The Guvnor
9th Dec 2001, 15:52
From today's SA Sunday Times:
[quote]Airlines forced into dangerous profit zone as rand bellyflops
AVIATION
By ROGER MAKINGS
THE weak rand is threatening the already marginal profitability of major South African airlines, and fares are likely to increase next year despite hostile trading conditions.
This week BA/Comair issued a profit warning to shareholders and SAA said it was no longer sure it would achieve a targeted R50-million headline profit for this financial year.
Nationwide, the third jet carrier operating SA trunk routes, said fares would have to be increased next year if profitability was to be maintained.
Nationwide chief executive Vernon Bricknell says yields will have to increase by 12.5% to overcome the 41% decrease in the value of the rand against the dollar since the beginning of the year.
"To achieve this we will have to manage our discounted fares carefully and seek a general fare increase," he says.
SAA says it is reassessing its rand/dollar exchange rate for the next financial year.
Richard Forson, SAA's executive vice-president and chief financial officer, said this week: "We will still strive to achieve headline earnings of R50-million but it is going to be difficult. Business travel is declining and the falling rand is not helping our operating costs, of which 51% are dollar-denominated."
Forson says much depends on what happens over the festive season, traditionally a busy time for the airline.
"We have prepared some worst-case scenarios and the necessary corrective action. Primarily we will concentrate on revenue generation as well as cost-cutting."
On the plus side, the airline's 16 new Boeing aircraft are more fuel efficient and do not yet require expensive maintenance, as do the older Boeings in the fleet.
The airline budgeted for R8 to the dollar for this year but this assumption has obviously "been blown out of the water".
"We are reassessing the average level for next year. It is going to have to be significantly higher," says Forson.
He also expects the planned new long-haul fleet to cost that much more, but manufacturers will just have "to put additional items on the table".
He predicts that even more foreign carriers will reassess their operations as South Africans find it increasingly difficult to travel overseas.
Forson says as costs increase due to the falling rand, so revenue generated in foreign countries increases - the one setting off the other.
"Where we do have a problem is when the dollar strengthens against the European currencies such as sterling, marks and franks."
Chris Hoare, commercial executive for Nationwide, said this week: "Costs on leasing, distribution through our Zurich-based reservation system Atraxis, fuel, insurance and maintenance - all dollar-based - have increased, yet the domestic market is shrinking and yields are dropping." He says there is overcapacity in the market and that Nationwide has reduced seats by 28% since the beginning of the year to sustain profitability.
Piet van Hoven, managing director of BA/Comair, warned that discounted fares would be more difficult to come by in the new year.
"They don't help our yields and these need to be boosted." This would not, however, apply to its sister discount carrier, kulula.com
In its warning to shareholders published this week, Comair said the weaker rand, a declining market and overcapacity were creating "adverse trading conditions".
The rand might also have an impact on the number of new aircraft Comair acquires.
It has five 737-400s on order, the first of which arrives next month. "I can't say what will happen, except that we are evaluating the situation."
However, there is also good news. All three men predict that more foreign tourists will visit SA because it is cheaper than destinations elsewhere in the world.
Hoare says sub-Saharan Africa is opening up to SA airlines and that this is providing increased foreign revenue.
"We have also noticed in recent weeks that there is a marked growth in foreign conference and performance incentive business, all of which is helping to cushion losses against the falling rand."
[quote]Airlines forced into dangerous profit zone as rand bellyflops
AVIATION
By ROGER MAKINGS
THE weak rand is threatening the already marginal profitability of major South African airlines, and fares are likely to increase next year despite hostile trading conditions.
This week BA/Comair issued a profit warning to shareholders and SAA said it was no longer sure it would achieve a targeted R50-million headline profit for this financial year.
Nationwide, the third jet carrier operating SA trunk routes, said fares would have to be increased next year if profitability was to be maintained.
Nationwide chief executive Vernon Bricknell says yields will have to increase by 12.5% to overcome the 41% decrease in the value of the rand against the dollar since the beginning of the year.
"To achieve this we will have to manage our discounted fares carefully and seek a general fare increase," he says.
SAA says it is reassessing its rand/dollar exchange rate for the next financial year.
Richard Forson, SAA's executive vice-president and chief financial officer, said this week: "We will still strive to achieve headline earnings of R50-million but it is going to be difficult. Business travel is declining and the falling rand is not helping our operating costs, of which 51% are dollar-denominated."
Forson says much depends on what happens over the festive season, traditionally a busy time for the airline.
"We have prepared some worst-case scenarios and the necessary corrective action. Primarily we will concentrate on revenue generation as well as cost-cutting."
On the plus side, the airline's 16 new Boeing aircraft are more fuel efficient and do not yet require expensive maintenance, as do the older Boeings in the fleet.
The airline budgeted for R8 to the dollar for this year but this assumption has obviously "been blown out of the water".
"We are reassessing the average level for next year. It is going to have to be significantly higher," says Forson.
He also expects the planned new long-haul fleet to cost that much more, but manufacturers will just have "to put additional items on the table".
He predicts that even more foreign carriers will reassess their operations as South Africans find it increasingly difficult to travel overseas.
Forson says as costs increase due to the falling rand, so revenue generated in foreign countries increases - the one setting off the other.
"Where we do have a problem is when the dollar strengthens against the European currencies such as sterling, marks and franks."
Chris Hoare, commercial executive for Nationwide, said this week: "Costs on leasing, distribution through our Zurich-based reservation system Atraxis, fuel, insurance and maintenance - all dollar-based - have increased, yet the domestic market is shrinking and yields are dropping." He says there is overcapacity in the market and that Nationwide has reduced seats by 28% since the beginning of the year to sustain profitability.
Piet van Hoven, managing director of BA/Comair, warned that discounted fares would be more difficult to come by in the new year.
"They don't help our yields and these need to be boosted." This would not, however, apply to its sister discount carrier, kulula.com
In its warning to shareholders published this week, Comair said the weaker rand, a declining market and overcapacity were creating "adverse trading conditions".
The rand might also have an impact on the number of new aircraft Comair acquires.
It has five 737-400s on order, the first of which arrives next month. "I can't say what will happen, except that we are evaluating the situation."
However, there is also good news. All three men predict that more foreign tourists will visit SA because it is cheaper than destinations elsewhere in the world.
Hoare says sub-Saharan Africa is opening up to SA airlines and that this is providing increased foreign revenue.
"We have also noticed in recent weeks that there is a marked growth in foreign conference and performance incentive business, all of which is helping to cushion losses against the falling rand."