Comair challenge may have wider ramifications

The action that Comair is bringing in the North Gauteng High Court is the first of its kind in SA.

In other jurisdictions such as the European Union, legislation restricts how governments may fund state companies in order to maintain competition.

SAA has been bailed out on an ad hoc basis to the tune of about R11bn since 1991, according to Comair's calculations. A court ruling that favours Comair's argument could force the state to review how it sees the carrier's role in the economy.

The dismal performance of state airlines over the past two years, which has coincided with large negative shifts in the global industry, has spurred the government to consider restructuring its airlines which includes SAA, its low-cost subsidiary Mango and regional carrier SA Express.

As part of a long-term plan to make the aviation assets financially stable and independent of the constant drip-feed of cash, is the potential consolidation of the airlines into a single operator. SAA's shareholder, the Department of Public Enterprises, defends the continued support of the airline because of its strategic contribution to the economy by providing for the transporting of people and goods as well as the employment it supports, which is estimated at 45,000 jobs.

Challenges

Last week, Comair's chief executive Erik Venter said this strategic role was being challenged as, according to the SAA Act, the airline is expected to operate in a "commercial manner". If the state wants to rely on the national interest argument, an amendment to the SAA Act may be necessary, he said.

Comair, represented by David Unterhalter SC, is launching a wide ranging attack on the legality of the R5bn bail-out. The bail-out is being targeted as there is a six month statute of limitation under the Promotion of Administrative Justice Act (Paja).

According to the notice of motion filed last week, Comair will ask the court to review and set aside the guarantee with a six-month suspension from the date of the order. In addition, Comair will ask the court to declare the guarantee "unconstitutional and unlawful" and that any assistance given to SAA after the court order comply with government's domestic air transport policy. The challenge will be built using the Bill of Rights, the constitution, the Public Finance Management Act, and Paja.

Comair will argue that the government has an obligation to take proactive measures to effect fundamental rights such as the right to equality - in this case the equal treatment of all airlines - and that everyone has the right to choose his or her trade.

Irrational

According to Comair, the funding of SAA is "interfering in and prejudicing the industry without a legal basis". It says the state did not follow the necessary parliamentary appropriation procedures under the Public Finance Management Act and the continued funding of SAA could be classed as wasteful expenditure. Under Paja there is a right to expect lawful, reasonable and procedurally fair administrative action.

Comair will argue that funding SAA is unreasonable given that domestic aviation policy aims to create a level playing field. State support is unreasonable and in breach of legislation.

The continued funding was "irrational, as a rational shareholder would not continue to fund a loss- making business with no reasonable return on investment".

Venter said it was hard to quantify the damage being done to the domestic market by the distortions caused by the "irrational commercial behaviour of SAA".

Comair, in the face of excess capacity in the market and artificially low air fares charged by SAA, had in the past been forced to defer plans for expansion or aircraft renewal.

Venter said the latest guarantee for SAA should be viewed as a bail-out, since at the rate SAA was spending cash, it was unlikely to be in a position to repay the money. "The state will probably just have to write it off," he said.

Source: Business Day via I-Net Bridge