by Gregory Simpson

ERIK VENTER, LORD OF THE SKIES

Comair started way back in 1946, a year after the end of WW2, and has been profitable ever since. This arguably makes it the most sustainable airline in the world, helped in no small part by Erik Venter, who is only the fourth CEO in 71 years.

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The stability of the leadership at Comair has undoubtedly been a key factor in their longevity and ‘Long Game’ approach to aviation.

And with profits of over 50% from the last financial year, Venter is all smiles as their main domestic competition, South African Airlines, flounders under a sea of questionable management, according to reports.

It’s always best to start at the beginning, as Venter outlines the keys to Comair’s longevity in a very cut-throat business where only the smart survive.

“Organisational culture is the crux of it, it’s not something that you can do through once-off initiatives, it’s got to be something that’s inherent in the approach to business and we’ve had very long-term CEOs, board members, even investors and that allows us to really focus on long-term goals and not just deal with the year-to-year approach to life. One of the things you can only achieve in a very long-term approach is to establish an organisational culture that’s very strong, so we’re quite obsessive about organisational culture. We have a fairly healthy paranoia for inflation because we can’t pass on cost increases simply to airfares, this doesn’t work in aviation,” he explains.

Pricing

Unlike most services that become more expensive by the year, air travel is one that has become cheaper over the years, in relation to inflation, which has been accelerated by the growth of low-cost airlines, like Kulula, which was the first in South Africa, and a game changer. These airlines copy the successful blueprint of companies such as Ryanair in the UK in the 90s.

“If you look on a global level, the International Air Transport Organisation identified that over the past forty years, the real cost of air travel has come down by 70%. Now, in South Africa, because our inflation rate is so much higher, we worked out that the real cost of air travel has come down by 70% in 15 years so, basically, we’re sitting with about 1.5% revenue growth, or ticket price growth, and about 9%-a-year cost inflation.

“Every single year, you’ve got to take out 7.5% cost inflation from the business, and when you’ve only got a 4% margin, if you miss out one year, you’re already straight into a minus 3.5% margin next year. Therefore, you have to have an absolutely consistent delivery on removing cost inflation and you can’t do that with a once-off initiative, it’s got to be inherent in the business culture,” Venter says.

Leadership pedigree

And to know where you are going, you need to know where you have been. Venter, who has been with Comair for 21 years, knows the calibre of leader who has gone before him.

He explains, “Our current Chairman was CEO for 30 years and now, in total, he’s been involved in Comair for about 50 years now. We’ve had four CEOs in 71 years—that’s some real, long tenure in top leadership—and it just means that you’ve got a long-term vision. In aviation, where you’re buying assets that you’re going to use for 20 years, you have to consider what the implications are when you have to dispose of the asset in 20 years time, at the time that you purchase the asset. You really have to have an approach where you’re not just concerned about your own tenure for three or four years, you’re thinking about that you might actually be here in 20 years’ time when you sell that asset.”

This is why a long-term vision is essential.

He continues, “You’ve got to have a very CapEx view and it creates enormous value to have such a long-term perspective on business. We do see it as being fairly unique and if you look at most organisations, particularly in the US, to a degree in Europe as well, there’s such a pressure on short-term investment from the investment community and short-term deliverables that we very often look at decisions that were taken and we think, but that’s really a bad decision. It’s going to deliver profits next year, but in year three, four, five it’s going to kill you and it’s because of this push at the moment, in particular from investors, to just see immediate returns,” he says.

A game-changer

To Comair’s credit, they have stayed ahead of the game in keeping their fleet up-to-date, giving them a competitive advantage over their competitors, who are often flying older planes that use more fuel. And with fuel being a very volatile commodity, a rise in price will have serious implications for older fleets. This ties in again with a long-term vision.

“One of the biggest factors in eliminating that inflation is the fleet renewal because the kind of efficiency we see coming through in technology is enormous. If you take, for example, the 737-MAX 8s that we’ve recently purchased, they’ve replaced older 737s, 300s and 400s—the fuel saving per seat is around 26%. So, you’ve taken a quarter of your fuel cost out for a new aeroplane. And apart from that, only about 6% of that is your hourly fuel burn and the other 20% is because you’ve increased the size of the aeroplane, so you’re spending the fuel burn over more seats.

“Your real competitive edge in terms of your pricing, is effectively a 26% improvement of your fuel cost, so for the most part, you never get to see it because all you’re doing is taking out your inflation so that you can match that very small ticket price increase but if you don’t do it, you’re out of business,” says Venter

And in a sense, a rise in fuel price wouldn’t be bad for his business.

“Not at all, when we originally started talking about and taking the decision to acquire brand new aircraft in 2008, that’s when we saw that oil price spike to US$149—only for a short time—but it was a good warning sign to say, ‘Well, this is the way it could actually go,” and so when we started the delivery of aircraft in around 2012/2013, quite a few questions were raised because by that time, the oil price had already come down dramatically and we were sitting back at crazy stuff that we never dreamt—US$40 a barrel.

“The question was raised, was it actually worth buying new aeroplanes when we’re now sitting at 40 dollars a barrel? But, obviously, it’s still 26% of US$40 a barrel, which is a good saving. But the real benefit is that eventually, the oil price will go up again,” he says.

This could put a tremendous strain on their competitors when that price eventually goes up.

Venter muses, “Well we’ve seen it sink quite a few airlines in the past and it’s a combination of factors—on the one side, the fact that we have such high-cost inflation in South Africa, but we still have the same kind of ticket price inflation as the rest of the world. The reason for that is we’ve had state-owned airlines that haven’t had to worry about full-cost recovery and therefore, our gap between cost inflation and ticket price inflation is quite bizarre.

“If you’re in Europe and you’re seeing the 2% cost inflation, the 1.5% ticket price inflation, you’ve got to make up half a percent but the issue here is that we have had state-owned airlines that just haven’t had that same pressure to have to recover costs, so they’ve constrained the ticket price inflation and consequently, a number of airlines have gone out of business for that reason alone—in that, the gap is so big and they can’t find ways. They don’t have the balance sheet to actually invest in new aircraft to compensate et cetera, so a lot of carriers have basically gone out of business just because they haven’t been able to invest in new technology to take out the inflation,” he says.

The fuel of the future?

With the UK looking to ban fossil fuel cars by 2040, could we see a time when aeroplanes use alternative energy? Venter believes that it will take a serious technology leap to change the current methods of propulsion.

“No one has come up with anything feasible yet. It’s a very difficult environment to bring in a different powered technology, maybe someone’s going to come up with something so dramatically innovative in energy storage that you will actually get to a point where you can produce an electric aeroplane but at the moment, there’s no technology that’s even close on the horizon, so we’re going to be sitting with jet fuel for quite a while to come,” he explains.

SAA’s woes

SAA’s woes are well-documented, with political ramblings and some poor long-term planning, there appears to be little light at the end of the tunnel for a carrier that was once the strongest in the Southern Hemisphere, a world leader, which is currently struggling to make ends meet, without the support of the government.

“I don’t think it will go down because if you look at most of Africa, most African countries still have national carriers and they suck out a lot more of GDP and tax resources than what SAA sucks out. However, they continue going and the countries that don’t have national carriers and have no reason to go and do it are pursuing the establishment of new national carriers, even though the last one went bust.

“The reality is that the world in which SAA used to be feasible has moved on dramatically on the international route, globalisation has taken over and the likes of an Emirates and a Turkish have attained global positioning that nobody else can match.

“Therefore, they can establish the economies of scale and the cost per seat that nobody else can match and particularly when you’ve got South Africa sitting at the very southern tip of a continent where there’s no hub potential. The world’s moved on, we’re not in that game anymore when we once had sanctions and where we had a handful of carriers serving South Africa, and SAA was the dominant carrier to the rest of the world, it’s just that that world is gone.

“Regionally, we used to have the situation where very few carriers serviced Africa and therefore, all the African traffic used to come via Johannesburg to go to the rest of the world—that’s also history. Now, you’ve got Emirates serving 25-odd locations in Africa and Turkish is serving 45 locations in Africa, so if you want to go to the rest of the world, your best option is to jump on an Emirates or Turkish flight, or even Ethiopian is a better location than Johannesburg. That piece of the business is gone. And then domestically, basically, domestic aviation has been privatised,” Venter says.

“SAA is now on 23% market share domestically, so the world has moved on in a very big way and it doesn’t really matter how much cost you try to take out of SAA. Today, the business model and the globalisation have changed the demand, so you can do what you like with the supply side of SAA and the cost structure of SAA—the demand is different,” says Venter.

Airport tax

If you look at the level of taxation at an airport level, it is almost the same price as the ticket, with Kulula only making R55 per ticket, according to reports. But Venter is not alarmed by the tax and carries on with business as usual.

“It has come down significantly in the last year, we had a massive spike in airport taxes due to the World Cup in 2010. The amount of infrastructure and the quality of infrastructure that was built to accommodate the World Cup—and it almost went beyond accommodating the World Cup—it was just a binge and unfortunately, the regulatory pricing model for the airport is that they get a guaranteed return on investment. So, essentially, the more they spend, the more profit they can make.

“So, they took advantage of this environment where the government was supporting any CapEx spend for the sake of the World Cup and they probably overbuilt a bit. But now that the cycle has come to an end, they work in five-year commission periods and the CapEx basis is becoming depreciated, they had quite a big adjustment this year on the airport tariffs. We’re back to a realistic number. I suspect that the big challenge, going forward, is that like all other state-owned enterprises, the airport companies do rely on government guarantees to a large extent to back up their borrowings. That’s going to be a challenge because the banks aren’t that enamoured with government guarantees anymore,” Venter explains.

Cape Town expansion

With the news that Cape Town International is planning a new, longer runway to accommodate the large Airbus A380, the taxes are unlikely to reduce any time soon. But Cape Town does need the extra capacity to make the most of the bumper summer tourist season that sees millions of tourists flock to sunny South Africa.

“Anything that’s going to encourage foreign tourism into the country and get the volumes of tourism into the country should really be encouraged and unfortunately, there are very few departments in the government that actually cooperate to improve tourism in totality. On the one hand, you’ve got transport that’s protecting SAA, well, treasury protecting SAA, and that in itself actually limits the number of foreign carriers that are allowed to fly to South Africa.

“The foreign guys are smiling because they know they’re not going to get more competition on their routes, they can keep their airfares quite high, which is ultimately bad for tourism in South Africa. Then you’ve got Home Affairs, which goes off on its own tangent and basically tells everyone in the world, ‘Don’t come to South Africa because we’re going to get you here when you try to enter through immigration.’ All these visa requirements et cetera have really set us back tremendously.

“But at least ACSA has realised we need the infrastructure from an airport perspective to accommodate foreign carriers and yes, hopefully, it pays off. The real issue is we’re not going to see it necessarily pay off in ACSA, we’re going to see it pay off in the bigger tourism industry and that’s probably the biggest challenge we’re facing these days. There just isn’t enough coordination of the big picture within the government to say, ‘Yes, we’re going to incur a cost over here but the benefit in a different area of the government or a different area of the economy is going to be so big.’ The challenge has almost become how you deal with transfer pricing between the government departments so that you don’t end up with stupid decisions in one department just for the sake of protecting that department’s finances,” he explains.

Cooperation essentials

You need synergy between all the government departments in order to work for the common good of the country.

Venter continues, “You need synergy and it needs to be run—I know the government has other obligations, but you do need to have some perspective in terms of running it like a business, particularly for the sake of bringing money into the economy because if you don’t bring the money into the economy, you can’t disperse it for any other purpose. It’s the same with running a business.”

That begs the question, does democracy lend itself to good business sense? Comair might not have been the company it is today if they had changed leadership every eight years, with every new leader wanting to stamp their own mark.

“I do sometimes question whether democracy is ultimately the best model. The benign dictator is probably the best model. It’s difficult to find benign dictators though. Dubai has been a brilliant model of what you can achieve if you had everything owned by an individual who just runs the big picture.

“Singapore is quite similar, it really is a properly coordinated economy and the interesting thing about Singapore is that the very top jobs are government jobs but you’ve got to have doctorates and you’ve got to have years of business experience before you’re even allowed to enter into the government. But it’s run like a really professional business organisation because if you don’t get the revenue income, you can’t disburse it for social requirements. And that’s where it all starts; you’ve got to have the revenue before you can disburse it for your social requirements,” Venter explains.

Barely scratching the surface

You could argue that we’re hardly scratching the surface in terms of the potential of this country.

Venter agrees, “I don’t think we’re scratching the surface—the biggest problem is there is no coordination between government departments as to how to put together a single plan that will optimise the country, not just individual government departments. And it’s exactly the same as a business.

Kulula’s success story

On a more positive note, Kulula has been a real superstar locally, raising the bar of the customer experience and most importantly, punctuality, which is missing from other carriers at times. The no-nonsense Venter outlines some of the keys to their success.

“Ultimately, there’s really not much of a difference in the background between BA and Kulula because we’re running it all within one company and it’s very difficult for us to even say which is the more successful brand because we really are extremely integrated with the two. We balance according to what the market is looking for as to where we put the capacity. So it’s a completely integrated model. Kulula has been successful as a brand, it’s grown very aggressively,” he says.

“It’s the novelty from the start, we came in first, we came with a different model and over time, we’ve managed to maintain a level of, I don’t know if you can call it trust, with the consumer. We’re not surviving by cheating the customer, we’re surviving through continuous improvement and efficiency, therefore, being able to maintain competitive pricing in the market. And that’s the way to run a business long term; you’ve got to actually keep the customers today because they will most likely be the same people flying in fifteen years’ time. At the moment, we’re running at about 89%, which is quite good. I don’t think there are many airlines at that kind of level,” he adds.

Diversifying Comair’s portfolio

In recent times, Comair has been developing peripheral assists such as their Slow Lounge, catering and car hire (through Europcar), which brings in valuable side revenues. You are also able to have larger mark-ups on food compared to air-travel, which runs on volumes and not prices.

“The real issue is that we’ve seen so little real economic growth in South Africa for such a long time and aviation travel is usually a very good indicator of real economic growth. And we’re talking in dollar terms, not rand terms—the genuine economic growth. We’re still sitting with the same passenger numbers in South Africa as what we saw back in 2008. We’re seeing about 13.5-million passengers a year and I don’t think there are many countries in the world that have had that level of stagnation in domestic air travel for such a long time. It is actually quite astonishing.

“We’ve kept growing and we’ve basically been eating away market share from other airlines, but the total market is stagnant. Our real concern is just how long it is going to take before we see proper GDP growth again and therefore, we can’t keep all our eggs in the aviation basket. We’ve got to find other areas that will deliver financial growth for the company, so we had quite a few businesses where we had in-sourced functions for our own purposes, such as pilot training and catering. As we built up the expertise in these businesses we started getting enquiries from outside to say, ‘Well, can’t you actually train external pilots as well, can’t you provide catering to other airlines?’ And so that’s the way we’ve gone now but it’s a relatively new phase for Comair—moving our internal expertise to external—we’re in the early days of growth there. But it’s certainly a lot more lucrative than flying aeroplanes, the margins are quite startling compared to the aviation business. It’s doing very well—the airport lounges are doing really well, the catering business we’re looking at, even products for retail and not for aviation catering—there’s scope in all those areas.

“And then the travel business has done well but again, it’s a bit constrained by the South African economy so we’re focusing a lot more on the inbound tourism travel, firstly, because it pays in dollars, which is always nice. It’s a real export product without having to go and establish a factory outside of South Africa. I can’t really think of many products that tick as many boxes for South Africa as inbound tourism—it’s based in South Africa, you’re employing South Africans, you’re earning foreign revenue, you’re bringing big spend into the country and it’s hugely labour-intensive. Foreign tourism should be sitting at the top of the government’s priorities,” he explains.

Skills development

Skills development is crucial for any airline that has long-term ambitions, with Comair spending millions on simulators. But does Venter see many females and black young pilots coming through the system?

“Not as much as we would like to see and the astonishing bottleneck is actually matriculants with higher grade mathematics and science. To a large extent, a pilot almost has to have an engineering aptitude and then has to be able to fly an aeroplane—they do need the mathematics and science. Typically, you find the matriculants with those degrees rushing off into legal, becoming doctors, businessmen et cetera, and they are not that excited about becoming pilots

“We are going out there and really trying to get aviation into the schools, getting people to think about aviation and not just purely to come into aviation as a pilot but to consider all the other careers that are within aviation—there’s everything from finance to HR to legal to call centre, sales, marketing and yes, there are also pilots and cabin crew. It’s quite a challenge to convince people because of that bottleneck in higher grade maths and science. Guys who are coming out with those qualifications have got the world at their feet and being a pilot doesn’t always tick the top box. But we’ve produced quite a few and we’ve been involved in our cadet pilot scheme for 17 years now, which is the longest cadet pilot scheme in the country as far as we’re aware,” Venter says.

Outlook 2018

Venter goes on to give his outlook for 2018, with the election looming large in everybody’s minds.

“Absolutely everything revolves around political policy and our big focus is to get GDP growth up and going again, which all hinges on stable economic policies and stable politics. It’s a huge issue for the country and ultimately, it feeds through to us and to any of the businesses operating in South Africa,” he says.

Johannesburg is no longer the gateway

It’s quite ironic that a country outside of Africa is the gateway, with Dubai or Istanbul taking a stranglehold over international air travel with their ultra-competitive pricing.

“If you want to go anywhere in the world from anywhere in Africa, you can catch a flight to Dubai or Istanbul and go to anywhere else in the world. Ultimately, it’s because African countries haven’t stood together and established an African consortium, or airline consortium to stand up to anyone else. You have all these little 50-odd individuals, small government-owned airlines, all trying to compete with each other and none of them has the scale to do anything. They all duplicate their costs so they all have their own facilities, they all have their own training facilities, they all have their air traffic control, they all have their aircraft procurement and as long as they’re all operating in isolation and they all operate with two or three aeroplanes, it’s futile, there’s no chance,” he concludes.

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