Regulatory bullying threatens Safair’s success in South African aviation: Ivo Vegter

In the competitive realm of South African aviation, Safair Operations, a private sector success story, faces regulatory attacks from smaller rivals exploiting outdated laws. Accused of violating foreign ownership restrictions, Safair’s aggressive pricing strategy, which is beneficial to consumers, has drawn ire from competitors seeking protectionist measures. The call for dropping restrictions highlights how such laws hinder economic growth, limit innovation, and jeopardize job creation. In a market where success should be rewarded, safeguarding inefficient firms only perpetuates economic stagnation to the detriment of South Africa’s citizens.

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By Ivo Vegter*

When you have bad laws, expect rivals to exploit them to drag down successful competitors and raise costs for consumers.

Safair Operations offers domestic flights in South Africa and a few international flights to African destinations under its FlySafair brand. Since the implosion of the predatory state-owned monster, SAA, it has won about 60% of the South African market

With the real devil – state-funded competition – having taken a leave of absence, smaller domestic airlines have now taken to attacking their most successful private sector rival, Safair.

They are not using superior quality or lower prices as their weapons. Instead, they have turned to the regulatory power of the state for protection.

According to a News24 subscribers-only article, two of Safair’s competitors have reported it to the International Air Services Council, and one of those also reported it to the Air Services Licences Council, for alleged violations of local shareholding requirements in its licences.

These two regulators administer the International Air Services Act and Air Services Licensing Act, respectively, the latter of which applies to the operation of domestic air services.

Foreign ownership restrictions

To be considered fit to operate a domestic air service, an airline must be incorporated in South Africa, and 75% of its voting rights must be held by residents of South Africa.

To be considered fit to operate an international air service domiciled in South Africa, the same rule applies, except that the voting rights must be ‘substantially held’ by South African residents.

According to News24, the industry has by convention interpreted this as meaning at least 50%.

ASL Aviation Holdings is a global aviation company based in Ireland. It bought into Safair Operations in 2013 to make the launch of FlySafair possible in 2014. ASL, since 2019, is 100% owned by STAR Capital, a private equity firm based in the UK.

When ASL first invested in Safair, it established the Safair Investment Trust, registered in South Africa, to hold almost 50% of Safair’s shares. It also created a 25% employee share ownership scheme, in order to comply with the South African licence conditions. That left ASL with a mere 25% stake in the company.

It has since acquired Safair Investment Trust, raising its direct shareholding in Safair Operations to nearly 75% in 2020.

This, it appears (and Safair’s rivals now claim), violates the foreign ownership restrictions that apply to both domestic and international air services operators.

Both Safair and ASL told News24 that they believe they are operating entirely within the law, suggesting that the state of affairs in 2020 was a temporary restructuring that has since reversed.

The real motive

One competitor let the cat out of the bag, however. Quoted anonymously by News24, they said: ‘The bottom line is that Safair is pricing very aggressively and it is hurting everyone. This might be good for the consumer in the short-term but not for the industry’s sustainability.’

So, they’re not concerned about foreign ownership at all. Their real motive is to blunt the vigorous competition they’re facing from Safair.

They’re right, it is good for the consumer. Not only in the short term, but also in the long term. They mistake their own sustainability (read: ability to make excessive profits) with the sustainability of the industry, however.

Sure, it would be nice if nobody competed on price, and everyone could charge expensive fares and add-on fees for being allowed to carry a wallet on board. Price competition is tough.

But price competition is how a free market ensures that customers aren’t extorted by greedy cartels.

Safair’s rivals are trying to undermine its ability to compete on price by trying to get its licence to operate revoked.

This, frankly, is vindictive bullying. I, for one, will boycott these rivals and prefer FlySafair in future.

Instead of trying to exploit bad law to undermine each other, the industry should instead be lobbying the government to drop the foreign ownership restriction altogether.

Foreign investment

The ANC government’s instincts are, of course, protectionist. They believe they are protecting some core national interest by imposing foreign ownership restrictions. They may also believe that such restrictions ultimately benefit the South African economy.

But these beliefs are mistaken.

The only national interest that the government has reason to care about is the ability to hold investors legally accountable for the actions of the companies they own. This justifies a requirement to establish a South African-domiciled investment vehicle. In short, requiring that Safair Operations is registered as a company and has offices in South Africa makes sense.

It does not matter to a South African flyer whether the airline they use is majority owned by South Africans, however. What matters is whether the airline is safe and modern, and offers the right balance between quality and affordability. There is no national interest in limiting who may invest in local airlines.

On the contrary, limiting who may invest in South Africa’s airlines severely restricts the capital available to establish and operate these airlines.

When foreigners arrive in South Africa with fists full of dollars or euros they say they want to invest in domestic companies, the very last thing the government should do is tell them to get lost, or confront them with a shopping list of petty preconditions that will chase most of them away.

While the idea of safeguarding domestic businesses and preserving national assets seems laudable, restricting foreign investment into South Africa hinders economic growth, limits innovation, and creates an insular environment detrimental to both domestic consumer interests and to the country’s global competitiveness.

Growth, jobs

Foreign investors bring in capital that fuels expansion, stimulates job creation, and fosters technological progress. Restricting these investments leads to a stagnant economy, hindering the very progress policymakers claim to seek.

Foreign ownership can also inject vitality into local industries by introducing new management practices, technologies, and market insights. This infusion of diversity can enhance efficiency, foster healthy competition, and elevate the overall competitiveness of domestic companies on the global market.

This is particularly important in highly competitive sectors like airlines where global experience can be the difference between survival and failure.

Companies that can draw on a broad global investor pool tend to be significant contributors to job creation. By restricting foreign ownership, South Africa risks limiting employment opportunities for its own citizens, both domestically and in the international job market.

South Africa cannot go to global forums and claim to be open for business, when back home it tells foreign investors they may not own controlling stakes in the companies in which they invest.

Rewarding failure and punishing success

Bad, protectionist laws like this belong in the dustbin of history. As long as they survive, they will be exploited by rivals that cannot cut it to undermine rivals who can.

Ultimately, the only consideration for the economy ought to be whether customers – the broad base of South African citizens – stand to benefit from a given economic policy.

Protecting underperforming companies from competition may indeed improve their ‘sustainability’. It should be clear, though, that what is being protected is their inefficiency and perpetual sub-par performance.

One of the most useful functions of a free market is that it doesn’t try to make poorly performing companies sustainable. On the contrary. If companies prove unable to provide the wants and needs of customers, while more efficient rivals succeed, the free market ruthlessly kills the failures.

Rewarding success and punishing failure is how we can be assured of continuous improvement and economic growth. Rules that reward failure, by protecting the failures from competition, will always be abused to punish success, and the greatest losers will be the people of South Africa.

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Ivo Vegter* is a freelance journalist, columnist and speaker

This article was first published by Daily Friend and is republished with permission