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South Africa: Comair vows to go after SAA settlement

By Xolisa Phillip, in Johannesburg
Posted on Thursday, 20 February 2020 12:18

South Africa's Comair holds the British Airways licence
South Africa's Comair holds the British Airways licence / Rights reserved

Comair, the regional and local airline operator, is feeling the heat from South African Airways’ (SAA’s) financial woes.

Comair holds the operating licence for British Airways in South Africa and houses Kulula, its low-cost domestic airline brand.

The company’s route network focuses on central airports in Southern Africa and the Indian Ocean Islands, as well as centrally located airports in South Africa.

Its Kulula brand is a direct competitor to SAA’s low-cost and successful subsidiary, Mango.

Headwinds from all directions

  • For the six months to 31 December 2019, Comair has warned shareholders to brace for a drop in earnings per share and headline earnings per share, which will result in a headline loss for the period under review.
  • As a result, Comair anticipates a loss per share and a headline loss per share “of between 118c and 123c.”
  • A combination of factors, including SAA breaching the repayment terms of a court-ordered settlement agreement; a move away from SAA Technical to Lufthansa Technik for maintenance services; and the grounding of the Boeing 737 MAX 8, have eroded the company’s bottom line.

The SAA factor

Comair’s settlement agreement with SAA arose out of an anti-competitive conduct filing in which the former accused the state-owned flagship carrier of abuse of dominance. Comair lodged its initial dispute with South African competition authorities in October 2003.

The main grievance was that SAA had incentive schemes with travel agents, which its competitors believed were intended to facilitate their exclusion in the South African market.

The matter was not only adjudicated by competition authorities, but also reached the high court and, eventually, the Supreme Court of Appeal (SCA). The SCA is South Africa’s court of last instance for non-constitutional matters. It sits in Bloemfontein, Free State, the country’s judicial capital.

In February 2019, the SCA made a R1.1bn, inclusive of interest, award in favour of Comair against SAA. In terms of the court-ordered settlement, SAA was to begin payments from 28 February 2019 to 28 July 2022.

However, SAA failed to make scheduled payments throughout 2019, including on 28 and 31 December 2019.

  • “Comair had recorded a loss of R285m against the SAA damages claim receivable. Following on from the SAA business rescue process, Comair [has] decided to increase the loss by R505m to the value of the full outstanding settlement amount of R790m,” the listed company told the market.

But it does not end there.

  • Comair has vowed to pursue the outstanding amount owed by SAA “aggressively” and “will explore all options available.”

Technically speaking …

In terms of its operations, Comair has incurred a rise in its line maintenance costs “arising from the transition of the fleet from SAA Technical to Lufthansa Technik.”

SAA Technical is the maintenance arm of SAA. It has also been beset by governance challenges, much like its parent airline.

Boeing 737 troubles

In March 2019, the US Federal Aviation Administration grounded operation of the Boeing 737 MAX 8.

This followed the tragic crash of a flight operated by Ethiopian Airlines in which all passengers and crew died.

Authorities and airlines in other jurisdictions followed suit, including Comair which grounded its Boeing 737 MAX 8. The airline had a second Boeing 737 MAX 8 scheduled for delivery in March 2019.

That was delayed because of the international grounding and “a third delivery is expected to be delayed beyond its contracted delivery month of February 2020. Shareholders are advised no revised delivery dates have been forthcoming from Boeing.”

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