Even with Lift, SAA won’t soar

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In the most recent twist in the SAA saga, Gidon Novick resigned from Takatso’s board amid alleged conflict-of-interest concerns arising from the Lift co-founder’s proximity to the two airlines.

Last week, the Mail & Guardian reported that one competing airline had concerns that the Takatso transaction would effectively merge Lift and SAA. Together, the two airlines would have the power to monopolise the South African market, further weakening the local aviation sector, it submitted to the Competition Commission.

According to experts, however, even with Lift on its side, SAA has little hope of reasserting its dominance over a market which — by all accounts — is far from reaching equilibrium after enduring successive shocks.

In its submission to the Competition Commission, the competitor was particularly concerned about the relationship between Global Aviation, Takatso’s minority shareholder, and Lift. 

As long as Global invests in Lift, the competitor said, there will be a strong relationship between the airline and SAA, resulting in a conflict of interest. The competitor submitted that Global be required to divest of Lift.

However, according to Angelo Tzarevski, director designate of antitrust and competition at law firm Baker McKenzie, forcing Global to divest of Lift in order for the Takatso transaction to be approved is not the only solution to the conflict of interest.

“In fact, it is arguable that that may be an extreme and unnecessary measure to mitigate the risk that is sought to be addressed,” Tzarevski said.

Given that Global would be a shareholder common to both airlines, there may be a concern that competitively sensitive information could be exchanged between the two, Tzarevski explained.

“Having said that, this would not be the first transaction in which this has arisen. Joint ventures involving competitors are not uncommon and have been considered by the competition authorities before,” he added.

Although the risk relating to the exchange of sensitive information between Lift and SAA is valid, the competition authorities are able to put in place appropriate measures that limit this risk, Tzarevski said.

‘Punching above its weight’

Novick has revealed that a merger between the Lift and SAA was considered, saying that combining the two airlines would remove the potential conflict of interest. 

In the event of Lift and SAA being brought into the same stable — which now seems unlikely in the context of the Takatso transaction — competition concerns would arise if both were dominant players on the routes on which they operate, Tzarevski said. 

If the two airlines are only minnows on routes otherwise dominated by other airlines, a merger could actually be beneficial, as it would enhance their ability to compete.

Speaking to the M&G this week, aviation experts underlined that SAA and Lift are both still very small players in the domestic market. Lift launched its operations only two years ago. Meanwhile, SAA lost a lot of its edge after going into business rescue in December 2019, which ravaged its market share and capacity.

“SAA is not really competing with FlySafair and CemAir. It just looks like they are. They are tiny fish compared to these other entities which have surpassed SAA. Even before the business rescue, they were growing faster than SAA,” aviation analyst Desmond Latham said.

A merger between Lift and SAA could allow the latter airline to target regional and international growth, Latham said.

Though it makes sense that the Competition Commission would want more players on the domestic routes, he added, SAA is not actually competing. “It is a weak entity … It is punching above its weight, because it is state-owned and is a legacy brand. But it is a small airline.” 

Aviation economist Joachim Vermooten said, considering their relative sizes and market dynamic, a merger between Lift and SAA would be “neither here nor there”. 

Global Aviation’s involvement in the Takatso consortium makes sense, Vermooten noted, because a funder would want to ensure it has the relevant technical expertise before investing in a tricky industry.

“Sometimes, it just so happens, that involves competitors,” he said, adding that when Sun Air was privatised in the late 90s funders required that Comair become its technical partner.

“And that was an even greater conflict of interest because both Sun Air’s and Comair’s market share was substantial.”

‘A slug on the road’

Phuthego Mojapelo, an independent aviation analyst, suggested that the recent ructions in the Takatso consortium has little to do with the relationship between SAA and Lift.

Instead, they likely have to do with the fact that SAA’s market share has continued to be decimated, especially considering the airline has been sidelined on the international routes that made it an attractive investment in the first place, Mojapelo said.

SAA has little chance of clawing back its market share, Latham said. “SAA is not even a tortoise. It is a slug on the road and passing them are cheetahs, which have already lapped them a few times.” 

Though the Takatso transaction — which has taken 18 months and counting to conclude — was aimed at restoring SAA to its former glory, in the meantime the airline’s competitors have sewn up the international routes, Latham said.

In response to the commentary following Novick’s resignation from the Takatso board, the department of public enterprises insisted that the deal was not at risk.

“The government reiterates its commitment to the on-boarding of the strategic equity partner for SAA and the growth of a competitive, sustainable and technologically agile airline. It will continue to regain its market share and offer the best service to its customers,” the department said in a statement. 

It further cautioned the public against the efforts of competitors, detractors and other forces to undermine the government’s attempt to save jobs and create a viable airline, noting that travellers are being fleeced because of the shortage of seats.

Low price dreams dashed

Competition authorities will undoubtedly have ticket prices in mind when assessing the transaction, considering how high they have soared following Comair’s collapse.

Last month, SAA executive chair John Lamola said the airline is relentlessly implementing its expansion and bringing on more capacity to meet holiday demand. Extra seats, he said, “enables the achievement of an equilibrium between supply and demand in the market that affects the pricing of air tickets”.

But the experts pointed out that a more robust SAA is not going to disrupt market dynamics, which is largely the result of ultra-high fuel costs.

“Even with more flights being introduced, the cost of fuel is significant … No ways are these ticket prices going to drop significantly anytime over the next 12 months. Anyone who dreams that up, even with more competition, does not understand cost inputs,” Latham said.

Vermooten and Mojapelo agreed that ticket prices are unlikely to normalise anytime soon. 

High chances of profitability should entice new entrants and enhance competition, driving down prices, Vermooten said. However, the slow recovery of business travel, as well as the high input costs, largely undermine the prospects of new airlines coming in to disrupt the market.

Mojapelo said: “The prices are not going to change anytime soon … And also SAA is not a cheap airline. So, even if they can increase their capacity and the number of flights to certain areas, that is not going to change.” 

What the domestic market needs, he suggested, is another low-cost airline. “What we need is another Mango or Kulula to come onto the playing field. Then we will see drastic change.”