‘Free the airline market’ say stakeholders

The South African aviation industry is mature and there is no need for the state to use tax payers’ money to support competition against the private sector airlines in the domestic market, said Professor Jackie Walters.

The professor was speaking during the June session of the University of Johannesburg’s Transport Forum Special Interest Group (TSIG). The panel included included Comair CEO Erik Venter, Aviation consultant Dr Joachim Vermooten and Chris Nkosi, provincial secretary of the South African Transport and allied Workers Union (SATAWU).

Walters said “All forms of state support have opportunity costs, money which could be used elsewhere where it is more deserving and could service a much wider and deserving population. The recent granting of yet another form of financial aid to SAA should be reason to re-examine the role of government in the domestic aviation industry in SA”.

Walters’ view stands against one which says that the state owned airline, SAA, while it must strive for efficiency must not be treated as a profit seeking entity but a necessary base to support the general economy and in particular certain critical industries like tourism and the aerospace industry. This alternative view applied to the objections against the privatisation of the former Iscor was renamed ArcelorMittal SA after it was sold to global steel magnate Lakshmi Mittal. The sale has been followed by a lot of “we told you so” observations because in seeking superior profitability ArcelorMittal SA stands accused of excessive pricing which is strangling a lot of activity in the downstream steel manufacturing industries. This view was aired by Nkosi during the TSIG session.

TSIG was convened to discuss the theme: What role should the state play in domestic aviation services?” The group characterised the theme as topical as seen against the background of Comair’s legal challenge of SAA bailout over the years which are said to amount to approximately R 18bn. There was also the recent demise of no frills airline 1time. The statement noted that a total of six domestic airlines have closed down between 1991 and 2012. These include Flitestar, Sun Air, Phoenix, Nationwide, Velvet Sky and 1Time.

Walters said that post 1991 deregulation, certain objectives of the 1990 aviation policy and the 1996 White Paper had been achieved. He said there was more competition and therefore more passenger choice; fare and service differentiation exists and aviation safety has been maintained. However, on the downside, the government has expanded its influence in the domestic market and now operates three state-owned airlines serving three market segments all competing against the private sector. He also said that far from being the neutral and passive player on a level playing field as agreed and required by various policy documents and legislation, the government had taken an active role in supporting SAA as the private operators had feared from the start.

Walters questioned why the government still believes it is important to have such a big state presence in the airline industry and said “It’s probably based on a misguided political objective of using a state-owned enterprise to be a catalyst for aviation development in Africa, “showing the flag” in foreign destinations and opening up politically desirable routes, while at the same time expecting the airline to be profitable. However, for domestic services the rationale for its expanded presence is entirely unclear. The private sector airlines are more than capable of serving the domestic market at no cost to the taxpayer”.

Aviation consultant Joachim Vermooten said competitive neutrality or a “level playing field” is crucial. “SA’s domestic aviation sector is a mixed market where state owned enterprises compete with private capital. A level playing field is essential because SOEs have different motivations from private operators in terms of pursuing output (revenue) rather than profit objectives. Given their vested interest in ensuring that SOEs succeed, government ownership gives rise to a conflict of interest with Government’s regulatory role, which creates competitive distortions. Despite its official role as regulator the government may, in fact, restrict competition through granting SOEs various benefits not offered to private firms”.

Vermooten added that “Governments can create an uneven-playing field. In SA, there is clear conflict of interest: government is both market referee (as the Departments of Transport and Public Enterprises) and player (SAA, SA Express & Mango).

Vermooten said governments around the world have introduced various models to manage the potential conflict of interest caused by state ownership of airlines recognising that lack of competitive neutrality has negative economic consequences.

The negative consequences said Vermooten, include SOE price structures which do not fully reflect resource costs; distorted decisions on production and consumption; adverse investment and other decisions taken by private sector competitors and negatively influencing the market’s competitive process. The impact is reduced efficiency in the economy­.

Vermooten said that good examples and evidence exist globally which could and should be considered by the South African government. He said the international Organisation for Economic Co-operation and Development (OECD) has identified eight building blocks for Governments to achieve competitive neutrality for SOEs.

Vermooten said that of the four principles stated in SA’s domestic aviation policy, only two: safety and users’ interests have been properly adopted. The principles that economics decisions be left to competitive forces and all participants to be treated equally before the law and subject to the same rules have not. He said lack of adherence to the official policy has shaken investment confidence in the industry.

Vermooten said the outcome is evident with only one private domestic airline remaining out of all the start-ups post deregulation.  “The future of a competitive domestic air transport market is in the balance and the risk of a state subsidised monopoly is emerging”.

To restore long-term viability of this sector, said Vermooten, there must be compensatory measures to prevent, avoid and mitigate undue distortion of competition comprising of divestment of assets, reductions in capacity or market presence and reduction of entry barriers in the relevant market.

Comair CEO Erik Venter said when the company entered the market in 1991, it did so, on the basis that there would be a guaranteed open competitive market and level playing field as laid out in official policy. He quoted the government’s Airlift Strategy of 2006 which said that subsidies had created a culture in SAA whereby it will “expect, automatically, to receive continued state support in the future if things did not go well”.

Venter said “The impact of not implementing the level playing field policy is that SAA management is absolved of responsibility for long term sustainability and SAA is protected from the threat of bankruptcy. In practise this means decisions are made for short term gain, which prejudice long term sustainability, including confusion between commercial and political agendas; inflated cost structures; excessive capacity and pricing that does not cover costs. While private competitors must operate profitably and invest for the future, SAA operates as a loss making enterprise within a mixed market which is not good for the long term viability of the industry and is especially bad for consumers. In the long run passengers end up paying higher fares for less choice and lower service standards”.

Venter said Comair was seeking a level playing field, which was still official government policy and on which the private sector had relied. He said that Comair’s required legal outcome was twofold: “That government will provide funding to SAA only after consultation with all affected stakeholders (per the PAJA) and that any funding will be in accordance with Government’s Domestic Aviation Transport Policy”.

Venter said Comair’s legal challenge was not designed to stop all funding of SAA or a proposal to privatise or challenge the shareholding of SAA or an attempt to shut down SAA. “As a private operator, all we are asking is that SAA competes on the same basis as the rest of us and that pricing and commercial decisions reflect the realities of a competitive and open market”.

This report was largely based on a press released issued by the TSIG with minor additions and additions by ujuh.co.za editor. The report stated that SAA was invited to the session but declined to participate.

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