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1time share analysis

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26 Apr 2012 As long as I could get a seat near the front, I've always liked flying with 1time airline (the MD8X series of aircraft have their engines at the back) - I enjoy its relatively spatious seats (by low cost carrier standards), short check-in queues, vegetarian-friendly menu, my little ones love the free kiddies pack, and they've never messed me around by excluding airport taxes from their headline prices.

Why I wont buy the 1time share

In February I explained why I wouldn't invest in Comair (Comair's share price has fallen 9% since), and today I'll explain why I wont invest in 1time either:

1time have had a change of management, and it's possible that the new management will turn things about in 2012, but to invest on that hope feels more a gamble to me than a sensible investment decision.

wing of a 1time plane

What went wrong?

1time cited "sharp increases in fuel & airport charges", the weakening currency", passenger numbers being lower than budgeted for and low ticket prices as a result of "fierce competition", as being the primary factors behind the poor results. I'd add to that the loss of R48m at Safair Technical (trading at Jetworx).

Fuel price increases for 2011 worst on record

As a rough estimate of the impact of fuel prices, let's assume that pricing occurs about a month before fuel is purchased, so any change in the fuel price over the month results in a profit or loss. I've average the rolling one-month changes in oil price in 2011, and it came to R21, which we can see is the worst over the last 10 years (I could only find data to 2002). The even worse news is that so far 2012 is the 2nd worst on record!

 

Rolling 1 month change in Rand oil price

1 Jan 2012 to 26 Apr 2012

17

2011

21

2010

6

2009

11

2008

-26

2007

16

2006

6

2005

7

2004

3

2003

-4

2002

-1

Airport charges

It's well known that there have been massive increases in airport taxes (largely to finance King Shaka International Airport). Changes to airport charges are known in advance, so theoretically could be taken into account in pricing, but the fierce competition in 2011 left airlines with no pricing power.

Dividends

1time has never declared a dividend, initially as a result of its policy to reinvest for growth, and in the latest financial year as there's been a loss.

Business Outlook

1time's margins are driven by the oil price, and so far the average rolling one month change has been R17 in 2012, the 2nd worst of the last 10 years. Increases in the fuel price are worse for 1time than their competitors, as their aircraft are less fuel efficient.

The expected continued increase in airport charges will further decrease margins.

Competition has slightly decreased with Velvet Sky not flying, which will allow a bit more pricing power and should result in higher passenger loads. Santaco Airlines seem to have delayed their entry into the industry. Of course the SAA Group have their ongoing losses subsidised by the South African government, which is a structural reason why airline prices tend to be lower than they should be for longer than they should be in South Africa, and makes it difficult for private companies to compete.

Excalibur Aerospace attempted to purchased a 29.6% stake in 1time, at 45c a share; and in one of the few highlights for 1time shareholders over the last year, the deal lapsed (Excalibur Aerospace exposed their level of competence in their management of Velvet Sky airline).

Aircraft fleet renewal plan

In their interims to 30 June 2011, 1time mentioned that they were busy with an aircraft fleet renewal plan, and "the Group expects to announce aircraft fleet changes during 2012 to ensure that the airline maintains its position as the lowest cost operator in the domestic industry". They mentioned nothing further in their condensed financial results to 31 December 2012, but no doubt this would have a big impact on costs during 2012 if they are still actioning.

In an interview with Alec Hogg, Blacky Komani (Chief Executive of 1time) mentioned that they've approached a "South African-based institution to say we need to refinance our fleet, because part of our big loss is based on the leasing costs that are paid in foreign currency. So we make losses on foreign currency conversion, as well as on the interest rate." I don't see this as making a huge difference, as the currency conversion costs weren't the major part of their losses, and their interest-rate costs may be higher in South Africa.

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