Not Rolling Over

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Independent South African airline Comair has launched a High Court legal action, challenging the South African government’s latest guarantee granted to South African Airways. Comair CEO Erik Venter says that the current and previous bailouts received by SAA do not comply with either the Domestic Aviation Transport Policy or the law in South Africa. He sat with editor Dylan Rogers to explain Comair’s stance.

Q: Very simply, what’s this all about?

A: When the domestic aviation industry was regulated in the 1990s, it was done on the principle set out in government’s domestic airline transport policy, and this policy placed an obligation on government to ensure a level playing field for private airlines, by requiring state-owned airlines to operate on a purely commercial and competitive basis. The ongoing subsidisation of SAA has supported commercially irrational behaviour, and the latest five billion rand guarantee will perpetuate this behaviour. We had hoped to see the principles of the domestic air transport policy applied in the latest SAA turnaround plan, but we’ve seen the opposite, in that the 20-year turnaround plan makes the intentions of government even more vague than before.

Q: So, you’re saying it’s anti-competition?
A: That’s the principle and to a large extent just allowing SAA the leeway to behave in a non-commercial manner, because they know that they’ll always be bailed out by government.

Q: What else concerns you?
A: While previous guarantees have typically come with very stringent conditions, this guarantee seems to be extremely open-ended, and we have seen this sort of irrational behaviour with SAA over the years, with regards expansion and airfares etc.

Q: It’s five billion now, but you believe the figure to be much bigger over the year?
A: We think it’s more like 22 billion over the recent life of SAA and about 11 billion of that is since deregulation in 1991.

Q: Have you engaged SAA on this issue?

A: We can’t really engage SAA directly on it, because of competition regulations and potential accusations of regulating capacity in the market and regulating airfares. We tried to get involved in providing comment on the turnaround plan for SAA, but we didn’t get that opportunity.

 

Q: Do you believe all of this has impacted on the failure of certain low-cost carriers in South Africa?

A: Yes. When costs have risen dramatically, SAA has not increased its airfares, and that has resulted in competitors being driven out of the market.

 

Q: What are you hoping to achieve with this court action?

A: It’s simply a matter of wanting them to comply with legislation that already exists. We are not asking for new legislation or behaviour outside of current legislation.

 

Q: You’re not pushing for privatisation?

A: There are a lot of potential methods to turn SAA around, and that’s a different story altogether -whether privatisation is the answer or whether it is foreign shareholding, or whether it is business rescue or simply down-scaling of the business. That’s a much bigger issue that we are not dealing with right now.

Q: What would you do to turn SAA around?
A: It would have to take the same kind of approach as the American carriers. They’ve gone into Chapter 11 to create the kind of environment where you can make a dramatic change to the business, because it really does need a dramatic change. You need to be placed under the kind of pressure where if it doesn’t get the success in turning around, it potentially could be shut down, and only when you’ve got that kind of pressure can you achieve the changes that are needed. There are changes to the fleet and a lot of decisions need to be taken around their unprofitable routes. As long as they are operating, they’re going to lose a phenomenal amount of money on many routes. There’s also head count, staff benefits, overheads and expenditure, and contracts with third parties. It’s really a review of the entire business that’s necessary, and it will take dramatic and painful action to actually change a business of that scale.

Q: If you’re unsuccessful?
A: We’ll end up having to battle on as we have for the last 15 or so years.

Q: And your competitors?
A: The ultimate risk is that SAA drives all of the competition out of the market and then we’re back to a pure monopoly situation. If you look at some of the routes into Africa, where there’s a monopoly, you can see the kind of airfares that are being charged. So, I suppose the greatest risk is that SAA could actually say that their turnaround plan is to get rid of the competition.

 

 

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