FlySafair’s future: Claims that most airlines at risk of sanctions a red herring and ‘deflection’

Budget airline FlySafair’s future may hang by a thread as the carrier awaits sanction from the Domestic Air Services Licensing Council.

At worst, the company could be grounded until it rights its ownership and effective control structure.

On Monday, the International Air Services Licensing Council will meet to contemplate the same transgression and punitive sanctions it may impose after finding FlySafair non-compliant in December.

FlySafair faces sanctions from both councils.

The airline operates regional flights to Zanzibar, Mauritius, and Zimbabwe along with its domestic schedule.

FlySafair: Final determination unpredictable

Collen Msibi of the Transport Ministry said that the Licensing Act outlines sanctions the councils may impose, including directing FlySafair to comply with legislation within a specified period, suspending the licence temporarily, or cancelling it entirely.

This provides the airline with an opportunity to address any issues, depending on the Council’s final determination, which remains unpredictable at this stage.

Local control or voting rights of 75% of any South African airline is required by this. The domestic council granulated this to natural persons this week.

Based on this interpretation, FlySafair does not meet the nationality provisions, as 75% of its shares are held by South African trusts and companies rather than individuals.

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‘Most’ airlines at risk

This interpretation, if upheld by a court, said marketing head of FlySafair Kirby Gordon, could render most South African airlines non-compliant with the law, including Airlink, which he said is similarly owned by trusts and companies.

An aviation analyst called FlySafair’s statement a red herring.

“It’s a tactical deflection from the issue. Decades of legal precedent exists to negate this assertion,” they said.

“Companies like Comair would never have been allowed to list on the JSE and SAA would have been non-compliant for almost a century if this was the case.”

ALSO READ: FlySafair says its ‘non-compliance’ applies to almost all SA airlines

Local control

They added that the crux of the matter was local control, which all other airlines in local aviation history have maintained.

Ownership has been challenged before. The current case echoes the 2013 Comair challenge to FlySafair’s ownership and control structure, during which the judge expressed strong doubts about its compliance with legal requirements in his ruling.

In 2014, FlySafair returned the favour and challenged Comair’s shareholding when the regulator attempted to suspend its licence. Comair warded off the threat and succeeded in overturning the suspension of its licence in court at the time.

Gordon suggested that LIFT, as the complainant, highlighted the matter solely because of its own commercial interests.

ALSO READ: ‘No immediate threat to operations. We will fly as normal’, says FlySafair

But the law is the law, even though it may be antiquated and counterproductive, as previously noted by SA Flyer editor Guy Leitch.

Previously, FlySafair also challenged the council’s interpretation of the law. The company sought a declaratory order from the courts to clarify legal requirements and provide guidance, it said at the time, for the broader aviation industry.

Airlink responds

Meanwhile, Airlink denied that any of its equity was held by trusts as asserted by FlySafair and Leitch this week.

“Airlink complies with all South African civil aviation regulations and respects the regulatory processes and decisions of the domestic and international licensing councils, which are the mandated economic regulators for South Africa’s commercial aviation industry,” chief executive Rodger Foster said in a statement.

Qatar Airways recently purchased the allowable 25% of equity and, ergo limited influence, of Airlink.

Gordon said that the council’s interpretation was also “highly unique and irregular in the context of global aviation with almost no examples of similar legislation existing in other countries around the world”.

Ownership and control around the world

An analysis by the Centre for Asia Pacific Aviation, CAPA, dents Gordon’s argument.

It reads that ownership and control restrictions on airlines consist of two key elements around the world.

The first places explicit numerical limits on foreign ownership of voting equity share capital.

For instance, the United States caps foreign ownership at 25%, Japan at 33%, and the European Union at 49% for non-EU ownership of its member states’ airlines.

According to CAPA, there is typically a relationship between equity ownership and voting rights, which often translates to effective control of a company.

ALSO READ: FlySafair approaches court as possible licence suspension looms

In FlySafair’s case, submissions to the Council contended that the airline’s ownership and ergo voting rights and effective control lies with its Irish parent ASL via a layered collection of companies and trusts.

Gordon, instead, said that legal precedent set in the 2014 Comair ruling clarified that councils should not “look through layers of ownership”. In other words, he suggested analysis must be at face value.

He then lashed out at the regulator and said that it also displays a lack of understanding of the structures they are tasked with regulating.

Effective control

Also, according to CAPA, a second element in terms of ownership and control arises from nationality clauses in bilateral air services agreements or flight rights between countries, which require airlines benefiting from traffic rights to be substantially owned and effectively controlled by nationals of the state in question.

While ownership can be relatively straightforward to determine, assessing “effective control” is less clear-cut, as it is challenging to quantify the level of influence an investor has over an airline’s management.

Factors like the right to appoint directors are considered but are not always definitive.

The analyst said that nationality provisions date back to the Chicago Convention signed in 1944, with 193 signatory states, including South Africa.

South Africa is not unique, and while the Acts may be poorly written, it is certainly not unique or antiquated as Leich and FlySafair suggested.

“FlySafair’s conduct may have caused South Africa to be in breach of its bilateral agreements,” they said.

CAPA’s analysis suggested that the industry has increasingly developed ways to bypass ownership and control rules. The analyst said that the Council’s view on the FlySafair debacle may be a case in point.

ALSO READ: FlySafair not compliant with foreign ownership rules, says licencing council

Premature appeal

Transport Minister Barbara Creecy also rejected the budget airline’s approach for clemency on Thursday.

FlySafair had requested an exemption from the very laws it claimed compliance with late last year. Creecy called it a premature appeal.

In a statement, the minister suggested that the airline waits for the outcome of council deliberations.

“It is not a foregone conclusion that the council will simply just cancel FlySafair’s licence. The council has a legal requirement to notify FlySafair of its final decision.”

The minister added that even if FlySafair emerges as the loser, it can still appeal any sanction and or seek high court relief.