Originally Posted by Daily Maverick
Yet another private-sector competitor in the airline market looks set to collapse in a tough market, under sustained predatory behaviour from the state-owned giant, South African Airways. If we ever want to be free of government monopolies, decent private companies need our support.
It’s the age-old story all over again, isn’t it? When domestic air travel was deregulated in 1991 a venerable name in South African aviation, Trek Airways, most famous for its inexpensive Luxavia joint venture, promptly acquired four new Airbus A320 aircraft and launched Flitestar, a service connecting Johannesburg with both Durban and Cape Town.
With competitive prices and good service, it promptly wrested a quarter of the market from the state-owned monopoly, South African Airways, which was forced to remove some of its aircraft from domestic service.
This, SAA did not like. It embarked on what veteran industry-watcher Paul Dubois calls “dirty tricks” to regain the upper hand. According to his article on Flitestar’s history these included blocking aircraft on airport aprons to cause delays, ratcheting up mechanical service fees and commissions to travel agents, arranging priority treatment by air traffic controllers and even sabotaging the national ticketing system, Safari, to show Flitestar flights as being full.
Flitestar may have jolted a lethargic state-owned monopoly into improving service somewhat, but by the time elections came around in 1994, the upstart had already closed its doors. In the wake of its liquidation, according to Dubois, SAA paid “in excess of R90-million to Trek Airways shareholders, Rentmeester Beleggings, SAFREN and the de Moelenaer family to cease operating ‘any’ airline service in competition with SAA for five years.”
The New South Africa would not begin with competition in the airline sector.
A year later, Phoenix Airways arose, but soon returned to the ashes, leaving only a wispy memory. It would go on to become a bidder in the privatisation of Sun Air in 1997 in a process that was heavily rigged in favour of SAA.
In a 1,500-page doctoral thesis on the competitiveness (or the lack thereof) in the domestic air transport market, transport economist Joachim Vermooten quoted Mac Maharaj, Transport Minister from 1994 to 1999, as saying: “I would like a South African investor or consortium to buy [Sun Air], but I would check carefully to ensure it isn't a front for a large foreign airline... That would give them a strategic foothold here and enable them to undercut South African Airways.”
How horrible! Passengers might have to pay less!
It was clear that SAA was going to get government protection and that real competition was the last thing on Maharaj’s mind.
The anti-competitive tactics that worked against Flitestar worked against Sun Air too. Among other predatory moves, like controlling landing and apron slots, SAA artificially increased capacity on routes operated by Sun Air, sparking a price war.
Vermooten explained how that worked: “[SAA] has not achieved an adequate return on assets and has received substantial financial state aid without any published conditions that would mitigate the anti-competitive effect of such state aid and promote competition in the air transport market. The risk of such state aid could enable the dominant state-owned airline, SAA, to deploy too much capacity on an uneconomical basis, operate many services at a lower income level than the cost of providing such services, dump excess capacity on competitive routes at a lower fare than needed to provide a reasonable return on assets, and conduct operations with the objective of earning a lower return on investment than would be required as a reasonable return on assets by competitors that are subject to normal financial markets and do not receive state financial aid.”
Sun Air ceased operations 1999, and SAA ticket prices quickly returned to their usual high levels.
Even the demise of its rival wasn’t good enough for SAA, however. Without even bothering with the required approval from government, it engineered a takeover of shares and debt designed to prevent the Sun Air liquidation from going to court, where the assets might be sold to potential competitors. While Maharaj worried about Singapore Airlines or British Airways running Sun Air, SAA feared a takeover of its distressed assets by Virgin Atlantic and KLM, both of which were sniffing for opportunities to challenge inefficient state-owned airlines in emerging markets like South Africa.
A day after it was purchased by SAA, Sun Air was shut down, though Coleman Andrews, the SAA chief executive at the time, denied having anything to do with it. That is a lie. At least, one can safely assume it must be a lie, because if it is true, it is evidence of gross negligence. Even notoriously predatory monopolists don’t accidentally acquire and shut down rivals in the ordinary course of business.
Once Sun Air had been driven under, SAA reprised its nasty little deal with Flitestar’s shareholders, and paid R50 million to Safair, the leasing company that owned the Sun Air aircraft, to keep the aircraft out of the hands of would-be domestic competitors.
Andrews would go on to abscond with a golden handshake worth R230-million, even though the state-owned airline was booking massive losses and fraud allegations were swirling all about.
“According to the editor of the Business Day, the result of the demise of Sun Air was higher domestic airfares, hundreds of people joining unemployment queues and an increasingly weary [sic] international investment community,” Vermooten wrote.
Rather too late, SAA was slapped with a R45 million Competition Commission fine. It had been found guilty of employing another tactic it first used against Flitestar, bribing travel agents, in its rivalry with Sun Air. “Loyalty rebates”, is what SAA delicately called these blatant kickbacks.
The fine was the largest the Competition Commission had issued to date, but it must have hit the state-owned airline like the tip on an expense claim for a Coleman Andrews dinner. SAA was quick to recover from this slap on the wrist.
While its lawyers were still mumbling niceties about never ever doing anything naughty again, it set its sights on Nationwide Airlines. This was the oldest of the three remaining private airlines, having been founded in 1995. Along with Kulula, established in 2001, and 1Time, founded 2004, it was using low-cost airline strategies to try to compete with the voracious government behemoth.
In addition to all the nice state-sponsored benefits it enjoys, however, like being bailed out whenever it failed to make a profit because it had been undercutting private competitors, SAA launched its own low-cost airline in 2006.
SAA’s little anti-competitive spawn was inexplicably called Mango. It got a fleet of nice hand-me-down aircraft from its sugar daddy, along with a lifelong service deal from its nice uncle, SAA Technical.
Meanwhile, in the real world, Nationwide and the other private airlines had to buy aircraft and pay for them by running a profitable business.
In the face of predatory pricing, over-capacity on competitive routes and having to park a half-hour bus ride from airport terminal buildings, Nationwide bravely kept flying until bits of its aircraft started to fall off. Then it shut its doors, too.
Notch another one up for SAA. (While we’re counting, add a notch for Velvet Sky, which launched a low-cost domestic service and went bankrupt while I was outside for a quick smoke.)
Flitestar, Phoenix, Sun Air, Nationwide, Velvet Sky. Now 1Time has its back against the wall. In the face of tough market conditions and high fuel prices, it filed for what it calls a “business rescue”, which is essentially bankruptcy protection.
1Time said it would continue scheduled services while it pitches a restructuring plan to its investors and creditors, designed to address heavy debt under loss-making conditions. However, I have tickets for George to Johannesburg today, returning tomorrow, and I’m nervous. Airlines that announce trouble don’t have a good record of hanging around to fly passengers to where they’re supposed to be.
SAA’s financials, meanwhile, though in better shape than a few years ago, remain worrying. Its cash flow remains negative to the tune of a billion rand a year or so, and several pages are devoted to its non-compliance with various financial laws and to its weak defences against a raft of local and global competition accusations. However, its operating profit is back in the black, which means 1Time and Kulula can expect a lot more walloping from the big government bully.
Those of us who use airlines in South Africa know what happens on routes that are not subject to competition by private airlines. If SAA or the cartel partners it acknowledges in its annual report, SA Airlink and SA Express, are your only options, expect to pay several times more for a short hop than you’d pay for a ticket on a competitive route. Try flying from Durban to Port Elizabeth, Bloemfontein to East London, or George to Cape Town if you want real “sticker shock”.
We know, from our own experience with the likes of Telkom and Eskom, how state-owned enterprises without adequate competition drive up price inflation and deliver shoddy quality. We know how ports, railways and other government infrastructure monopolies drive up prices and limit our ability to move commodities and compete in global markets.
The anti-competitive rot goes deep. That SAA has only ever been nailed for one kind of anti-competitive behaviour on two occasions, paying only token fines, suggests that competition authorities are simply not equipped to deal with the problem.
Vermooten agrees: “No specific guidance currently exists in the domestic air transport industry in South Africa relating to the particular forms of conduct that would be regarded as having an anti-competitive effect. No measures currently exist in South Africa that enable the competition authorities to respond timeously (as required in the airline industry) to prevent anti-competitive or predatory conduct, to stop such conduct (in contravention of those guidelines) by means of cease and desist orders and effective interim orders where there is a danger that competition will be eliminated.”
This leaves us, the passengers, as the last bulwark against a time when SAA will once again have the African sky—and access to our pockets—all to itself. We can stand around waiting until SAA has murdered 1Time too, or we can use what little power we have against state-owned monopolies and vote with our wallets.
Never buy a ticket from the state-owned monster, SAA, or its misbegotten whelp, Mango, if you have a choice. Prefer a private competitor, and given its precarious position right now, give your money to 1Time if you can.
It’s the least you can do for your country.
Meanwhile, I’ll be sitting at the airport, hoping the last time I saw 1Time wasn’t the last time 1Time flew.