SOUTH African Airways (SAA) made the startling admission on Saturday that it subsidises low-cost state-owned airline Mango, by subleasing to its entire fleet at a significantly discounted cost.
The admission opens up Mango to action by the competition authorities, as low-cost competitors who have long suspected unfair competition are unlikely not to act on the national carrier’s statement.
SAA made the admission in the context of a statement on the resignation of Mango CE Nico Bezuidenhout, who announced on Friday that he was leaving to take up another opportunity.
The intention of the statement appears to have been a desire by SAA to tarnish Bezuidenhout’s reputation by implying that Mango’s success was not due to his managerial strength, but was rather due to the fact that SAA was subsidising the airline.
The statement says that, as “an initial investment to subsidise the start-up of Mango Airlines, SAA subleased 10 aircraft, at a significantly discounted cost to Mango Airlines, while continuing to pay the market related premium to the lessor.”
“The aircraft are still in use and comprise the whole of Mango’s fleet. SAA understands and accepts that this is a necessary investment and a demonstration of shareholder support towards an entity it has exclusive shareholding over.”
At its launch in 2006, Mango stated that its low costs would be a result of its “no frills” approach, as well as the operation of fuel-efficient aircraft that would save on ticket prices. It acknowledged a R100m shareholder loan as start-up capital.
The statement on aircraft leases follows a forensic inquiry into procurement that the board of SAA commissioned from auditing firm EY in 2015.
While the investigation was completed in December, its findings have not been made public. Among the matters that were probed were all of the national carrier’s leasing arrangements.
The statement will be music to the ears of other low-cost airlines. Comair CE Erik Venter said on Sunday: “We raised the concern that SAA would subsidise Mango when it was launched in 2006, but for the past eight years, both SAA and Mango have vehemently defended the position that all interactions between SAA and Mango were on an arms-length basis.
“The admission that Mango has been subsidised, unfortunately, means that all three state-owned airlines operate at a loss and with state support. The implication is that new entrants into the airline industry will continue to face a significant barrier in the form of a competitor that can sustainably price its tickets at below operating cost,” he said.
A prominent competition lawyer interviewed yesterday said that “at face value, this is a form of predatory pricing. It does appear that Mango may be charging prices that are lower than the costs that should be associated with those aircraft.”
Should the competition authorities decide that the low-cost market is a distinct market, then Mango, as a dominant player could face penalties for predatory pricing.
The airline industry operates on tight margins, giving dominant players the advantage. SAA has previously faced unsuccessful litigation from Comair, which claimed that the government’s loan guarantees were not consistent with domestic aviation policy, which promises fair competition on free-market principles.
SAA is also at the centre of two damages claims, by Nationwide and Comair, which are claiming R35m and R1bn, respectively, for breaches of the Competition Act. Bezuidenhout has established a strong reputation in the industry and has acted as SAA CE for two separate stints, but has clashed repeatedly with SAA chairwoman Dudu Myeni and has been subjected to several probes aimed at proving misconduct.
One of the issues over which Myeni has been particularly aggrieved is the closure of the national airline’s Durban to Cape Town route, which the SAA statement says “hurt SAA’s commerical interest and financial performance”.
The statement says that an investigation is still being conducted, and no conclusion has been reached.
The route was closed by former CE Sizwe Mzimela in 2010 for the heavy losses it was incurring. However, it has been often implied by Myeni that the real intention has been to provide Mango with additional commercial opportunities.