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Sam Mkokeli
Sam Mkokeli
Feb 23, 2023, 2:48pm EST
africa

South Africa's airline privatization plan at risk over market dominance fears

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The News

Nicolas Economou/NurPhoto via Getty Images

South Africa’s plan to partially privatize its national airline is in trouble.

The country’s competition regulator may not approve the deal, according to three people familiar with the matter, and the government hasn’t allocated enough money to clear the airline’s debts.

South African Airways collapsed in 2019 and was bailed out through a business rescue process which involved the government paying its 10.5 billion rand ($58 million) debt in preparation for a new ownership regime.

A new consortium chosen as partners by the government called Takatso, which includes investment firm Harith and Global Airways, was announced in 2021 as the government's equity partner to own 51% of the airline.

The competition authorities are concerned that the involvement of Global Airways, which owns Lift, an operating airline, poses a market consolidation risk, according to officials at the ministries of finance and public enterprises, and an official who works for Takatso. They said the Competition Commission, the main regulator, has started investigating the possibility that the new company would stifle competition if the deal goes through.

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The Competition Commission did not immediately respond to a request for comment from Semafor Africa.

Beyond questions of competition, the deal also faces financial challenges. Finance Minister Enoch Godongwana on Wednesday allocated one billion rand ($54 million) to complete the insolvency programme — far short of the 3.5 billion rand ($192 million) required to honor the airline's historical debt.

"The partial fulfillment of this obligation is not what Takatso Aviation had expected," said Takatso spokesman Thulasizwe Simelane, in a statement responding to the budget allocation. He said it was about half what they expected.

"The budgeted 1 billion rand will settle some, but not all of the outstanding amount. It therefore falls short of what it would have taken for the government to completely clear this obligation, which is one of the conditions for the finalization of the SAA Transaction with the Strategic Equity Partner," he said.

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Sam's view

The competition and financial problems risk scuppering a part privatization deal that is emblematic of a much bigger project than aviation ownership. The deal is considered a test case for the restructuring of troubled state-owned companies that would be pursued under President Cyril Ramaphosa. The hope was that it would provide a model through which Africa’s most industrialized economy could be revived.

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The questions about market concentration suggest the Takatso Consortium may not pass in its current incarnation. It may have to go back to the drawing board. Divorce among the partners looks like a serious option. Alternatively, they may try again after adopting a different approach.

Even if the deal clears the Competition Commission, the financial shortfall will have implications for the joint-venture's plans to raise finance to run the business. The COVID-19 pandemic fundamentally disrupted the aviation sector globally, and by the time South Africa finishes navel-gazing, SAA will have lost market share.

The possibility of a South African Airways collaboration with Kenyan Air has been touted. An arrangement like that might create a stronger base and market for both airlines. Code-sharing, where airlines place ticket codes on a flight operated by a partner airline, is one of the easiest ways to make such an approach work.

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Room for Disagreement

Following the announcement of the one billion rand allocation to cover some of SAA’s historical debts, including the payment of unflown tickets, Public Enterprises Minister Pravin Gordhan told Semafor Africa: "The airline is okay.”

“Flights are regularly operating at 90% of seat capacity," said Gordhan. He said the competition process would run its course independently and reach its conclusions.

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Gordhan also said the airline could form partnerships with other African airlines, adding that the South African and Kenyan governments have considered cooperation at a high level.

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The View From Nairobi

Kenya Airways, which is technically insolvent, has been undergoing restructuring since June 2022 while relying on state loans and trying to rationalize its fleet and staff. The Kenyan government has also considered selling the airline to Delta Airways in the United States,merging with South African Airways or some form of privatization.

But George Bodo, the chief executive of Callstreet Research and Analytics, said there is “no tangible deal on the table” and Kenya’s government is in a weak bargaining position.

“The private investors are not getting into a charitable exercise,” he said. “The government will have to deal with the existing debt and begin on a clean financial slate. In other words, there is no straitjacket formula out of the mess; the taxpayer has to carry the debt burden.”

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Notable

  • ​​The partnership between the struggling South African Airlines and equally troubled Kenya Airways would be treated as a merger under the Common Market for Eastern and Southern Africa (COMESA) due to its effect on regional competition. Kenya Airways would be required to notify COMESA’s Competition Commission in order to move forward.

— Additional reporting by Muchira Gachenge in Nairobi


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