Four months after Comair was placed into business recue, its business rescue plan was finally published late last night. The plan sets out the recapitalisation of the airline with an injection of capital by a new investor. Creditors and shareholders have until September 18 to decide whether to approve the plan, which could see the airline take to the skies again on December 1 or earlier. Tourism Update sums up some of the key facets of the plan.
Comair’s financial distress
Comair’s business rescue practitioners believe that the once-profitable airline, which has been operating since 1946 and is considered one of the largest commercial airlines in Southern Africa, found itself in financial distress due to a number of external circumstances that the airline was unable to control.
“It is important to understand that what happened to Comair was the result of an eco-system problem that has seen some 600 airlines around the world cease to operate. It was not something that was business specific. Comair is a national asset. Getting it back in the air will save 1 800 jobs, provide the flying public with more choice and competitive fares, strengthen the aviation sector and contribute to the broader South African economy,” said Richard Ferguson, one of the business rescue practitioners.
The practitioners explain that in addition to the impact of COVID-19 and the lockdown-imposed travel bans, Comair’s profitability and cash flow had already declined due to rising levels of debt that it took to renew the company’s fleet. The worldwide grounding of the Boeing 737 Max aircraft during 2019 exacerbated this situation, as Comair had placed a large order with Boeing for these aircraft and already made certain pre-delivery payments. The situation worsened when SAA was placed into business rescue in December 2019 and breached the terms of its Competition Commission settlement, leaving Comair out of pocket to the tune of R790m (€40.1m).
Why should stakeholders vote for the business rescue plan?
The BRPs argue that the plan will allow creditors a more favourable realisation of funds owed to them as opposed to a wind-down or liquidation of the airline. The plan outlines a number of scenarios that estimate that creditors could realise 100% of their funds through the implementation of the plan, while it is estimated that secured creditors would only realise about 60% of the funds owed them and unsecured creditors only about 40% of the funds owed them, should the airline liquidate. Funds are also expected to be realised sooner through a business rescue process while a liquidation is estimated to take two to four years to complete.
When is Comair expected to fly again?
While the business rescue plan gives December 1 as the expected date for the airline to resume services, there are indications that this date may be moved earlier.
“It is the desire and intention of the investors to re-commence domestic passenger services earlier than December 1. The company will endeavour to do so as soon as practical, subject to the fulfilment of the required suspensive conditions,” states the plan.
Employees
Comair’s BRPs have applied a no-work-no-pay principle when it comes to the 2 200 people that the group currently employs. This means that employees have not received salaries, or accrued leave, bonuses or increases since the company ceased operations when lockdown was announced on March 27. This principle will continue to apply until such time as the airline recommences flying.
Approximately 400 jobs will be cut, through voluntary retrenchment, early retirement and the continuation of Section 189 retrenchments. This will see Comair’s workforce decreased to 1 800 employees. If the plan is not accepted all employees would lose their jobs and would receive lower retrenchment benefits.
The plan outlines a number of suspensive conditions that would need to be met for the business rescue plan to be implemented. These include Comair coming to an agreement with the various trade unions and employees to cut 400 jobs and for remaining employees to waive claims for payment while the airline has been grounded. When Comair recommences its flying operations, the plan outlines that the payment of renegotiated salary and benefits will take place. Employees necessary for the restart of flying operations will be paid an hourly tariff for services rendered prior to the operations’ start date.
While Comair’s board has remained intact during this period, the obligation to pay non-executive directors has been suspended for the duration of the business rescue process. Meanwhile, managers who have continued to work with the BRPs are receiving reduced remuneration payments. It is interesting to note that the proposed investment contemplates the appointment of certain executive and non-executive directors and executive managers.
Fleet mix
The fleet mix proposed in the plan will increases the proportion of Comair-owned aircraft, which will limit the airline’s exposure to foreign currency risk. Comair’s fleet has been placed in long-term storage and to ensure that the aircraft are correctly maintained, repaired and insured. Aircraft will gradually be returned to service when the airline resumes flying, with a seven-month ramp-up period planned until June 2021. The initial fleet mix is expected to comprise 20 aircraft, of which 17 will be next-generation Boeing 737-800s and three Boeing 737-200s. The plan outlines that the fleet will ultimately consist of 25 aircraft, 15 of which will be owned and 10 of which will be leased.
The BRPs have already terminated certain lease agreements and are in the process of returning these aircraft to the lessors. The BRPs are also renegotiating all remaining lease agreements, asking for a 12-month moratorium on all lease payments, a moratorium of maintenance reserve payments and a reduction in future rental payments and an agreed extension of the lease agreements.
Funding
The airline’s return to service is expected to be financed by an injection of R500m (€25.4m) from a preferred investor in return for a 99% shareholding. Up to 15% of this shareholding will be allocated to a suitable B-BBEE partner within 12 months. The first R100m (€5m) of this investment will be paid in two equal transactions in September and October. The investors will also be responsible for providing equity capital to the company for the sum of R400m (€20.3). Comair will be de-listed from the JSE and a new board constituted in due course.
Another R100m will also be paid to Comair by Discovery Limited in respect of services to be provided by Comair to Discovery members, including Vitality ticket subsidies. These funds are expected to be advanced on Comair’s operations start date and will be set off against future ticket sales over a period of approximately 12 months.
A further R600m (€30.4m) in new nett debt funding has also been applied for, which is subject to credit approval and fulfilment or waiver by the investor.
Existing debt has also been deferred, with capital payments deferred for 12 months and interest for eight months.
Customers
In the event that Comair was not acting as the principal service provider, but as an agent for hospitality and travel bookings (for example, where a Qatar Airways flight was booked through Discovery Vitality), customers holding unused third-party reservations will be refunded where possible.
Operational strategy
The plan intends for Comair to continue operating its air services under the brands of British Airways and kulula.com and outlines a strategy for the airline to improve on historic levels of revenue by leveraging off the strength of these brand names and seizing opportunities that have opened in the domestic market through the rationalisation of competitor routes. Another of the plan’s suspensive conditions also includes the termination of Comair’s contract with Sabre and a move across to the Amadeus platform.
