operates as low-cost-carrier (LCC) Kulula.com and a British Airways franchise, had been profitable every single quarter for 73 consecutive years.

However, in December 2019, the company posted a R564 million ($36.5m) interim loss, after costs rose 14% and revenue grew by only 3%.

By May 2020, the company had entered business rescue, the South African equivalent of administration. It all happened very quickly.
“Since I’ve taken over as CEO it has been a crisis a month,” Stander said.

The first blow was the Boeing MAX grounding. Comair had ordered eight MAXs to replace five owned 737-400s. The first new aircraft had arrived, a second was about to be delivered and a third was on the production line… then the type was grounded.

Cash was tied up in MAX down-payments ($45 million), replacement aircraft had to be leased in ($6.5 million) and maintenance costs spiralled ($14 million).

Stander said the MAX grounding led to “punitive costs and disruption to fleet availability”. Comair deferred its remaining five MAX deliveries to 2024-25, accelerated its compensation talks with Boeing and is exploring legal options. “It is hampering our fleet forecast, because we don’t know when it will be in service again,” she said.

Meanwhile, Comair’s far less profitable rival, South African Airways (SAA), was battling its own storm. SAA entered business rescue in December 2019. Normally, this would bode well for a lean and agile competitor like Comair, but not this time.

Comair did gain from some of SAA’s network cuts, but it had won an unfair competition case against SAA in February 2019 and been awarded a R1.1 billion ($70m) settlement.

SAA was ordered to pay Comair in regular instalments through to July 2022, but it defaulted in December 2020, after entering business rescue, forcing Comair to write-off R790 million ($51.2m) of the settlement. This accounted for R450 million of the R564 million interim loss. Stander said Comair will still “aggressively pursue” the money.

Meanwhile, SAA Technical had been Comair’s maintenance partner for decades, but Stander said its timings could be unreliable, affecting Comair’s operational performance. Comair decided to transition line maintenance to Lufthansa Technik to improve dispatch reliability, but this also came with a price tag. It will be up to two years before this transition pays off, because of initial set-up costs.

In the face of all these exceptional headwinds, Comair began implementing a turnaround plan. Then Covid-19 struck.

Comair entered the crisis with a fleet of 26 Boeing 737s and a diversified business, including the Altitude Training Academy (Alt.Academy), caterer Food Directions, airline-lounge brand SLOW Lounges, IT provider Nacelle, and a series of tourism brands.

Comair was also acquiring 100% of Star Air Cargo and Star Air Maintenance, bringing heavy maintenance capability back into the group.

But Covid-19 took a rapid toll on the business. On March 23, Comair announced that it had started redundancy talks, as part of its turnaround plan. On March 27, the carrier – and all other South African airlines – was ordered to stop flying. On April 3, Comair terminated its Star Air Maintenance and Star Air Cargo acquisition, along with the disposal of some of non-core businesses. On May 5, Comair entered business rescue.

“Now that the phased lockdown has been extended, the grounding is likely to endure until October or even November. These extraordinary circumstances have completely eroded our revenue base, while we are still obliged to meet fixed overhead costs. The only responsible decision is to apply for business rescue,” Stander said on May 5.

At the time, Stander said Comair “remains solvent” and refinancing talks were under way, but business rescue was “necessary” to quickly push through Comair’s turnaround plan and prepare for an operational restart once government sanctions were lifted.

“Through this process, we intend to right-size our operations to be more efficient, agile and customer-centric. This includes, but is not limited to, reconfiguring our network and fleet mix, reviewing portfolios and joint ventures, increasing digitisation of the business, and new product development and delivery,” Stander said.

By now, both SAA and state-owned South African Express (SAX) were also in business rescue. The South African Government had announced plans to revive SAA in a new form, while state-owned SAX was slated for liquidation.

But Comair has, historically, been a much more successful and stable airline than its government-owned competitors. On May 19, Comair business rescue practitioners, Shaun Collyer and Richard Ferguson, said there were “reasonable prospects” for the company to be rescued.

Collyer stressed that Comair was not “factually insolvent”, with R7.42 billion in assets and R5.48 billion in liabilities. The airline is also well-placed with 39% domestic market share, “immense goodwill” and a longstanding reputation.

“It was financially distressed because there was insufficient cash to pay ongoing costs and obligations and, with its flights grounded for an uncertain period, no opportunity to generate revenue,” the business rescue practitioners said on May 19.

Comair’s business-rescue plan was slated for publication on June 9, 2020, with a vote scheduled for June 24. The business rescue practitioners said the strategy will need buy-in from all stakeholders, along with post-commencement finance.

“The last few months have been particularly eventful,” Stander said, on March 11. “Comair has been having some really, really strong headwinds. We have had some really big uncontrollable items that have had an impact on our performance.”

 


 

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