Comair's share price fell as much as 10% to an intraday low of R3.01 yesterday after the British Airways franchisee, which also operates kulula.com, released its financial results for the year ended June.
Its savings from reduced jet fuel prices in the first half were wiped out in the second half by ticket prices falling roughly 15% on average in the SA market to compete with new players. The price cuts also reversed the revenue growth experienced in the financial first half.
Comair CEO Erik Venter said on some routes ticket prices did not cover costs, and average revenue in the industry had dropped 10%. "Prices will have to go up or someone will disappear from the market," said Venter. "The losses are not sustainable."
Transport economist and aviation expert Joachim Vermooten said a more competitive market was good as the industry could rely on "competitor factors" to be a natural regulator. He said new entrants had not increased capacity in the market, but Mango and Comair had purchased new aircraft. "You need a third or fourth competitor to get a measure of stability and trigger price competition," he said.
Comair's profit fell to R218m from R264m, and revenue was flat as new airlines entered the market. Low-cost airline FlySafair took off in October last year offering tickets as cheap as R399 and Skywise launched this year with similar prices. A hybrid airline, Fly Blue Crane, made its first flight this month.
Venter said Comair expected the oil price to remain low and Comair was not hedging any of its fuel contracts. Comair did not achieve the full benefit of lower fuel prices because it hedged 26% of its fuel demand during the early decline of oil prices.
In 2008, Comair was among airlines to suffer from hedging when oil prices dropped. Airlines, unsure when oil prices would peak, purchased hedges at the beginning of 2008 when oil was trading well above 100 per barrel but incurred losses when the price fell sharply in July that year.
"We are not hedging anything at the moment. The market dynamics are more unexpected than was anticipated. We think oil prices will stay low for a bit longer. But we will not be hedging until we see a market movement like a significant increase in demand or decrease in supply," said Venter.
In the first half of Comair's financial year, the plunge in the oil price resulted in a drop in the price of jet fuel to R7.30 per litre by December last year from R9.50 in July last year. A litre of jet fuel cost R6.50 by the end of June.
Comair still had 160,000 barrels hedged at an average $82 each at year end, about 10% of its fuel demand. These hedges will expire in December.
Vermooten said hedging was a short-term buffer against price movements and oil prices were expected to remain just above or below 50 per barrel. "In these circumstances, if you hedge it would be a waste," said Vermooten. "At this moment with the world economy where it is, there is no outlook that warrants hedging."
Source: Business Day
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