Airline ownership in spotlight
FlySafair grounded by foreign shareholdings, writes Nicky Smith
LAST week’s damning judgment in Comair’s successful application for a court interdict against FlySafair raises serious questions about whether the new, low-cost aspirant airline will ever take to the skies — dashing hopes of more competition and cheaper fares in the domestic market.
It had been FlySafair’s intention to begin flying between Johannesburg and Cape Town this week.
At the time of North Gauteng High Court Judge Neil Tuchten’s ruling, about 2,500 people had taken the airline up on return flights priced at about R1,600.
With FlySafair grounded, Comair can — at least for the time being — enjoy having one less competitor to contend with. Comair has agreed to honour all the flights booked with FlySafair.
However, in the interdict proceedings, it was up to Comair and Skywise — another yet-to-be-launched, low-cost carrier in SA — to convince the court that their case was not merely about competitors trying to stifle competition in the domestic market.
Judge Tuchten not only agreed that FlySafair, which is owned by Safair, had a case to answer. He also detailed how appallingly the Air Services Licensing Council had dealt with Comair and Skywise’s objections over FlySafair’s licensing process, including after the licence had been awarded.
Judge Tuchten said he thought there was a “strong” chance that FlySafair in its application had “deliberately concealed” information about its shareholders.
The significance of this is that South African law ensures there is a cap on foreign ownership of airlines in the domestic market, which is designed to protect local carriers. Only 25% of an airline company may be owned by foreigners.
In his scathing judgment, the judge said the evidence was “well nigh overwhelming” that FlySafair’s holding company, Safair, had created a scheme to simulate meeting these legal requirements.
FlySafair is the latest in a string of firms wanting to take up the gap created by the bankruptcy of 1time airline.
London-listed fastjet, the low-cost carrier based in Tanzania, has been talking about its entry into SA’s market since 1time’s failure. In July, fastjet finally ended its second attempt to operate domestic routes and will focus on developing the Dar es SalaamJohannesburg route. It has vowed to return to SA.
Comair and Skywise objected to the granting of a licence to FlySafair, and when their objection to the Air Services Licensing Council disappeared into a black hole, they resorted to the courts to prevent FlySafair from starting up.
At issue for FlySafair’s competitors was that they both believed it did not meet the cap on foreign ownership.
Comair CEO Erik Venter has repeatedly said the FlySafair structure was a front —the same thing he said about fastjet’s scheme. Mr Venter also maintained that FlySafair could not be given a licence because it did not meet the legal requirements. Judge Tuchten agreed.
Comair and Skywise argued two central points. First, that Safair would not have “effective control” of FlySafair, and second, that not enough of the FlySafair shareholders were residents of SA.
Judge Tuchten said that on the evidence there was a “strong probability” that Safair was “both commercially and legally obliged” to “defer to and implement any decisions” made by the two holding companies, one Irish and the other Belgian, that control Safair. “The evidence shows that both the holding companies control their subsidiaries.”
In addition, the shareholder agreement submitted to the licensing council said three FlySafair directors would each hold 25%, and Safair the balance. The three directors were said to be South African residents, a legal requirement.
However, the judge said the law requires that 75% of the “voting rights” have to be under the control of South African residents.
Under the FlySafair shareholder arrangement the shares held by the directors were “a special class of shares called A ordinary shares” that “have restricted rights” and 10 times fewer votes per share than the shares held by Safair.
“On a purely arithmetical analysis, Safair Ireland holds something more than the 25% of the voting,” Judge Tuchten said. No “reasonable person” could have concluded that the three directors held 75% of the voting rights. That the directors declined to be cross-examined “reinforced the probabilities that grounds” of objection were good, he said.
“The financial and reputational prejudice which Safair will suffer as a result of an interim interdict has, in my view, as its cause Safair’s scheme, which I think is probably illegal and thus ineffectual,” Judge Tuchten said.