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Group Overview
Group turnover increased by almost 15% to Lm124 million which was largely due to the increase in airline business of the parent company. Passengers carried increased to 1.8 million from 1.6 million in 1999. The Group's pre-tax profit was Lm6.3 million as compared to the previous year's Lm6.2 million.
The significant expansion in the company's airline business sector was met by lower yields and an increase in costs. Total airline operating costs increased by Lm14 million.
The break even seat factor deteriorated by 6 percentage points primarily due to increased fuel and payroll costs - significant cost increases which were not passed on to passengers in terms of higher fares. Despite difficult market conditions, the Group maintained its record of delivering a healthy return to shareholders.
Cashflow Return on Investment (CFROI)* for the year was 24% while Return on Capital Employed (ROCE)* was 11%. Furthermore the Net debt-to-equity ratio decreased from 74% to 46%. Net equity increased by 20% to nearly Lm52 million.
Capital gains of Lm1.9 million and Lm2.5 million were earned from the sale of investments and aircraft equipment respectively. These were partly offset by provisions against the Group's investment in its main associate, Azzurra Air. Net interest cost amounted to Lm2.2 million.
Business environment The growth in the local economy and in that of our major European markets continued to stimulate demand for air transport. This was reflected in the 5% increase in tourist arrivals and a 4% increase in air cargo. The excess capacity in the airline industry has fuelled further competition and introduced new pressures on yields. At the same time, the price of fuel oil doubled over the 12 month financial period.
Airline Operating Results
Revenue and Yields
The airline registered a turnover of Lm99 million, an increase of Lm13 million over the previous year. This was largely due to a 13% growth in passenger traffic which exceeded the overall market growth rate and therefore resulted in a higher market share. Competitive pressures had a significant effect on yields. The airline's success in achieving growth in sales volumes and efficiency in resource utilisation was met by a lower average Revenue per Passenger Kilometer which decreased from 3.07 cents to 2.9 cents.
Operating Costs
The airline augmented its fleet by two B737-300's during Summer 1999, mainly to service new demand from German Tour Operators. Available seat kilometers (ASK's) were thus increased by 7.4%. The effect of the higher fixed costs incurred to produce this extra capacity was felt throughout the airline. The airline experienced cost pressure across the board but fuel and payroll need to be particularly mentioned. The single biggest increase in variable costs was that in respect of fuel. At just under Lm11 million, fuel cost accounted for 11% of total operating costs. Fuel price inflation has resulted in an additional cost of Lm3 million during the year under review, representing a 44% increase over the average cost in the previous year. Payroll costs also increased by 22% to Lm21 million. This increase was partly due to additions to our crew complement to operate the expanded fleet and to fly the other aircraft which were leased out to other airlines. In a nutshell, the increase in turnover was offset by the effect of lower average yields and higher operating costs. Consequently the airline's operating profit dropped by 12% to Lm2.3 million despite an increase of 15% in turnover.
Group Financial Position and Cash Flow
The Group's financial position continued to strengthen as a result of the positive operating and financial results for the year. Net equity increased by 20% to nearly Lm52 million. Cash generated from operations was also higher at Lm14.2 million, up from Lm9.9 million in the previous year, mainly due to favourable working capital movements. This surplus was applied in repaying debt. Net debt (total borrowings less cash and bank balances) was thus reduced by 25% to Lm23.7 million. Consequently the Group can boast of an impressive improvement in its gearing: the Net debt-to-equity ratio decreased from 74% to 46%. The Group benefitted from an effective tax rate of under 11% mainly on account of certain gains not being subject to tax, in part because of the impact of tax losses of a capital nature incurred on its investments in previous years. Despite adverse business conditions in its core sectors, the Group's liquidity improved, as the current ratio increased from 0.98 to 1.03.