Airlink ready to make 'new SAA' deal...if it makes sense


Privately-run regional airline Airlink would be open to getting involved in a public-private partnership with a "new" or restructured airline that replaces South African Airways - provided it makes sense, says CEO Rodger Foster.

For him "making sense" would mean an airline that can run on commercial principles and proper governance, and without political interference.

Before the national coronavirus lockdown and flight bans, Airlink operated on 55 routes to 39 destinations in nine African countries. As things stand, restricted air travel will only commence in SA at Level 3, full domestic air travel at Level 2 and regional and international air travel at Level 1.

SAA has been in business rescue since December last year. Unions have until 7 May to sign a proposed termination of employment agreement with the business rescue practitioners. Thereafter, employees will have an opportunity to sign individually until 11 May.

The Department of Public Enterprises (DPE) has appointed an international aviation firm to assist with the formation of a new airline to replace SAA. The department also indicated that Minister of Public Enterprises Pravin Gordhan had successfully concluded a "leadership compact" with labour unions, aimed at ensuring a "smooth transition" to a new SAA.

An international aviation expert, with knowledge of the SA airline industry, told Fin24 he sees "zero appetite" from airline investors globally since they are busy trying to save their own interests due to the devastating impact the coronavirus pandemic has had on the airline industry.

"Having a carrier flying a flag is very important for South Africa from a tourism point of view. A flag carrier does not, however, have to be government owned," he said.

The expert, whose identity is known to Fin24 but requested to comment anonymously for professional reasons, added: "The SA government seems to foresee a glorious future for a new airline bringing everyone together, but it will need blood, sweat and tears. Unions would at some stage have to understand that wages are paid out of the income a carrier makes and not out of the pockets of SA taxpayers."

The Swiss Air model

At a briefing to Parliament on Tuesday, Finance Minister Tito Mboweni hinted that the fall of Swiss Air and subsequent "rising from its ashes" of a new airline could be a good example to study ahead of Minister of Public Enterprises Pravin Gordhan's briefing set for Wednesday.

Fin24 spoke to three aviation experts with knowledge of the so-called Swiss Air model, as well as of SAA's history and current predicament. All three noted that Swiss Air was not 100% state-owned and, importantly, that most of the Swiss Air debt was not government guaranteed.

In the case of SAA, the majority of its liabilities are backed by government guarantees, which means liquidating SAA to set up a new airline is not necessarily a solution, according to one of the experts.

Research conducted by aviation economist Joachim Vermooten last year concluded that the "Swiss Air model" could be an option to mitigate the risk of a sudden service disruption of SAA. Serious pitfalls, however, included the need for detailed preparation and funding before implementation.

Local options?

The question then arises whether any opportunities remain for SAA to find equity partnerships with SA's non-state-owned airlines.

According to Foster, it would not be the first time Airlink concludes a PPP, should it find a suitable option with SAA. Airlink has already had a PPP with Eswatini since 1999.

He said it is not clear which private equity or strategic equity partners the DPE has in mind, but he says that, in terms of the law, no more than 25% of a South African international airline company is allowed to be in foreign ownership.

Foster also does not think SA banks would want to put serious capital into a start-up airline "based on the old SAA".

"Although the coronavirus pandemic has impacted the whole airline industry, Airlink still has equity and a great team of people. We have always been a frugal organisation," says Foster.

For any new airline to arise from SAA, the big question remains: where is the money to come from? Especially since government has already told the BRPs it has no more money to give.

Until such time the dream of a new SAA remains "a castle in the sky", according to Foster.

Competition law

Elaine Bergenthuin, a director and competition law expert at De Beers Attorneys, explains that, in terms of the Competition Act, any joint venture transaction of this nature would invariably be subject to scrutiny by the SA Competition Commission.

The impact of any agreement in terms of lessening competition in the aviation industry will be weighed against the technological, efficiency or pro-competitive gains from a deal.

"A possible exemption to the application of these provisions is where the economic stability of an industry - as designated by the relevant minister - is at play," she adds.

A reliable source, with knowledge of SAA's operations and finances, is of the view that liquidating SAA to establish a new airline does not make sense, because all major liabilities of the airline are backed by government guarantees. For creditors too, it would be better if SAA is not liquidated, in his view.

"What needs to be done is for a restructured SAA to take advantage of the current crisis where no one is trading," he suggests, since it is very important to make SAA commercially viable.

What about Mango?

For the international aviation expert, a "new SAA" could start with four aircraft, hire only the staff needed from the best talent available, and start only routes to London and Frankfurt to begin with. It should then make sure it earns money and grow from that solid basis.

"From the current perspective, I would say they should make sure Mango is structured into a separate entity. I would think they should use SAA as an international airline and Mango for domestic," he says.

Non state-owned South African airlines Comair and Flysafair were approached to find out whether they would be interested in some sort of partnership with SAA.

Comair announced on Tuesday that it had entered business rescue due to the unforeseen impact of the coronavirus lockdown and flight bans. It operates, as well as British Airways, the latter under a licensing agreement.

The company, which started with restructuring at the end of March, announced earlier that it cannot afford to pay employees their full salaries and is seeking assistance from government's Temporary Employer-Employee Relief Scheme.

Update: FlySafair echoed Airlink's sentiments to say that any viable deal would be worthy of consideration but that their primary focus for the time being is to sustain the current pressures arising from the Covid-19 pandemic.

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