Despite the technical recession in the first quarter of its financial year, South African aviation group Comair performed well to deliver a record 12% increase in revenue for the interim period ended December 31, 2018.

However, the company said on Tuesday that the revenue growth was offset by elevated fuel prices and unforeseen short-term aircraft leasing costs.

Consequently, earnings per share (EPS) and headline earnings per share (HEPS) decreased by 38% to 27.2c a share.

Nevertheless, the non-airline businesses continued to perform well and maintained an overall contribution to net profit before taxation of 27%.

Cash generated from operations declined by R187-million to R436-million versus R623-million in the six months to December 31, 2017. This decline arose primarily as a result of elevated fuel prices.

Investing activities, meanwhile, included R89-million that was paid towards predelivery payments on the Boeing 737-8 MAX aircraft order and R253-million being invested in aircraft heavy maintenance. This resulted in a closing cash balance of R331-million.

Meanwhile, in the company’s airline business, passenger revenue increased by 11% on the back of a combined increase of 5% in passenger volumes and a 6% increase in the average fare per passenger.

Comair’s average seat occupancy has increased but remains below the global average of 85%, which is indicative of the continued overcapacity in the domestic airline market, the company said in a statement on Tuesday.

Airline operating costs increased by 17%, with the most significant driver being a 35% increase in the rand price of fuel per litre, amounting to an additional R263-million compared with the prior period, following a sharp escalation in the dollar price of oil combined with rand volatility.

The translation profit of the comparative period that arose from the effect of the exchange rate on a dollar-based aircraft loan, was reversed as the currency deteriorated from R12.36 to R14.38 against the dollar as at December 31, 2018.

This resulted in a reported loss of R11-million in the current period on the loan value of $15.7-million, compared with a profit of R11-million on the revaluation of the loan at December 31, 2017.

Additionally, increased aircraft depreciation amounting to R46-million arising from the re-assessment of depreciation on certain aircraft components, as well as an additional R50-million in hard currency-based operational costs, resulted in a higher cost base compared with the comparative period.

The problems with maintenance scheduling and parts inventory at South African Airways Technical hampered on-time departures and operations, resulting in unbudgeted, incremental costs of around R34-million, which included short-term aircraft leases to sustain fleet availability.

The airline has, subsequently, commissioned heavy maintenance events overseas in order to alleviate the backlog on local maintenance service capacity and is on track with the implementation of its aircraft line maintenance arrangements with Lufthansa Technik in South Africa.

The airline will be taking delivery of two new Boeing 737-8 MAX aircraft in February and March, as well as four leased Boeing 737-800 aircraft, which are scheduled for delivery between April and September, to replace its older Boeing 737-400s.

“The ongoing upgrades to our fleet are intended to mitigate the rise in the fuel price, while enhancing the potential revenue per flight and providing an improved customer proposition,” the company said.

Meanwhile, an insistent focus on implementing technology solutions has enhanced the company’s operating performance, customer service and revenue generation.

The pace of development in technology is relentless, Comair said, adding that the company has acquired a data integration platform for R19-million.

“This technology seamlessly connects all applications and data sources and will eliminate the duplication of development efforts across the company’s various distribution channels while facilitating the extraction of the maximum benefit from its customer data in order to improve on its service offering and on the marketing of relevant products to its various customer segments.”

Comair has further invested in the renewal of its Sabre suite of software licences, amounting to a cost of R34-million over two years. 

In August 2018, the company entered into a joint arrangement with information technology (IT) company, Infinea SA Holdings, thereby establishing jointly-held Nacelle Proprietary, which has been positioned as a service provider to the aviation and related sectors to deliver services such as IT operations support, project deployment and software development.

According to Comair, the joint venture creates the opportunity to commercialise decades of Comair’s operational discipline and expertise in aviation through utilising Infinea’s expertise in software development, software marketing, operations support and payment solutions.

The company is still in its startup phase and to period-end incurred a loss of R3.8-million, with the group’s proportionate share of unrecognised losses at period end being R1.9-million.

Looking ahead, Comair lamented that the current weak economy is expected to maintain pressure on consumer spending while the oversupply of seats in the domestic market continues to place downward pressure on pricing across most routes.

With the dollar price of oil having declined subsequent to the end of the first half, this will provide some relief in the second half of the financial year, the company said.

The ongoing investment in new aircraft remains a key competitive differentiator for Comair, particularly in an environment of higher oil prices and a poor exchange rate.

Comair further intends to continue with its diversification strategy as a means of mitigating airline risks such as fuel and exchange rate volatility and the inflationary cost of fleet replacement, the rate of which continues to outpace growth in margins.