Failure to rescue Comair was a gamble from the start

It turns out that 1.1 billion rupees was not enough to save Comair.

This is the amount injected by the mysterious bailout consortium nominally / publicly “fronted” by CEO Glenn Orsmond (R500 million shares) and the group’s lenders (R600 million new loans). It should be noted that the creditors were already on the hook for R1.4 billion.

It ended with a grim report of less than 200 words from the business bailout professionals (the airline has been operating under the business bailout for over two years).

Those practitioners yesterday called for the liquidation of the 76-year-old airline group, stating that “they no longer believe there is a reasonable prospect that the company can be saved.”

The last few months …

Reading between the lines of the report and the press release (which was almost double the length of the report), this appears to be the course of events over the past few months:

  • The Omicron variant of Covid-19 / Civil Aviation Authority inaction / high fuel prices / (choose your excuse here) had led to a situation where the airline needed additional funding.
  • Somehow, the airline stayed afloat – probably not repaying the loans on schedule – and the rescue consortium was “only able to finance the impact of these events up to a point.” There is no specific public information indicating that the consortium has invested nothing more compared to R500 million.
  • Existing lenders, who had already amassed additional money because this was – as Orsmond kept reminding us over the past few months – “an inherently good business,” were unwilling to put a dime into this mess.
  • The business rescue professionals, fulfilling their fiduciary duty, turned to the consortium for further funding and this request fell on deaf ears (despite Orsmond’s public proclamations). Clearly, they say, this “was not successful”.
  • Since the lenders and the consortium were apparently unwilling to invest any more money (or as the professionals call it, “under these circumstances”), they turned to other lenders to raise the required funding. This may “not be guaranteed”.

And here we are.

A proud and consistently profitable group of airlines has finally hit the wall.

Miles van der Molen, CEO of the regional operator Cemair, said Business Insider the group had always felt “that there would still be a significant adjustment in the industry before it normalized, and Comair was the logical victim because of their approach and financial position.”

Van der Molen could not have better summed up the entire circus of the past three years.

Orsmond, it should be remembered, was a senior executive at Sun Air (in liquidation), co-founder of 1time (in liquidation), one of the founders of Skywise (apparently in liquidation) and now CEO of Comair (in liquidation).

Why lenders would have been willing to put an additional R600 million into Comair (when they were “only” exposed to the R800 million tune) is worth looking into.

The same goes for the very modest amount of the consortium’s equity loan (R500 million).

restart costs

The costs of restarting the business alone amounted to R700 million. Comair not only had R120 million in downsizing costs, but had over R200 million owed to both the International Air Transport Association (IATA) and fuel suppliers in depots. That money pledged by lenders and lenders was quickly absorbed.

READ ALSO: Comair’s wings have been permanently clipped after obtaining no further funding

So why would a “rescue consortium” and existing lenders invest over Rand 1 billion in this business in the first place?

You could start a new airline from scratch – and easily, at the price of the consortium’s capital injection.

For something the size of Comair, R1.1 billion less than the committed business restart costs of R700 million was simply too small.

BA connection

The key lies in the (almost amateurish) financial projections in the business rescue plan. Here we see that in 2023 – the first normal trading year of the “new” Comair – revenue would have been R7.9 billion. Most of this, nearly R5 billion, would come from its licensed British Airways (BA) operation.

Despite the lower load factors, this unit printed money.

Has – or had – a ridiculously profitable customer base on the Johannesburg-Harare route (along with SAA, with one flight a day), Fastjet, Airlink (which quickly filled the gap left by the old SAA with three flights a day), and Air Zimbabwe (which somehow still operates only one flight per day).

It also carried all inbound BA passengers, many of whom would head to Cape Town or Victoria Falls. Members of parliament and other government officials can also use their vouchers to fly with BA (or SAA). This is funded by the taxpayers.

The BA franchise is where the profit was made in Comair.

In projections for 2023, the bailout saw an en route profit for both BA and Kulula (excluding headquarters costs) of R1.4 billion. Take these expenses into account and the group’s net profit would be R711 million.

The profit before interest, taxes, depreciation and amortization (Ebitda) would have been / could have been / should have been R1.7 billion. Not that this is a useful measure for an airline.

By 2024, revenue would have been R8.2 billion (BA at its “peak” of R4.9 billion) with Kulula rising in some way (the unknown “how”) resulting in profits of R808 million. This juicy license from BA, where he pays around 9% royalty plus additional costs such as catering, was probably the basis for this entire bailout.

Interesting facts about the rescue plan …

Three key assumptions (yes, key!) In the bailout plan for the next three years were that, from a metronomic standpoint:

  • The price of Brent crude oil would average $ 45;
  • The average rand / dollar exchange rate would be R17.50; Other
  • The average price of jet fuel would be R6.85.

It is surprising that this was signed.

Any analyst worthy of the name could / could / should never align their assumptions about input prices over three years. Especially in the airline sector.

Brent is now at $ 123. The edge is around R15.46. Jet fuel is roughly double the hypothetical price. No one could have predicted any of this, but it is very unusual to see the same assumptions made year after year and accepted as bankable.

Of course, Comair would have had to face the consequences of this current environment. Like any airline. FlySafair, Airlink and Cemair continue to add routes and frequencies and, of course, they are all profitably traded.

A lack of sufficient working capital, as well as poor management, a shaky business plan and an invasion of Ukraine (which has caused an increase in input costs) would almost always lead to this result.

A penny for Gidon Novick’s thoughts? Or even the former CEO of Comair Erik Venter?

This article first appeared on Moneyweb and has been republished with permission. Read the original article here.