FlySafair in hot water

It is difficult to resist the temptation to comment on the current turbulence relating to FlySafair. The turbulence relates to 2 issues, both of which have politico-legal substance.The primary issue relates to the FlySafair "ownership" issue, and the second relates to FlySafair overbooking practices.

As far as the ownership is concerned, both the domestic and international licencing councils have declared FlySafair to be in contravention of South African aviation policy regarding foreign ownership. We currently are waiting for these bodies to announce the sanctions to be proposed. Note that both of these councils consist of government appointees.

There are three areas for discussion of the ownership debate. The first is the overall merit of the requirement for a limit on foreign airline ownership, the second is the legalise surrounding the definitions of ownership, and the third is the impact of the council findings, and who gains and who loses.

For discussion on the overbooking debate we should look at the concept of consumer rights, as opposed to the industry practices, and their impact on airfares.

Ownership Issues

1. The principle of foreign ownership

Although we are in an era of airline deregulation and open skies, many countries do still insist on some portion of local ownership of airlines. This portion varies generally from 25% to 75%. Why is this?

Air transport is a major contributor to any country's economy. The connectivity which the industry provides, leverages major economic activity. Nations are therefore keen to ensure that maximum benefit accrues to local interests in the home country.

Airline profits are wafer-thin, and thus the earnings portion of economic benefit is small compared to the other benefits, such as tourism income, job creation and travel industry earnings. Conversely, for a country with a small economy, the availability of foreign capital can unlock more benefit, than the actual airline earnings portion. This motivates the recent Qatar investment in Airlink.

2. Legalities and sanctions

The licencing councils are constituted as impartial arbitrators, whose role is to enable industry participants whilst ensuring that the air regualtions are complied with.

The fact that it has taken a few years to constitute the air services licencing councils, has led to a long waiting period to address the issues at hand with respect to FlySafair. This should not influence the judgment on this issue, but is most unfortunate.

There is some disagreement on whether owners have to be "natural persons". Most South African airlines have portions of ownership not belonging to natural persons. There is a reasonable argument which proposes that few natural persons have the financial resources to own part, or all, of an airline. This would suggest that the licencing councils, the interpretation, or the air regulations, are off the mark with the rulings under discussion.

There is a suggestion that the licencing councils are being patriotic and chauvinist, rather than pragmatic and understanding of the industry contributions. It is also reported that the councils are imposing conditions on their findings which are not specified in the regulations.

The sanctions available to the licencing councils include fines and suspension of a licence. It seems hardly practical to summarily suspend the FlySafair operating licences. This would have dramatic impact on the travelling public, and the industry in general. A fine seems unlikely, since if we conclude that FlySafair is breach, then it would be argued that is the failure of the licencing councils that FlySafair have been allowed to operate for such a long period.

 

 Winners and losers

Should FlySafair be forced to terminate services, the winners would be the competitor airlines, indeed they are the main instigators. This would include the government owned SAA. The losers, if FlySafair are forced to suspend operations, will be the entire travel industry, including customers, as well as current employees. In the longer term, we would expect airfares to move upwards, thanks to reduced capacity supply, and the disappearance of a benchmark low-cost operator.

 

Overbooking Issues

4. Industry practice

Globally, airlines do overbook flights since on every flight there are likely to be no-shows. The International Air Transport Association fully supports the practice. Each individual airline will adopt a detail policy based on its market and refund policies. In South Africa, some airlines have commented that they do not overbook, but prefer to refuse refunds to no-show passengers.

5. Consumer interest

It is tough to judge which is the worst of 2 evils: overbooking or no refund for the consumer. No-show passengers can have very valid reasons for failing to arrive for a flight. In both cases we believe that the crux of the matter is the manner in which the airline manages and recovers the situation. For example, we would hope that overbooking level is reduced where there are no alternative flights to a destination on the day of the occurrence.

There is no specific provision for airline overbooking in South African consumer legislation. Globally there are specific compensation regulations.