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Pro­tec­tion­ist bi­lat­eral agree­ments force air­lines to in­no­vate

Finweek English Edition - - Business Strategy - SIKONATHI MANTSHANTSHA sikonathim@fin­

ACOM­BI­NA­TION OF higher fuel prices and the over-dom­i­nance of the State in the avi­a­tion in­dus­try has forced South Africa’s pri­vate air­lines to in­no­vate in or­der to sur­vive and thrive. In ad­di­tion to launch­ing op­er­a­tions on lu­cra­tive routes in the south­ern African re­gion, pri­vate air­line op­er­a­tors Co­mair and 1time Hold­ings have had to find other means of sur­vival.

Af­ter jump­ing into the tour op­er­at­ing and fi­nan­cial ser­vices in­dus­tries, Co­mair is cur­rently in­volved in ne­go­ti­a­tions to buy 49% of state-owned Air Malawi to cir­cum­vent the bi­lat­eral agree­ments that have been used by African gov­ern­ments to thwart com­pe­ti­tion. Should an agree­ment in Blan­tyre come to pass, the stake would give Co­mair ex­po­sure to vir­tu­ally the whole of Africa, thereby lim­it­ing the ef­fects of the bi­lat­eral agree­ments. By all ac­counts the Malaw­ian gov­ern­ment seems very ea­ger for a deal with Co­mair, if its pre­ma­ture an­nounce­ment of an agree­ment early Septem­ber is any­thing to go by.

That agree­ment would im­me­di­ately give Co­mair ex­po­sure to the lu­cra­tive Blan­tyreJo­han­nes­burg and Nairobi busi­ness routes, while those with other ma­jor cities in Africa and Europe only need Air Malawi to ex­plore land­ing rights. Co­mair has been “looking” at fly­ing to En­tebbe, Uganda, for al­most two years. All Co­mair CE Gi­don Novick would tell Fin­week is that it’s looking at the East African mar­ket. Any deal with Air Malawi would give Co­mair that ex­po­sure to more routes, with the priv­i­leges that come with be­ing ally, the main­te­nance busi­ness con­trib­uted the most to group profit, with a 15% mar­gin on R64m turnover at the in­terim pe­riod in 2008, while the air­line at­tained a 6% mar­gin be­fore the oil price spi­ralled to more than $140/bar­rel, which re­sulted in a group-wide loss of R6m.

Orsmond sees the com­bined tech­ni­cal en­tity in­creas­ing rev­enue to around R300m in its first year of op­er­a­tion, which would bring the divi­sion to within a whisker of the R422m air­line rev­enue in the six months to June. “That re­duces oil ex­po­sure for the group,” says Orsmond.

Safair Tech­ni­cal has in­ter­na­tional main­te­nance li­cences ap­proved by such reg­u­la­tors as the US Fed­eral Avi­a­tion Au­thor- a “na­tional car­rier”.

On the other hand, Co­mair’s smaller com­peti­tor on the SA do­mes­tic mar­ket – 1time – has had to go be­hind Im­pe­rial Hold­ings in or­der to lay its hands on Safair Tech­ni­cal, the main­te­nance busi­ness of Safair Ltd that Im­pe­rial un­til re­cently owned. The par­ties ini­tially couldn’t reach an agree­ment and Safair was sold to an Ir­ish com­pany, with which 1time has now reached an agree­ment to buy 77,5% of Safair Tech­ni­cal.

The US$7,15m (al­most R59m) buy will give 1time ac­cess to Safair Tech­ni­cal’s five hangars at OR Tambo In­ter­na­tional and Cape Town In­ter­na­tional air­ports and more than 300 staff. Com­bined with 1time’s own Aeronexus Tech­ni­cal it will be­come one of Africa’s largest air­craft main­te­nance busi­nesses. Aeronexus Tech­ni­cal is cur­rently op­er­at­ing at full ca­pac­ity with a two-bay hanger fa­cil­ity at OR Tambo In­ter­na­tional. 1time CE Glenn Orsmond says: “We’re buy­ing the ex­tra ca­pac­ity pro­vided by the five hangars and the skilled em­ploy­ees of Safair. By this we’re also mak­ing sure the skills re­main here in SA.”

Pre­vi­ously, 1time’s air­line passenger busi­ness was its largest rev­enue con­trib­u­tor, fol­lowed by its main­te­nance fa­cil­i­ties busi­ness, with the char­ter com­pany the small­est with a 10% con­tri­bu­tion. Tra­di­tion- ity, the Euro­pean Avi­a­tion Stan­dards Au­thor­ity, In­ter­na­tional Op­er­a­tions Stan­dards As­so­ci­a­tion, as well as SA’s Civil Avi­a­tion Au­thor­ity. The li­cences are held in re­spect of mod­ern com­mer­cial air­craft types, such as Boe­ing’s 737 and 727 se­ries, as well as 1time’s own McDon­nell Dou­glas 80 se­ries, among oth­ers. That should place 1time in a good earn­ings po­si­tion, as many com­mer­cial air­lines (among them Co­mair, which has now re­placed its en­tire fleet with Boe­ing 737-400s) are now mi­grat­ing to the more fuel-ef­fi­cient Boe­ing 737-400 air­craft.

Safair still has the ex­per­tise to ser­vice clients fly­ing older air­craft, par­tic­u­larly in the rest

Co­mair is cur­rently in­volved in ne­go­ti­a­tions to buy 49% of sta­te­owned Air Malawi to cir­cum­vent the bi­lat­eral agree­ments that have

been used by African gov­ern­ments to thwart com­pe­ti­tion.

of Africa. Com­ing with a guar­an­teed R50m net as­set value, Safair Tech­ni­cal counts among its ma­jor cus­tomers Safair Op­er­a­tions (Africa’s largest air­craft lease com­pany, now owned by Aergo Cap­i­tal), In­ter­link and SAA Cargo.

To il­lus­trate the frus­tra­tion faced by pri­vate air­line op­er­a­tors, Orsmond says the An­golan gov­ern­ment re­cently granted ex­tra land­ing rights in Luanda to SAA without af­ford­ing any other SA com­pany an op­por­tu­nity to in­tro­duce flights there. That’s af­ter 1time had been talk­ing to An­gola for at least two years with a view to re­sum­ing op­er­a­tions there.

Re­duc­ing oil ex­po­sure. Glenn Orsmond

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