STUART THEOBALD: Apartheid-era law used to fight off FlySafair should be modernised

I can think of few good reasons to ban foreign ownership of SA companies.

The security industry may present a case, because it could be a Trojan horse for a foreign malevolent interest. A few years ago I would have laughed that off, but since global geopolitics have become more complicated, I’m willing to see the logic. But does the same extend to airlines?

I ask because FlySafair, which has left me impressed every time I’ve flown on it, is being targeted for being too foreign owned. Some competitors allege it is in violation of legislation that forbids more than 25% foreign ownership.

Such restrictions are not uncommon worldwide — the US and China have similar rules. The concern is similar to that about foreign ownership of the security industry — who knows what some malevolent foreign power might aim to do with a fleet of aircraft, should it own one.

Other countries have no such concerns. Foreigners can own 100% of airlines in the UK and Germany, while New Zealand and the Netherlands allow ownership up to 50%. Some nations have specific requirements for government permission to acquire an airline, but don’t forbid it.

The SA restriction of ownership is in terms of a 1990 law, the Air Services Act, which is, in many respects, outdated. Airlines may be owned by natural persons resident in the Republic or, “if he is not a natural person, is incorporated in the Republic and at least 75% of the voting rights in respect of such person is held by residents of the Republic”.

This language is curious, not only for the casual sexism, but also for the assumption that a legal person can only be held by natural persons. On a surface reading, you could meet the requirement simply by having a further resident legal person as a shareholder in the airline — a trust, for example — and have your foreign shareholders sit behind that. The International Air Services Act, made law in 1993, also has a requirement that airlines operating internationally from SA have a “substantial” domestic shareholding. That word is quite open to interpretation.

Dredging up an apartheid-era piece of legislation to fight off an agile, effective competitor doesn’t look good, yet that’s what Lift co-owner Global Airways and Airlink are doing. It strikes me this legislation is in dire need of modernisation.

Ownership shifted

The excellent Transport White Paper released in 2021, which made a valiant case for restricting state participation in the domestic airline market, is silent on the matter of foreign ownership. It does make the point that “where [state-owned companies] compete with private sector companies, it must occur in a fair setting, where all competitors are treated equally, regardless of ownership”, which deserves applause.

But surely the same principle applies in the case of foreign ownership — competitors should be treated equally. That is how consumers get the best result from the airline industry.

Safair’s ownership structure has shifted over the years. Irish firm ASL Aviations, owned by private equity, has long had a shareholding. For a substantial period, about half was held by a trust, which included some participation by staff. But that changed a few years ago.

ASL is decidedly coy on its website about just how much it owns of Safair, but its competitors cite financial statements from ASL that read it bought out the trust and owns just less than 75% in 2019. On the surface, that appears to break the rules, though perhaps there remain legal persons in the chain of ownership that may escape the legislation as it is written (though not the spirit).

The competitors argue that Safair has an unfair advantage because it is in violation of the rules. It is not clear to me that having a foreign owner is necessarily a competitive advantage. The retail sector comes to mind. Walmart-owned Massmart has been losing market share to the big local retailers. And anyone remember Edcon for which foreign ownership was an unmitigated disaster?

Maybe airlines are different because foreigners can add value through global networks. But if that’s the case, consumers are left better off and we should wonder why we have this prohibition on foreign ownership in the first place. The rules are from an era when the line between civilian and military aviation was thin. That is surely no longer the case.

Like so much of the legislation still sitting on our statute books from the apartheid era, it is in dire need of modernisation to ensure the rules lead to positive outcomes for South Africans. The febrile era of the late 1980s when this legislation was drafted is hardly the country we now live in.

The airline industry is a great SA example of successfully unleashing the market to serve consumers. While there have been many casualties in the industry over the years, it has been able to take these largely in its stride because there are multiple players. The biggest threat has been the state-owned sector, which distorted it thanks to constant state bailouts, but that is now over.

I see no good reason to restrict foreign ownership that would lead to an even better, more competitive, sector.

• Theobald is chair of research-led consulting house Krutham.