Founder: Turnaround Talk
During the height of the Covid-19 Pandemic, a lot of attention was given to how the Pandemic impacted international travel. At the same time, South African Airways was going through the implementation of its business rescue plan which was farcical at best. Very little attention was paid to how the Pandemic would impact domestic airline carriers, the most prominent of which was Comair.
As we have seen, Comair is a company that is up against the ropes. The company is currently in the midst of the second forced grounding of its fleet this year as its business rescue practitioners scramble to find the necessary funding to implement the company’s business rescue plan.
This is yet another example of the inherent fragility that is commonplace in the profession. Just because there is a plan and a competent BRP, there are no assurances that the plan will go ahead unhindered.
As we dissect the issue, Dr Joachim Vermooten (a respected turnaround professional) and other aviation experts spoke to News24 to provide some insight into the issues that Comair faces.
Comair under pressure
The News24 article points out that internal communications between employees, seen by Fin24, have alleged that Comair had about a week in which to secure funding or face liquidation. One employee claimed that they had been told by the BRPs that failing meeting this deadline, they would be legally bound to apply for liquidation.
Approached by Fin24, the BRPs did not confirm this, however. “Negotiations are in progress and we are not able to confirm when these will be concluded, successfully or otherwise,” they said.
They did, however, say that monies had been ring-fenced in May for statutory payments to the South African Revenue Service (SARS), the pension fund and medical aid.
the article adds that monies were also set aside for May salaries. As for June salaries, they BRPs simply states that “staff have been sent home and arrangements will be confirmed in due course”.
Furthermore, Comair has allocated approximately 150 skeleton staff up and until next week to perform necessary functions. Monies were set aside to pay these staff members.
A Comair employee said it would be incredibly sad if, after two years of an attempted business rescue, Comair would have to stop operations after 75 years.
Comair suspended its kulula.com and domestic British Airways flights on Tuesday evening due to not having enough money to continue flying. The company has been in business rescue for the past two years. It says it has been impacted by rising debt due to pre-pandemic fleet renewal plans, the impact of the Covid-19 pandemic on the aviation industry, and, recently, the rising fuel cost.
Photo By: Kulula.com
What if Comair doesn’t survive?
Comair estimates it has about 40% of the SA domestic market, which means there will be knock-on effects if it does not secure funding and is forced to exit.
Aviation expert Desmond Latham says that will cause short-term spikes in the cost of flying, particularly domestically.
Competition watchdog the Competition Commission has already attempted to nip this in the bud by meeting with competitor airlines to prevent price gouging while the flights are halted, Fin24 reported.
“Comair is one of many local operators who are able to offer services. The problem is ticket prices. These have already gone up, using the very basic concept of supply and demand,” says Latham.
Latham believes this could be alleviated through tax and tariff relief measures, especially since Airports Company SA’s apron and landing fees are among the highest in the world. Furthermore, up to 70% of an airline’s running costs are based on fuel, which has sharply increased recently.
‘Sad for Comair, not a crisis for the market’
Aviation economist Joachim Vermooten foresees that, if Comair has to exit the market, other airlines – like South African Airways (SAA) – will fill the gap by expanding, especially since there are many planes available at lower leasing costs at the moment due to the impact of the Covid-19 pandemic on the industry.
Without Comair in the market, it might also make investing in SAA’s low-cost subsidiary Mango a more attractive proposition, in his view. A bid process for Mango has taken place and a preferred bidder still has to be announced.
“Just keep in mind that Comair has only suspended operations at this point. It can still manage to obtain financing to restart operations on a smaller scale,” says Vermooten.
Photo By: AFP
Facing the Alamo
It seems as if Comair’s BRPs, Shaun Collyer and Richard Ferguson, will soon be facing a barrage of questions from labour unions over the matter. And judging by past interactions between labour unions and companies, it may be a long day at the office fielding these questions. Nobody promised a rose garden to turnaround professionals when they entered into the profession anyway,
Another News24 article points out that three unions represented at Comair want to speak directly with the company’s business rescue practitioners (BRPs) after what they regard as a failed meeting with management on Thursday.
This comes after Comair had to suspend its kulula.com and domestic British Airways flights on Tuesday evening due to not having enough money to continue flying.
The article points out that the National Union of Metalworkers of South Africa (Numsa), Solidarity, and the Comair Pilots’ Association (CPA) met with the company’s CEO Glenn Orsmond for about an hour on Thursday. According to Comair, the meeting was requested by the unions.
All three of these unions have now written to the BRPs asking to meet with them.
The article adds that, according to the unions, Orsmond told them that the suspension of flights did not impact their rights as employees. But, said Numsa and Solidarity, he did not confirm whether salaries would be impacted either.
The unions added that, according to Orsmond, high fuel prices were part of the reason flights had to be suspended and the duration of the flight suspension would depend on whether the necessary funding could be raised. This is in line with the stance Comair has taken publicly.
The article points out that after the meeting, Numsa again called for Orsmond to resign, saying he was evasive and did not answer their questions. Numsa questioned why the BRPs were not present at the meeting, as well as their role, their fees and why they did not foresee the company running into financial problems.
The News24 article concludes by pointing out that Comair went into business rescue in May 2020, a few months after the start of the Covid-19 hard lockdown with its related grounding of all commercial flights. At the end of 2020, Comair’s business rescue practitioners approved a new owner, the Comair Rescue Consortium (CRC), which promised a R400 million equity injection and a R100 million loan. Comair will remain in business rescue until it gets enough funding to emerge as a viable business, otherwise the rescue practitioners will have to wind it down.
Diagnosing the problem
The calls for Orsmond to step down are not new. When the company was forced to ground its fleet by the South African Civil Aviation Authority earlier this year due to technical issues, Orsmond’s suitability as a leader was brought into question in the media.
I feel that the Unions are asking the right questions and are on the right path of protecting the livelihood of Comair employees. This circles back to the age-old debate of who is entitled to more value in a business rescue. Yes, creditors (as the company’s major shareholder) has a significant case when it comes to the preservation of value and they should receive a return on their investment. However, does this mean that this needs to take place over the preservation of jobs?
Lastly, the Unions are right to raise concerns about why the BRPs did not foresee the company running into financial problems. The fact that Comair was in financial distress is an indicator that there were financial problems going into the rescue. However, I think it would be prudent of the Unions to phrase this point of order differently. The Unions should be asking: why would the BRPs not foresee Comair running into financial problems if Orsmond and the board provided these BRPs with truthful information about the extent of the company’s financial distress from the start of the rescue? Numerous turnaround professionals have flagged this as a persistent problem with the companies that they are trying to rescue. The fact that the Unions are already taking Orsmond to task about his evasiveness when answering their question may not bode well for Comair if one has to do investigations in their upfront truthfulness with Collyer and Ferguson.
However, if Collyer and Ferguson were provided truthful information and they were still unable to foresee the risk of financial problems, questions regarding their ability to carry out the rescue should not top the Unions list of concerns. We are facing an attrition based environment where a number of small changes can complicate a rescue. Collyer and Ferguson need to be given space and time to do their job to the best of their ability without the added pressure of the whole country scrutinising their every move.
