CemAir vs Harith: Is South Africa Creating an Airline-Airport Conflict of Interest?

By Garth Calitz

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South Africa's domestic aviation market is heading into another potentially significant regulatory battle, with privately owned CemAir asking the Competition Tribunal to block Harith Aviation's proposed acquisition of FlySafair. At the heart of the dispute is a question that goes well beyond the ownership of one airline: can an investment group have interests in both a major airline and airport infrastructure without creating a conflict of interest?

CemAir believes the proposed transaction presents precisely that risk. Harith, meanwhile, is seeking to acquire Safair Holdings, the parent company of FlySafair, from Ireland-based ASL Aviation Holdings. The Competition Commission has already recommended that the transaction be approved, but imposed conditions aimed at preventing discriminatory treatment of other airlines using Lanseria International Airport. The final decision now rests with the Competition Tribunal.

The most important element of CemAir's argument is Lanseria. Harith has an interest in Harith InfraCo, which holds approximately 37.5% of Lanseria International Airport. The remaining approximately 62.5% is held through interests associated with the Government Employees Pension Fund. Harith Aviation, meanwhile, is the investment vehicle through which control of FlySafair would be acquired. That creates a vertical relationship between an airline and the airport where it operates.

CemAir argues that this is fundamentally different from a conventional airline acquisition because FlySafair would become part of a broader investment network with interests elsewhere in the aviation infrastructure chain. According to CemAir's submissions to the Tribunal, this creates both the ability and the incentive to coordinate airline and airport strategies in ways that did not previously exist. The concern is not necessarily that Harith would deliberately disadvantage competitors. The concern is whether the ownership structure creates an opportunity to do so.

Airport access can be commercially critical. Slots, landing arrangements, tariffs, passenger facilities, ground handling, parking, terminal services and future infrastructure investment can all influence an airline's ability to compete. If one airline has an investor with a material interest in the airport, competitors understandably want guarantees that the playing field remains level.

And this is where South Africa's rather creative approach to aviation ownership becomes interesting. The country has spent years trying to encourage investment, competition and transformation in aviation, while simultaneously allowing government-linked investment structures to become involved in various parts of the industry. Apparently, the solution to excessive government involvement in aviation is sometimes to give the government-linked investment ecosystem several seats at the table and then hope nobody notices they are sitting next to one another.

CemAir is a direct competitor to FlySafair, so there is an obvious commercial dimension to its objection. But the airline's legal argument goes further than simply saying that FlySafair is already too powerful. CemAir has told the Tribunal that the transaction should either be prohibited or subjected to much stronger structural safeguards.

Its legal representatives argued that purely behavioural promises may not be sufficient. Instead, CemAir proposed measures including independent airport governance, removal of common directors, enforceable information firewalls, transparent slot and tariff criteria, equal-access obligations, independent monitoring and rapid dispute-resolution mechanisms.

That distinction is important.

A behavioural condition effectively says: you may own both interests, but you must behave properly. A structural remedy attempts to ensure that the ownership structure itself makes anti-competitive behaviour more difficult.

One of the less visible but potentially more important issues is information. Airlines generate enormous amounts of commercially sensitive information. Future routes, aircraft utilisation, schedules, pricing strategies, passenger numbers, capacity planning and expansion plans can all reveal where an airline believes opportunities exist. Airports also have access to commercially important information concerning their airline customers.

The Competition Commission acknowledged that information-sharing risks existed. However, it concluded that these risks could be addressed through conditions attached to the transaction. Those conditions include safeguards around information sharing and requirements that airport-related goods and services at Lanseria not be provided to other airlines on unfair, unreasonable or discriminatory terms.

CemAir's response is effectively that a firewall is only as good as its governance, enforcement and ability to detect breaches. That is a reasonable question in an industry where competitive advantages can be created without anyone ever explicitly refusing an airline access.

After all, telling an airline that it is welcome to compete while quietly making the cost of competing higher is a rather different thing from actually giving it a level playing field. It is one of those wonderfully complicated situations in which everyone can insist that the rules are fair while simultaneously spending considerable time discussing why they need so many rules to make sure they remain fair.

Harith's position is supported by the Competition Commission's assessment. The Commission examined the transaction from both horizontal and vertical perspectives. However, it found that Harith is not itself a passenger airline and does not currently have controlling interests in passenger airlines. It also noted that Harith's interest in Lanseria is non-controlling.

The Commission therefore concluded that there was insufficient evidence to suggest that the merged entity would have an incentive to foreclose competitors from Lanseria.

There is also a practical consideration. Lanseria is not South Africa's only airport and, according to the Commission, still has available capacity. The airport has invested billions of rand in its facilities over the past decade, with the intention of attracting additional airlines.

From the Commission's perspective, deliberately making Lanseria unattractive to competing airlines would therefore make little commercial sense. That is a fair argument. An airport generally makes money by having aircraft, passengers, airlines and commercial activity moving through it. Turning the airport into an exclusive clubhouse for one airline would hardly be a masterclass in infrastructure economics.

The Commission also concluded that the indirect PIC interests raised by CemAir did not give the PIC operational control over FlySafair and did not establish the level of influence CemAir suggested.

This is where the transaction becomes particularly complicated. CemAir has asked the Tribunal to consider the ownership relationships collectively rather than looking at each entity separately. South Africa's government owns SAA. The government also owns approximately 74.6% of Airports Company South Africa, while the PIC owns a further 20%. CemAir pointed to the fact that SAA, FlySafair and CemAir all operate within the same aviation market while government-related investment interests extend across parts of the aviation infrastructure chain.

CemAir also highlighted publicly reported relationships between the GEPF, PIC, Harith and Lanseria. Its argument is not simply that state-linked investment is inherently problematic. Rather, it is that the accumulation of interests creates a network of relationships that deserves closer examination before one of the country's largest domestic airlines changes ownership.

Investment by pension funds and state-linked institutions is not automatically anti-competitive. But where the same investment ecosystem reaches into airlines, airports and aviation infrastructure, transparency becomes particularly important. And perhaps this is where South Africa's aviation policy deserves a raised eyebrow.

The scale of FlySafair makes the issue more significant. The airline has become the dominant player in South Africa's domestic market, controlling more than 60% of domestic seat capacity according to reporting on the Competition Commission's decision. That market position means any structural advantage gained by FlySafair could have consequences beyond a single airport.

The proposed transaction also comes after a prolonged dispute over FlySafair's compliance with South Africa's domestic ownership requirements. The Harith deal is intended to provide a South African ownership structure while allowing the airline to continue operating under its existing business model.

In other words, there is a strong regulatory argument for allowing the transaction to proceed. But there is an equally strong competition argument for ensuring that solving FlySafair's ownership problem does not create a new competition problem. That distinction should not be lost in the political and regulatory noise.

South Africa has spent years trying to satisfy multiple, sometimes competing, policy objectives in aviation: local ownership, economic transformation, competition, investment, employment and the protection of strategic infrastructure. The result is a regulatory environment where an airline acquisition can apparently solve one problem while creating three new questions for lawyers, economists and regulators.

CemAir undoubtedly has a commercial interest in the outcome. Every seat that FlySafair sells is potentially a seat that another airline does not sell. A stronger, better-funded FlySafair could make life even more difficult for its competitors. But dismissing CemAir's objection as simply sour grapes would be too easy. The airline has identified a genuine structural question: should an airline and an airport through which it competes with other airlines share common investment interests?

Globally, vertically integrated aviation groups are not unusual. Airlines have owned airports and airport groups have owned airlines in various markets. Such structures can produce efficiencies and investment opportunities. They can also create conflicts. The critical issue is therefore not necessarily whether Harith should be allowed to own FlySafair. It is whether the regulatory framework is strong enough to ensure that FlySafair's competitors receive genuinely equal treatment at Lanseria.

And there is an important irony here. If South Africa's regulatory system is sufficiently robust to prevent conflicts of interest, then the country should have little to fear from greater private investment. If it isn't, then perhaps the problem isn't the investors — perhaps it is the system intended to regulate them.

The Harith-FlySafair transaction could ultimately become a useful test case for South African aviation. If approved with robust safeguards, it could demonstrate that airline and infrastructure ownership can coexist without damaging competition. If the Tribunal concludes that structural separation is required, however, it could establish an important precedent for future transactions involving airports, airlines, ground handlers and other aviation infrastructure providers.

CemAir has asked for the Tribunal to consider remedies that go considerably further than simple promises of fair treatment. The Competition Commission believes its proposed conditions are sufficient. The Tribunal must now decide which position is more convincing.

For the general flying public, the issue may sound remote. But competition eventually reaches the ticket counter. If airlines receive genuinely equal access to infrastructure, consumers benefit from competition. If infrastructure access becomes a strategic tool, competition can suffer. South Africa has already experienced the consequences of a highly concentrated domestic airline market. The last thing the industry needs is a regulatory structure that inadvertently creates another barrier for smaller competitors.

There is also a broader lesson for government. If the state wants private investment to play a greater role in aviation, it needs to make sure the rules are clear, transparent and applied consistently. Investors should not have to guess whether an airport, airline or pension-fund interest might suddenly become a competition issue.

Likewise, competitors should not have to rely on assurances that everyone will behave themselves simply because the paperwork says they should.

The Harith-FlySafair transaction therefore represents more than a change of ownership. It asks a much bigger question about the future structure of South African aviation: can an investor be both an airline owner and an airport stakeholder without creating a conflict of interest?