Failed rescue of Comair was a gamble from the beginning

It turns out R1.1 billion was not enough to save Comair.

That’s the amount injected by the mysterious rescue consortium nominally/publicly ‘fronted’ by CEO Glenn Orsmond (R500 million in equity) and the group’s lenders (R600 million in new loans). It must be noted lenders were already on the hook for R1.4 billion.

It ended with a dour less-than-200-word report from the business rescue practitioners (the airline has been operating under business rescue for over two years).

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

Last few months …

Reading between the lines of the report and the media statement (which was nearly double the length of the report), this appears to be the course of events in recent months:

• The Omicron variant of Covid-19/Civil Aviation Authority grounding/high fuel prices/(pick your excuse here) had resulted in a situation where the airline needed additional funding.
• Somehow, the airline remained afloat – likely by not repaying loans on schedule – and the rescue consortium was “only able to finance the impact of these events up to a certain point”. There is no specific public information to indicate that the consortium invested anything more than the R500 million.
• Existing lenders, who had already stumped up additional cash because this was – as Orsmond kept reminding us in recent months – “an inherently viable business”, were not prepared to put a further cent into this mess.
• The business rescue practitioners, fulfilling their fiduciary duty, approached the consortium for more funding and this request fell on deaf ears (despite Orsmond’s public proclamations). Plainly, they say, this was “not successful”.
• Because lenders and the consortium were seemingly unwilling to invest further cash (or as the practitioners term it, “in these circumstances”), they approached other lenders to raise the funding required. This could “not be secured”.

And here we are.

A proud, consistently profitable airline group has finally hit the wall.

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

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

Orsmond, it must be remembered, was a senior executive at Sun Air (liquidated), co-founder of 1time (liquidated), one of the founders of Skywise (ostensibly liquidated), and now CEO of Comair (to be liquidated).

Quite why lenders would’ve been willing to put an additional R600 million into Comair (when they were ‘only’ exposed to the tune of R800 million) deserves scrutiny.

So too does the very modest amount of equity funding from the consortium (R500 million).

Restart costs

Business restart costs alone totalled R700 million. Not only did Comair have R120 million in retrenchment costs, it had over R200 million due to both the International Air Transport Association (Iata) and fuel suppliers in deposits. That money committed by lenders and funders was rapidly absorbed.

ALSO READ: Comair’s wings permanently clipped, after failing to secure additional funding

So why would a ‘rescue consortium’ and existing lenders want to invest over R1 billion in this business in the first place?

One could start a new airline from scratch – and easily, for the price of the consortium’s equity injection.

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

BA connection

The key is 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 be R7.9 billion. The bulk of this, almost R5 billion, would be from its British Airways (BA) operation, under licence.

Despite lower load factors, this unit printed money.

It has – or had – a ridiculously lucrative customer base on the Johannesburg-Harare route (alongside SAA, with one flight a day), Fastjet, Airlink (which rapidly filled the gap left by the old SAA with three flights a day) and Air Zimbabwe (which somehow still operates a single flight a day).

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

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

In the projections for 2023, the rescue plan saw a route profit for both BA and Kulula (excluding head office costs) of R1.4 billion. Take those expenses into account, and the group’s net profit would be R711 million.

Earnings before interest, tax, depreciation and amortisation (Ebitda) would’ve/could’ve/should’ve been R1.7 billion. Not that this is a useful measure for an airline.

By 2024, revenue would be R8.2 billion (BA at its ‘peak’ of R4.9 billion) with a ramp-up of Kulula somehow (the ‘how’ not known) resulting in profits of R808 million. This juicy licence from BA, where it pays about 9% in royalties plus additional costs such as catering, was arguably the base of this entire rescue.

Funny thing about the rescue plan …

Three key (yes, key!) assumptions in the rescue plan for the next three years were that, metronomically:

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

It is astonishing that this was signed off.

Any analyst worth their salt would/could/should never straightline their assumptions of input prices across three years. Especially in the airline business.

Brent is now at $123. The rand is around R15.46. Jet fuel is about double the price of the assumption. No one could’ve predicted any of this, but it is highly unusual to see the same assumptions being made year after year and accepted as bankable.

Of course, Comair would’ve had to deal with the consequences of this current environment. As does any airline. FlySafair, Airlink, and Cemair continue to add routes and frequencies and are, surely, all trading profitably.

The absence of sufficient working capital, plus poor management, a rickety business plan, and an invasion of the Ukraine (which caused a spike in input costs) would almost surely always result in this outcome.

A penny for Gidon Novick’s thoughts? Or indeed former Comair CEO Erik Venter’s?

This article first appeared on Moneyweb and was republished with permission. Read the originals article here.