Strategic Management

Comair flies high after efficiency strategy pays off Comair announced on Tuesday that it has achieved record earnings for the financial year ended June 30 2018, despite challenging trade conditions. Profit after tax was R326m, up R29m compared to the prior financial year. This marks 72 years of uninterrupted profitable operations. A final gross cash dividend of 17 cents per ordinary share was approved. During the past financial year its non-airline business contributed 25% to net profit before tax. Earnings per share (EPS) increased by 10% to 69.8 cents per share, while headline earnings per share (HEPS) increased by 4% to 69.5 cents per share. During the previous financial year EPS was 63.7 cents per share and HEPS 67.0 cents per share. The challenging conditions during the financial year included poor economic growth in SA rising fuel prices and surplus capacity in the SA domestic airline market. Comair's main business is scheduled and non-scheduled airline services within SA, sub-Saharan Africa (SSA) and the Indian Ocean Islands. It operates under its low-fare airline brand kulula.com, as well as under the British Airways livery, as part of a license agreement. In addition, Comair has a catering service domestic and international airport lounges and a training centre. Comair CEO Erik Venter told Fin24 they anticipated in the past that oil prices would increase again. That is why it followed a strategy of upgrading its fleet over the past five years to more fuel-efficient aircraft. This strategy is increasingly paying off, widening the gap with competitors, in his view. Comair currently buys about 17 million litres of jet fuel per month and Venter estimates it saves about 6% to 7% on its total fuel burn thanks to the new aircraft. Once the next generation Boeing 737 MAX aircraft is incorporated in the Comair fleet as from January 2019, Venter anticipated the airline will use about 17% less fuel per flight than a year ago. Taking into account the extra seats offered on the new aircraft, he estimates that the fuel burn per seat will be 35% less than on the aircraft being replaced. "This is a long-term game and currently the higher fuel price is giving us more edge over our competitors," he said. Surplus capacity Venter explained that the surplus capacity in the domestic airline market was caused by the expansion of the low-cost airline industry over the past three years, while the demand for low-cost air travel did not grow. "Over the last three months, as economic pressure grew - especially due to fuel price increases - some airlines have been cutting airfares to try and grow revenue. We see a bit of desperation in the market at the moment," said Venter. He added that, while profits for the year were good, Comair is still not achieving the margins that will allow for the optimum pace of upgrading its fleet. He foresees that the weak SA economy will maintain pressure on consumer spending, while the oversupply of seats in the domestic airline market suppresses pricing across most routes. At the same time, he regards Comair as well placed to operate in these difficult conditions, thanks to its strong brands, committed staff, effective equipment, an efficient cost base and strong cash reserves. Furthermore, its diversification strategy into non-airline business yields comparatively higher margins and is less capital intensive than the airline segment. Skills shortage According to Venter, there is a broad shortage of skills in Africa in the aviation industry and it is expected to get worse over the next few years as many skilled technicians start to retire. That is why Comair sees a market for creating these skills at its academy. There is already a lot of interest from international companies operating in SA. As for its flight operations, Comair plans to stick to what it currently offers until the economy improves. Asked about his view on the situation at state-owned airlines SAA and SA Express, Venter said these airlines have hard challenges ahead. "It seems as if people internally at these airlines do not want to see change as they benefit from the way things are. There are also constraints from government's side," said Venter. "To make the state-owned airlines more efficient might mean losing jobs, something which will not go down well during an election year. And I cannot see that combining the two state-owned airlines will make any difference." In his view, it is the sentiment about SA as a country and the problems at the state-owned airlines which negatively impact investment in the country's airline industry. This despite Comair showing 72 years of profits.

Question 4

Based on the above article, use the resource based view (RBV) to conduct an internal analysis for Comair.