Comair hit by SAA claim uncertainty, impact of grounded Boeing

For the six months ending December 31, 2019 Comair [JSE:COM] reported a headline loss of R564 million, of which R450 million is attributable to the increase in a loss allowance on a South African Airways (SAA) damages claim.

Comair operates its own low-cost carrier as well as British Airways in South Africa under a licence agreement.

Earnings per share (EPS) declined by 543% to a loss per share (LPS) of R1.205 per share and headline earnings per share (HEPS) decreased by 546% to a headline loss per share (HLPS) of R1.212 per share. Revenue increased by 3% to R3.8 billion.

Comair group CEO Wrenelle Stander told Fin24 it is facing strong headwinds as a result of its fleet renewal programme; the transition of its fleet from South African Airways Technical (SAAT) to Lufthansa Technik Maintenance International; the impairment of the SAA claim; as well as the extended grounding of the 737 MAX 8.

At the same time, she said, regarding various board resignations in the past, that it followed on from an earlier board meeting where the board charter was reviewed, and it was decided to create greater alignment with King IV governance principles.

"We now have a fully refreshed board, still including seasoned aviation experts and people who understand the challenges we face," said Stander.

"It is a great time to reposition the business. We have taken decisive steps to implement far reaching cost-cutting measures and to increase revenue through improved ?eet availability and aircraft utilisation."

SAA claim

In February 2019 Comair entered into a settlement agreement with SAA in terms of which the state-owned airline would pay Comair an amount of R1.108 billion plus interest in accordance with a payment schedule commencing in February 2019 and terminating in July 2022.

SAA, however, failed to make the payment of the capital and interest amount due in December 2019, the same month it went into voluntary business rescue. Consequently, SAA is in breach of the contract and the full outstanding amount of R790 million became due in terms of the settlement agreement.
The future recoverability of the amount outstanding, however, remains uncertain and Comair recorded a loss allowance of R285 million over the interim period against the SAA damages claim receivable as at June 30, 2019.

Stander told Fin24 that Comair has been in contact with SAA's business rescue practitioners and is also part of SAA's creditors committee. Comair is a concurrent creditor along with about 95% of other creditors.

Boeing 737 MAX 8

Stander said negotiations with Boeing are underway to mitigate the impact of the grounding of the Boeing 737 MAX 8. Comair's Boeing 737 MAX 8 has been grounded for about 18 months now and Stander says the impact on Comair's business has been quite big, for three reasons.

"We ordered eight Boeing 737 MAX 8s and we still don't know what the situation is regarding the grounding of the MAX 8. The US Federal Aviation Authority has indicated that the MAX 8 could be flying again from June," said Stander.

"That, however, does not mean we will be flying our MAX 8 again from June. Delivery or not of the other 7 MAX 8s we ordered is still depending on the outcome of our negotiations with Boeing."
Aircraft maintenance costs

Aircraft maintenance costs increased by R215 million arising from the replacement of ?ve owned Boeing 737-400 aircraft with ?ve leased 737-800 aircraft, as well as additional line maintenance costs arising from the transition of the ?eet from SAA Technical to Lufthansa Technical.
In view of the group's current ?nancial status, the board has determined that no dividend should be declared for the 2020 ?nancial year.

It is also envisaged that no dividends will be declared until such time as the ?eet has transitioned from SAAT to LTMI, the matter of the 737 MAX 8 has been resolved and targeted aircraft utilisation has been achieved.

As for legal action by strategic leadership consultancy Metaco, acquired by Comair in July last year, Stander said they are going to arbitration on the matter.

As for the interim results in general, Stander told Fin24 she is happy that, despite challenging market conditions, the group could show 3% growth in revenue.

"All in all, there are strong headwinds, but I remain optimistic," she said.

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