Do airlines need non-airline businesses to survive? If one company’s unbroken 72-year run of profits is anything to go by, the answer is a resounding yes.
For the past 72 years — all of its existence — South African aviation company Comair has posted a profit, a remarkable run in a fickle industry.
Founded in 1946, Comair is the only aviation company listed on the Johannesburg Stock Exchange, the largest exchange in Africa. In 2018, Comair posted record earnings, with profits of $23.5-million.
The company is perhaps best known as a franchise partner for British Airways in Southern Africa. It jets, which wear the British Airways livery, fly among the region’s major cities. In addition, Comair also operates the low-cost carrier kulula, based in Johannesburg.
But what’s more interesting is that an increasing slice of the company’s pre-tax profits – 25 percent, in 2018 – are coming from non-flying sources. It all begs the question: Do airlines need non-airline businesses to survive?
“On a global level, airlines are doing things very differently, because fundamentally they can’t make money out of simply carrying passengers anymore,” said Erik Venter, Comair’s chief executive officer.
In Comair’s case that has meant broadening the company’s suite of products beyond mere planes ferrying customers from A to B.
Some of its non-flying revenue sources include:
• The Comair Training Centre – flight simulators, a cabin crew academy and ground crew training – which teaches crews from 30 international airlines.
• Comair Travel, South Africa’s largest online retailer by value.
• Food Directions, which provides in-flight catering. It services local retailers, airlines and airport lounges.
• Comair’s SLOW lounges, which host both British Airways’ premium passengers and qualifying customers from global airlines and financial institutions.
Technology also is a key expansion point for Comair. Last year it formed a joint venture, Nacelle, to market and provide airline technology solutions, from electronic flight bags to ramp management systems.
“We’ve been doing a lot of our own software development,” said Venter. “Most of the businesses we established because we couldn’t find the right pricing or the right service level in the market.”
For similar reasons, Comair bought the leadership development consultancy Metaco Holdings in 2018.
“We do a lot of coaching and individual leadership development within the company, and we see a demand for that in corporate South Africa,” Venter said.
DIVERSIFICATION WON’T WORK FOR ALL AIRLINES
Speaking to the Business Day, aviation analyst Joachim Vermooten noted that while the aviation industry is skewed by the ongoing state-funded bailouts of South African Airways, “margins are better in the non-airline ancillary businesses where interference by the state does not affect business.”
The strategy of diversification “has worked for some airlines and not for others,” added Linden Birns, aviation analyst at Plane Talking. “It depends entirely on the airline, its business and revenue growth strategy, its shareholders’ appetite and the specific economic conditions a carrier finds itself trading in.”
In southern Africa, those conditions aren’t pretty.
According to Venter, the real cost of air travel in the region has declined by 70 percent in just 15 years. Poor GDP growth over the past decade has meant airlines can’t use volume growth to replace falling yields, while high inflation and currency volatility further compound the problem.
“Since 2001, average inflation has led to a cost increase of 9.5 percent per annum, but we’ve only achieved an average airfare increase of 1.5 percent per annum, so every year there’s another eight percent of cost that one has to get out of the market,” said Venter
Part of Comair’s success has been ensuring each company is run separately, tendering and competing on the open market.
“We’re not going to sacrifice any one unit’s profitability for the sake of propping up another,” Venter said. “And an airline simply doesn’t have the luxury of subsiding anything else.”