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Airlink scores in SAA deal

Nov 12 2017 06:00
Lesetja Malope

Despite denials by the main players, competitors insist that the contract presents a barrier to entry for smaller airlines.

The long-standing franchise agreement between SAA and Airlink may be contributing to a lack of sufficient competition in South Africa’s aviation industry and appears to have unlocked many opportunities for Airlink – at a cost of only R14.5 million.

Airlink, of which SAA owns a 2.9% stake, has bagged extra earnings thanks to the agreement, which has been in place since 2000.

According to aviation analyst Joachim Vermooten, the relationship between Airlink and SAA gives the former a significant advantage and presents a barrier to entry for other, smaller airlines.

“The advantage is on revenue rather than on cost, and that advantage is not only to Airlink but to SA Express as well,” he said.

Vermooten added that the arrangement between SAA and Airlink was unique in that it is based on code use instead of code share, which is rife in the aviation industry.

Code use is when one airline uses the code of another airline. Code share is when two codes are used – one for the marketing carrier and another for the operating carrier.

Thando Vilakazi, an economist and senior researcher at the Centre for Competition, Regulation and Economic Development at the University of Johannesburg, said that, based on the agreement alone, it could not be ascertained if the SAA-Airlink model was anti-competitive or not.

“The relationship needs to be scrutinised carefully for it to be determined as uncompetitive,” he said.

On Friday, Airlink CEO Rodger Foster and SAA spokesperson Tlali Tlali both said the agreement between SAA and Airlink was not “anti-competitive”.

The confidential document, which City Press has seen, gives Airlink unlimited use of SAA’s intellectual property – including the SAA flight designator, which is the booking system that allows Airlink flights to be hosted on the SAA code designated by the International Air Transport Association (Iata).

“SAA and Airlink wish to enter into an agreement, in terms of which Airlink shall be granted licence to use the intellectual property, including – without limitation – the SAA designator,” reads a clause in the agreement.

Last week, Tlali confirmed that Airlink was on the booking system because of the franchise agreement.

“SAA is like any other international airline of our size and stature, in that we host all our inventory on a number of global distribution systems to enable the travel agencies to be able to book our flights,” he said.

“SAA has a franchise agreement [which is a commercial agreement] with Airlink, and this enables Airlink to use the SAA code designated by Iata. This, in turn, means that all Airlink flights are hosted on the SAA code and all the back office administrative work is carried out as per this agreement.”

According to a source, who is an aviation expert, the booking system alone would have cost more than R100 million. And, although a number of airlines have such agreements – including Comair with British Airways – Airlink’s deal with SAA gives the former free reign to monopolise the industry because it is open-ended.

However, the contract does restrict Airlink’s licence to 32-seater aircraft, while aircraft of a “lesser standard” than the Jetstream 41 are not allowed.

Asked if Airlink had restrictions on the type of aircraft it could fly under the contract, Tlali said: “Airlink is not restricted by the agreement and can operate any aircraft type it chooses to deploy.

“Obviously, it makes economic sense for it to operate low- to medium-capacity narrow body aircraft to maximise the economies of these thin markets.”

When told that a number of airlines had claimed to have approached SAA for a similar agreement, Tlali said the national carrier had engaged with all airlines that had shown an interest. “It is up to these airlines to decide whether or not our approach is in line with their business model. For partnerships to work, they must be based on sound business choices each partner makes in pursuit of clear commercial interests.”

Airlink’s Foster said the airline operated more than 50 aircraft, ranging in size from 12 to 98 passenger seats.

The contract was signed by Andre Viljoen, who was SAA’s executive vice-president and chief financial officer at the time. He was appointed CEO of the airline in 2001, and resigned in July 2004.

Airlink currently operates more than 50 000 flights a year, serving a network of 40 destinations in Southern Africa. It has a foreign subsidiary, Swaziland Airlink, and has more than 50 aircraft, posting an estimated annual turnover of R4 billion.

Sipho Ngwema, spokesperson for the Competition Commission, said the watchdog had not received any complaints and was not investigating the matter.

According to a study released in March 2016 by the Centre for Competition, Regulation and Economic Development, the domestic market is dominated by SAA which, together with SA Express, Airlink and Mango, controls 56% of South Africa’s market share.

Competitors in that sector include the carriers Solenta, Comair and kulula.com.

According to a senior executive in one of the competing airlines, who preferred not to be named, some of the airlines that have come and gone would not have failed had they concluded the same agreement with SAA.

Thando Vilakazi, senior economist at Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johnannesburg, said based on the agreement alone, it could not be ascertained if it was anti-competitive or not.

“The relationship needs to be scrutinized carefully for it to be uncompetitive,” he said.

The confidential document, which City Press has seen, gives Airlink unlimited use of SAA’s intellectual property, including the SAA flight designator, which is the booking system that allows Airlink flights to be hosted on the SAA code designated by international Air Transport Association (IATA).

“SAA and Airlink wish to enter into an agreement in terms of which Airlink shall be granted licence to use the Intellectual Property, including without limitation, the SAA Designator,” a clause from the agreement reads.

SAA spokesperson Tlali Tlali had previously confirmed that Airlink was on the booking system because of the franchise agreement.

“SAA is like any other international airline of our size and stature in that we host all our inventory on a number of Global Distribution Systems (GDSs) to enable the travel agencies to be able to book our flights. SAA has a franchise agreement (which is a commercial agreement) with Air Link and this enables Air Link to use the SAA code designated by IATA (International Air Transport Association). This in turn means that all Air Link flights are hosted on the SAA code and all the back office administrative work is carried out as per this agreement.”

According to a source, who is also an aviation expert, the booking system alone would have cost more than R100 million and though a number of airlines have such agreements, including Comair with British Airways, Airlink’s agreement with SAA gives the former a free role to monopolise because of its open-endedness.

The contract, however, restricts Airline’s licence to 32-seater aircrafts, while aircrafts of a ‘lesser standard’ than the Jetstream 41 required.

Asked if Airlink had restrictions on the type of aircrafts it may fly under the contract, Tlali said: “Airlink is not restricted by the agreement and can operate any aircraft type they choose to deploy. Obviously it makes economic sense for them to operate low to medium capacity narrow body aircraft in order for them to maximise the economies of these thin markets.”

When told that a number of airlines have claimed to have approached SAA for a similar agreement, Tlali said the national carrier had engaged with all airlines that have shown an interest.

“It is up to these airlines to decide whether or not our approach is in line with their business model. For partnerships to work, they must be based on sound business choices each partner makes in pursuit of clear commercial interests.“

According to Airlink Managing Director, Roger Forster, the airline operates over fifty aircrafts ranging in size from 12 passenger seats up to 98 passenger seats.

The contract was signed by the then Vice President and CFO Andre Viljoen, who resigned from SAA in 2004 August as CEO.

Airlink currently operates over 50,000 flights a year serving a network of 40 Southern Africa destinations, has a foreign subsidiary Swaziland Airlink and has over 50 aircrafts turning over an estimated R4 billion annually.

Sipho Ngwema, a Competition Commission spokesperson, said the watchdog had not received any complaint and there was no investigation by them into the matter.

According to study that was presented last year March by Centre for Competition, Regulation and Economic Development (CCRED), the domestic market in the country is dominated by SAA and together with SA Express, Airlink and Mango, the four take up 56% of the market share.

Competitors in that sector include Solenta, Comair and kulula.com.

According to a senior executive in one of the competing airline who preferred not to be named, some of the airlines that have come and gone would have never gone down under had they had the same agreement with SAA.

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saa  |  airlnk  |  comair  |  competition  |  iata

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