Tourism Business Council South Africa CEO Tshifhiwa Tshivhengwa says Comair’s grounding will wipe out 40% of domestic air capacity. Tourism minister Lindiwe Sisulu has described the airline’s demise as “unfortunate” and says Comair’s closure “will have a negative impact on tourism in the country”.
However, aviation economist Joachim Vermooten tells The Africa Report that other carriers in South Africa can learn valuable lessons from Comair about balancing operation capacity – number of seats and flights – closer to market demand levels.
“… [Upward] movements in the Brent crude oil price results in decreases in the company’s profitability,” state BRPs Richard Ferguson and Neil Hablutzel in their application filed to the high court in Johannesburg, which on 14 June granted an order paving the way for the provisional winding up of Comair.
[Engagements] with other potential investors came to nought
Following failed efforts to raise R500m ($31m) in new capital to inject into Comair, Ferguson and Hablutzel “are of the view there is no longer a reasonable prospect of rescuing the company”, which entered business rescue in May 2020.
“The company does not have access to any further funding necessary to fund its operational costs,” say Ferguson and Hablutzel. “The respondent [Comair] is commercially insolvent and falls to be placed into liquidation.”
Investors had provided $8m (about R120m) on 10 March 2022, but the company required at least another R125m by close of business on 30 May 2022, say the BRPs.
“… [Neither] the investors nor the lenders were prepared to fund the company any further. … [Engagements] with other potential investors came to nought,” Ferguson and Hablutzel say.
A total of 11, 543 parties, including about 1,200 employees, are affected. The high court has given the 11,453 respondents until 26 July to “show cause why Comair should not be provisionally wound up”.
Comair is unable to make payment of salaries and wages due to employees beyond May 2022; operational costs due to trade creditors; and aircraft storage, maintenance, and insurance costs, according to Ferguson and Hablutzel’s filing.
That means “… the company cannot ensure the preservation of aircraft within … [its] fleet (valued at R3.5bn).” “There is an urgent need for a liquidator to take these assets under […] control to preserve value for the company’s creditors,” say the BRPs.
As at April 2022, Comair had total debt of R3.3bn about half of which comprised aircraft loans from Nedbank (R1.5bn) and Absa (R346m), the documents submitted to the court show.
End or an era
Founded in 1946, Comair grew into one of the largest commercial airlines in Southern Africa.
The operator of budget carrier Kulula and full-service British Airways flights, under a franchise agreement inked in 1996, listed on the Johannesburg Stock Exchange (JSE) in April 1998.
Before its grounding, four out of every 10 domestic tickets sold in South Africa were British Airways or Kulula tickets, according to the tourism ministry.
SAA adds more capacity in wake of Comair’s collapse https://t.co/sGnIJPibZn
— Business Report (@busrep) June 28, 2022
Information filed in support of the company’s initial business rescue shows that for the year ended 30 June 2019, Comair had a net profit after tax of R896m. However, around February 2020 the company posted a net loss after tax of R490m.
Comair suspended trading in its shares on the JSE in May 2020. The company officially delisted from the bourse in April 2021.
The Competition Commission has expressed concern about price gouging within the market following Comair’s grounding.
Tshivhengwa shares similar sentiments from a tourism perspective. “We want to be a destination that is affordable. We have to give people value for money. From an air travel point of view, affordability is important,” he says.
“Either we get more capacity to bridge the gap [opened up by Comair] or we’re going to have issues,” says Tshivhengwa.
“Now, with the country being fully open, it means we may not have enough capacity to move people around. We have been encouraging everyone [airlines] to apply through the licensing council to increase their capacity, [and] to acquire or lease more aircraft,” Tshivhengwa says.
“Aviation that works is important for tourism recovery,” says Tshivhengwa.
Market correction
Vermooten, an independent aviation economist and research associate at the University of Johannesburg, says recent aviation demand in South Africa has been sitting around 60%.
That means most airlines have been operating in excess of market demand. “The average passenger numbers per flight haven’t recovered to pre-pandemic levels. … [There] was excessive capacity,” Vermooten says.
Between 2011 and 2012, the US aviation industry re-balanced operation capacity and set it closer to market demand, according to Vermooten.
South African airlines are undercapitalised.
“Since then, the whole industry in the US has been profitable up to Covid-19. That’s the big lesson for South Africa,” says Vermooten.
South African-based airlines also face a challenge in that foreign direct investment in local carriers is limited to 25% of equity, Vermooten says.
“That implies the majority of the shareholding has to come from South Africa, which is relatively small with regard to the expensive capital assets that have to be operated,” says Vermooten.
“That means South African airlines are undercapitalised. You need good capitalisation to have enough equity and funding available for black swan events,” says Vermooten.
“We need investment from hard currency investors because the assets, and most of the costs, are hard currency in nature. You need to balance the two,” Vermooten says.
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