Africa

Comair Results Hit by Boeing 737 MAX Grounding and SAA Claim Impairment

Comair
Comair Boeing 737MAX | Boeing

Comair Limited reported a headline loss of R564 million in its interim results for the six months ending on 31 December 2019. R450 million of that loss is attributable to the increase in the IFRS 9 loss allowance on the SAA damages claim.

Comair is the only JSE-listed airline operator, with two airline brands: the low-cost carrier (LCC) kulula.com, and British Airways, which it operates under licence in Southern Africa.

Comair Group CEO Wrenelle Stander said:

“Comair Limited is facing strong headwinds as a result of its fleet renewal program, the transition of its fleet from South African Airways Technical (SAAT) to Lufthansa Technik Maintenance International (LTMI), the impairment of the SAA claim as well as the extended grounding of the 737 MAX 8.

“We have taken decisive steps to implement far-reaching cost-cutting measures and to increase revenue through improved fleet availability and aircraft utilization. In addition, negotiations with Boeing are underway to mitigate the impact of the grounding of the Boeing 737 MAX 8 and to pursue the full outstanding settlement amount owed by SAA, notwithstanding the provision made by Comair for the full amount. We are also divesting from non-performing investments.”

Stander continues:

“A new board is in place which fully understands the challenges and opportunities the business is facing. The board will support the executive management team, to successfully navigate the challenges and leverage the opportunities that lie ahead. It is a great time to reposition the business.”

South African Airways Damages Claim 

On 15 February 2019 the Company entered into a full and final settlement agreement (“Settlement Agreement”) with South African Airways (SAA) and which Settlement Agreement was made an order of Court by the Supreme Court of Appeal.

In terms of the Settlement Agreement, SAA would pay Comair a settlement amount of R1 108 040 000 plus interest. The Settlement Amount would be made in accordance with a payment schedule commencing 28 February 2019 and terminating on 28 July 2022.

South African Airways failed to make the payment of the capital and interest amount due on 28 December 2019. Consequently, SAA is in breach of its obligations in terms of the Settlement Agreement, and the full outstanding amount of R790 million, as of 31 December 2019, became due in terms of the Settlement Agreement.

South African Airways was placed in voluntary Business Rescue on 5 December 2019. The Business Rescue Practitioner is required to determine whether or not there is a reasonable prospect of a successful business rescue. If not, the South African flag carrier will be placed into liquidation.

The future recoverability of the amount outstanding from SAA remains uncertain. Comair recorded a loss allowance of R285 million in terms of IFRS 9 against the SAA damages claim receivable as of 30 June 2019. Following the SAA Business Rescue Process, the Board of Directors of Comair has decided to increase the IFRS 9 loss allowance as of 31 December 2019 by R505 million to the full value of the outstanding Settlement Amount of R790 million.

Transition of the fleet from South African Airways Technical (SAAT) to Lufthansa Technik Maintenance International (LTMI)

The transition from South African Airways Technical (SAAT) to Lufthansa Technik Maintenance International (LTMI) for the fleet’s line maintenance has been accelerated as far as is feasible while maintaining the flight schedule and on-time-performance targets. Seven of the 26-strong fleet are already being maintained by LTMI, with significant improvement in aircraft availability. The transition requires grounding the aircraft to extract historical maintenance records. This is timed to coincide with a major maintenance event, minimizing disruption to the flight schedule. The complete fleet transition is due by the second half of the 2020 calendar year. LTMI recovers initial set-up costs and scales up its facilities to coincide with the transition, so Comair will not see any meaningful cost benefits until FY22.

Grounding of the 737 MAX 8

Operations of the Boeing 737 MAX 8 aircraft were suspended on 13 March 2019 by the US Federal Aviation Administration. No re-certification date has been forthcoming from Boeing, but Comair continues to incur cumulative losses and disruption to fleet availability. The grounding hampers the Group’s ability to forecast future fleet requirements.

Comair has also contributed USD45 million (USD26 million in cash and USD19 million funded) in pre-delivery deposits towards the 737 MAX 8 order. The ongoing uncertainty surrounding re-certification as well as the prescribed return-to-service processes of the 737 MAX 8 has led Comair to accelerate compensation negotiations and explore the legal and financial consequences thereof.


Click to comment

Leave a Reply

Your email address will not be published. Required fields are marked *

To Top