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I bought some Mazor at 205c.

Comair share very weakly rated

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11 Feb 2014 Even though airlines are a terrible business to invest in and I avoid doing so, I am fascinated by them, so keep an eye on the newsflow. Why do I say they're terrible? Well, they require huge amount of capital to buy the planes, margins are wafer-thin, and the industry is terribly cyclical with the cost base changing with the oil price.

Of the airlines that there are, Comair is supremely well run by a bunch of highly competent individuals.


An airline's cost base fluctuates with the exchange rate, which impacts both the cost of fuel as well as USD-denominated maintenance costs.


Revenue depends on the number of passengers as well as on how much they spend. Comair says that "The domestic passenger market continues to show year-on-year shrinkage of approximately 5%, compounding on similar shrinkage in the prior year." Give the high cost base and resultant high ticket prices, it's unlikely that there'll be a near-term recovery in consumer spending.

Pricing also depends on supply, and Comair say that due to its increased fleet size as well as the increased size of state-carrier fleets, there is now more capacity in the domestic market than there was prior to Velvet Sky and time's exit in 2012.


Comair says that their current after tax profit margin of 5% remains below the 7% for the Transport & Logistics sector, as published by the DoT.

The 34.3c earnings per share in the 6 months to 31 Dec 2013 was way higher than in the 6 months to 31 December 2012. This is not surprising, considering that there was blood on the streets in 2012, with first Velvet Sky and then 1time getting knocked out of the ring (1time in Nov 2012).

If earnings could be extrapolated to full year earnings of 68.6c a share, that means that at a 10x PE they should be trading at R6.86 a share. The share price closed at R3.78 a share on Friday.

This means the market expects Comair's earnings to drop, and it has good reason to. It's very likely that a couple of the 4 news airlines wanting in on the action will start up during 2014 (1time, fastjet, flySafair and Skywise). Also, the cost base increased rapidly over the second half of 2013.

It's likely that FY2014 will be a watershed year for Comair. The order of 2 new B737s to arrive in 2015, may be just the wrong timing, if the new airlines are starting up then & market gets swamped by too much metal in the air.


It remains a concern that current assets (R1176m) are less than current liabilities (R1449m), and that the gap has widened since the 30th June 2013.

It is very difficult to say by how much profits will be impacted by the new potential new arrivals.


Although it feels tempting to have a gamble on Comair, I've done too much gambling recently :)

Kulula plane parked at Lanseria Airport, Johannesburg

Commentary on results to 30 June 2012

Comair have retained their unbroken profit history, now of 67 years, with headline earnings of 3.8c per share. They cite the 29% higher jet fuel price, an airports tariff increase of 70%, cost savings through the introduction of in-house flight catering units in Cape Town & Johannesburg & a salary freeze as contributing factors.

During the year a R14.7m loss was also incurred on the disposal of 3 Boeing 737-200 aircraft (which indicates that the numbers on the balance sheet may overestimate the value of the assets) and writing down the value of a fourth to nil.

It bodes well for the future that Comair are investing in themselves - in FY 2012 they spent:

It's not clear what the magnitude of the benefits from these investments will be, but it seems they may appear in the results of FY2013.

Current assets (R709m) are less than current liabilities (R1206m) - this seems to imply that Comair are using money paid for plane tickets to finance the purchase of aircraft.

It's clear that all the South African airlines are struggling, with 1time going into business rescue & Velvet Sky going under.

Comair are heading in the right direction with their cost cutting, and by tacking on revenue, like their initiative to start charging more for luggage. I have a feeling that this is just the start of them heading the industry in the direction of how low cost carriers operate in Europe - e.g. all checked-in luggage being charged for. Comair could emerge as the Ryanair of the South African airline industry, with the lowest cost base and the highest ancillary revenue (20% of Ryanair's revenue is ancillary).

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