South Africa’s ‘comic sans’ airline and the corruption behind it all…

Published by Nicholas Combes and Mitchell Brooks (www.brookslegal.wordpress.com)

In late 2016 it was announced that SAA, SA Express and Mango airlines would undergo a parent take-over. The merger is said to be overseen by an American 3rd party organisation, Bain & Co, a management consultant firm. The reported fee agreed for Bain’s oversee was in the region of R12 million.

From an operational aspect, Mango is already operating under SAA’s AOC (Air Operating Certificate) and its’ fleet is maintained by SAA’s technical department. This means that no real change would be felt across airline operations.

Mango is a 100% subsidiary of SAA, meaning that SAA holds the entirety of Mangos’ shares. The financial integration should be straight forward. But it is the company restructure that interests us.

With that said, SAA does not stand to reap profits greater than the existing dividends it already receives. I am no tax expert but, if anything, SAA may be attempting to avoid dividends tax by up to 20% by becoming one single entity…

But it is admittedly difficult to see why a state owned entity would take on the cost of this merger, simply to avoid the same tax that it enjoys the benefit of!

For those even remotely aware of South African Airways’ financial history, you will remember that the state airline has already been rescued by various state bail outs (thanks taxpayer). South African Airways still reported a 2015 loss of R5.6 billion or $485 million. Mango is currently the only profitable subsidiary of the 3 merging companies. (It has done well to remain so against the might of Comair’s low cost subsidiary, Kulula.)

The merger proposes a streamlining of SAA as a parent company to maximise profitability. But if Mango is doing well shouldn’t they be left alone to continue just this? If the SAA board cannot return a flagship carrier to profitability, then taking on another two airlines is not going to make their jobs any easier. Adding two bad eggs with one good egg still makes a crappy pancake.

Mango’s relatively small yet successful operation is not going to be offering any lifelines for SAA parent. SAA is a sinking ship that ultimately threatens to pull Mango down with it.

Image result for south african airways
A South African Airways A340-300 aircraft.

So what really is the motive for this merger?

Let us back track to the restructuring of the boards of the entities and simplify things. As it stands, an unsuccessful SAA has a board of directors, with its highly criticised Dudu Myeni as its chair. On the other hand, a successful subsidiary, Mango, has its own independent board of directors. What should be noted is that, notwithstanding the MOI of the Companies, the Companies Act 71 of 2008 requires the shareholders of a company to elect a minimum of 50% of the board. This means that SAA parent already has the power to appoint the majority of its own new board.

Based on the endless corruption allegations and financial short falls of SAA, is it not plausible that the proposed merger serves the purpose to concentrate power towards one individual, whose purpose to date has clearly not been the success of a company, the chairperson – Dudu Myeni.

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SAA’s controversial chairperson, Dudu Myeni. (Courtesy of Mail & Guardian)

Another prominently possible reason for the merger would be to restructure the ownership of the fleet. SAA has found itself being investigated by the Competition Commission on more than one occasion. State entities are in fact the most frequent transgressors of the Act, which has caused quite a lot of speculation surrounding its possible amendment to relieve state entities all together. Furthermore, SA President Jacob Zuma did hint towards this amendment at SONA 2017, which indicates that there is certainly an intention for the state to relieve itself from this Act to some degree.

This may seem quite deceptive, as the merging of the entities may be for the purpose of avoiding the red tape surrounding the Competition Act. In June 2016 SAA conceded to sub chartering aircraft to SAA at discounted rates. In fact, the SAFAIR CEO indicated that SAA would have been subsidising almost 40 percent of Mango’s costs through the arrangement.

Of course such an arrangement drew attention from Mangos biggest rival Kulula, who laid a complaint to the competition commission on grounds of collusion. Unfortunately the channel chosen by Kulula was slightly flawed and perhaps would have been better suited under a predatory pricing argument.

The problem with pursuing the horizontal collusion argument is that the relationship between SAA and Mango is distinctively more vertical than horizontal because, as mentioned earlier, SAA amounts to a supplier of aircraft to its 100% wholly owned subsidiary. It would be quite difficult to argue that SAA competes with its sub in the domestic, low-cost airline market. Arguably, that is where the collusive approach falls flat.

A more reasonable approach would be to argue that SAA was abusing its dominance in the domestic airline market, gained by means of historical state funding, by sub chartering aircraft (a service) to its subsidiary at prices below their marginal or average variable cost.  Furthermore, the only intention that can reasonably be inferred from this arrangement is that SAA, and by implication Mango, sought to remove Kulula from the market – hence the term predatory pricing. Think about it, why else would a bleeding parent company sublease aircraft, at a loss, to a succeeding sub?

The point is, if mango and SAA become one entity they no longer need to formally lease aircraft between each other, meaning that Mango benefits from the use of the aircraft at low costs which allows it to undercut Kulula and squeeze their margins, eventually squeezing them out of the low cost market. The biggest effect of the restructuring is that without a leasing arrangement the Competition Act is circumvented.

However, the merger will have to pass the muster of the Competition Tribunal in order to merge and I am quite hopeful that the merger will be rejected on the grounds that it would lead to extremely anti-competitive consequences in an already struggling market.  One could say the merging parties have exceeded their maximum take-off weight (“MTOW”), and even if cleared would unlikely reach their Vspeed “rotation speed.”

Ultimately, there are only two parties that may benefit from this merger, Dudu Myeni and allegedly a number of SAA pilots. An anonymous insider has suggested that currently the policies within the two companies are different in regulating the years of experience required to jump to the left seat, with the SAA policy requiring over a decade. The question arises as to whether SAA pilots may demand a threshold more akin to their orange comrades.

Cabin-crew, disarm doors and cross-check”

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