Accounts publicly available in in Ireland’s Companies Office show that since 2019, SA’s dominant domestic airline, Safair, has been 75% owned by European operator ASL Holdings – contravening South African regulations stipulating a 25% foreign limit. Cemair founder and CEO Miles van der Molen believes since May last year its Irish parent has been subsidising Safair by some R100m a month. In this hard-hitting interview, Van der Molen says it’s no innocent oversight by Safair, which was taken to task on the same issue in 2014. After initially complying, records show the airline quietly injected the shares into an SA shell company owned by its Irish parent. He spoke to BizNews editor Alec Hogg.
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Highlights from the interview
In a recent interview on BizNews.com, Miles van der Molen, founder and CEO of Cemair, discussed potential regulatory changes impacting South Africa’s aviation industry. The conversation focused on Safair’s challenge regarding its ownership structure, with implications for foreign operators entering the market. Van der Molen highlighted concerns about fairness and market dominance, cautioning that altering ownership rules could disadvantage local players while benefiting larger global entities. He underscored the complexity of regulatory decisions, emphasizing the need for consistency and adherence to established rules to maintain market integrity. Reflecting on Safair’s compliance issues, he suggested that any structural changes could significantly impact operational strategies and investor perceptions. Van der Molen also commented on the potential timeline for regulatory adjudication, indicating optimism for a swift resolution despite ongoing complexities. The interview underscored broader industry anxieties about regulatory stability and the delicate balance between promoting competition and protecting local interests in South Africa’s aviation sector.
Edited transcript of the interview ___STEADY_PAYWALL___
00:00:09:00 – 00:00:41:12
Alec Hogg: So today’s interview has taken a little while to get together. Miles van der Molen, who is the founder and chief executive of Cemair, is one of those really busy people. Getting into his diary is not easy. But in March, he wrote a right of reply to a story we published on BizNews. It was a very strong right of reply, and I’ve wanted to pick up with Miles on some of those issues. Today’s opportunity, we’ll be into that in a moment.
00:00:41:14 – 00:01:10:18
Alec Hogg: Well, you took us to task, and it was primarily over an article that we ran saying that Safair, one of your competitors, or the biggest domestic airline in South Africa, was both profitable and sustainable. Your insider’s understanding of this is that it’s anything but, and indeed, that Safair is being subsidized to the tune of 100 million rand a month.
00:01:10:18 – 00:01:47:13
Alec Hogg: Now, we know that the South African airline industry space has had a lot of issues over the years. We’ve had South African Airways being subsidized and then eventually having to be bailed out by taxpayers. We’ve had Comair, which went bust because they were taking a very strange approach towards commerciality. And now we have the new market leader, that appears to be doing some, well, things that are not exactly in accordance with the parameters that you guys have to operate in, in the airline industry.
00:01:47:15 – 00:01:57:04
Alec Hogg: But, Miles, why—it’s not often that companies talk about competitors in this way, in particular in this way. Why did you decide to go public on this?
00:01:57:06 – 00:02:14:06
Miles van der Molen: Hey, look, it’s always good to talk to you. It was a right of reply. So when the information is out there that we don’t believe is correct, we get involved. So that was the only reason why we—well, I sent you that mail. The 100 million a month, that is a complete guess from my side. I don’t know, and I’ve got no inside knowledge. What I do know is that Safair is not a South African-owned company, which is a requirement in terms of the act to operate in the South African airline.
00:02:29:04 – 00:02:32:17
Alec Hogg: Just explain that. You say in terms of the act.
00:02:32:19 – 00:03:05:08
Miles van der Molen: So, there’s an Air Services Licensing Act, domestic and international act, that governs the issuance of air service licenses. An air service license allows you to operate an airline of any kind, scheduled, unscheduled, or other. So that’s a prerequisite before you start operating. It’s issued by the Department of Transport. There’s a requirement in there for a local ownership percentage, and the shareholding of any airline needs to be held by South Africans.
00:03:05:08 – 00:03:09:11
Miles van der Molen: And so different regimes, it sort of breaks it down, and controlled by South African residents.
00:03:09:12 – 00:03:12:07
Alec Hogg: And that ownership percentage, how big is that?
00:03:12:09 – 00:03:20:16
Miles van der Molen: So, the one act specifies that no more than 25% can be foreign-owned. The other significant ownership must be South African.
00:03:20:18 – 00:03:38:12
Alec Hogg: All right. So we’re talking about 75% South African. If you take the 25% foreign as the baseline, and yet Safair holds itself up to be South African. I think they even fly the Springboks. So what is their shareholding, and how do you know this?
00:03:38:13 – 00:04:07:10
Miles van der Molen: So, ASL Holdings in Ireland, they say they own 74.86% of Safair, and they have an option on the remaining 25.14%. Their financials are available online. You can buy them from the company’s office in Ireland. They say since 2019, they are a majority shareholder in Safair and classify it as a subsidiary.
Read more: Right of Reply: Cemair’s CEO takes Vegter, BizNews to task over Safair story
00:04:07:12 – 00:04:22:23
Alec Hogg: Hang on. So we’ve got a South African law that says you’ve got to be 75% South African-owned, and you’re saying that Safair is 75% foreign-owned by an Irish company. That seems weird.
00:04:23:00 – 00:04:31:09
Miles van der Molen: I’m not saying it; they’re saying it. This is their admission. They own effectively 75% of Safair in their audited financial year.
00:04:31:09 – 00:04:33:09
Alec Hogg: What is ASL?
00:04:33:11 – 00:05:00:01
Miles van der Molen: ASL is a well-established Irish aviation brand. Their approach in Europe primarily involves doing a lot of freight work. They’ve owned Safair for many years. In fact, when they started operating in 2013 or 2014, there was a challenge by Comair where they questioned the ownership structure. At the time, Safair altered the ownership structure.
00:05:00:03 – 00:05:14:12
Miles van der Molen: And the Licensing Council accepted the new structure. Then in 2019, they made some material changes to that. At that point, ASL once again continued to classify it as a subsidiary.
00:05:14:16 – 00:05:22:18
Alec Hogg:
So, have they changed and South Africa changed its laws, or is there a way around that 75% local ownership requirement?
00:05:22:23 – 00:05:46:12
Miles van der Molen:
No, that dates back to 1991. So it’s an old act. And what Safair has done is they’ve put the shareholding through an SPV in South Africa, and then the Irish company is the beneficial owner of that. So I believe in its substantive form, kind of, review, you see the beneficial ownership, and they say the beneficial ownership of Safair rests with ASL Holdings.
00:05:46:16 – 00:05:50:14
Alec Hogg:
Why is it so important that the airline be South African-owned?
00:05:50:16 – 00:06:06:16
Miles van der Molen:
Oh, well, look, you know, there are two obvious bodies of thought that, it’s important that it is, but it is important that everybody follows the same set of rules. It’s a capital-intensive game. And if you have access to capital at a lower cost, it’s a sizable advantage.
00:06:06:18 – 00:06:35:00
Alec Hogg:
And if you are a well-capitalized international business that is wanting to drive competitors out of the market, presumably you would be able to do that, given that you’re working in hard currency and South African operations are not. So, I’m just trying to get my head around why this would be so relevant, or indeed, what it is.
00:06:35:02 – 00:07:00:15
Alec Hogg:
Will the Irish owners of Safair, what their motivations would be to, if they’re losing money, presumably, as you said, you work it out, then the rest of you guys won’t be able to carry on indefinitely. And I suppose they might be thinking, well, let’s subsidize this for a period of time and then we will be the last man standing. Am I reading this correctly?
00:07:00:17 – 00:07:24:01
Miles van der Molen:
Yeah, that would be my guess, is that it is a last man standing kind of strategy where you can price everybody. They did flood the market with capacity in the last 18 months or so. You would have seen it as a consumer, an enormous amount of capacity at very low prices. And it becomes an unsustainable industry, and eventually, some players have to exit.
00:07:24:03 – 00:07:36:11
Miles van der Molen:
And if you have access to foreign capital, that gives you the ability to weather the storm that you’re creating. And then on the far side of it, obviously, you can reprice your product and take it from there.
00:07:36:13 – 00:07:43:09
Alec Hogg:
And this information on ASL, is that publicly available?
00:07:43:11 – 00:07:51:16
Miles van der Molen:
Yes, it is. For the cost of any €2.50, you can buy it from the Irish companies office. It’s a public formation, yeah.
00:07:51:18 – 00:08:11:13
Alec Hogg:
They took a massive chance then because here’s the South African regulations. And if somebody, some smart person in the CIPC or wherever in the airline authority, were to go to the Irish companies office and see this information as you’ve described it, and I know it’s true because you’ve sent me a copy of it and I read it as well, then there must be fines or some kind of punishment for it.
00:08:11:15 – 00:08:18:06
Miles van der Molen:
Yeah, the penalty for, I mean, it’s before the licensing council, both councils, the international council and the council in terms of each act. And it is before the councils. The international council has heard the matter and the decision is being awaited, and the domestic council is still looking into the matter. So there’s more procedures to follow there.
00:08:18:07 – 00:09:04:04
Miles van der Molen:
There’s no precedent on this, so what the penalty might be is anybody’s guess. Considering that if they are found guilty, this would be the second offense, which I’m sure would be considered. I suspect, regardless of the council’s decision, because it’s such a pivotal matter for the entire industry, I suspect there would be an appeal process that would follow it. But yeah, the penalty could be anything from a fine to some time to rectify it, to withdrawal of the license.
00:09:04:06 – 00:09:13:07
Alec Hogg:
So from a South African consumer point of view, if somebody overseas or some Irish guys are prepared to subsidize your travel, as from what you’re telling us, Safair has been doing for over a year, then why should we be worried about that?
00:09:13:09 – 00:10:00:21
Miles van der Molen:
The big issue is sustainability. You know, there’s lots of memories in the South African consumers’ minds of arriving at the airport and your airline no longer operating, like Mango and the Comair failure. And one time before that, there’s been so many over the years. And although people do enjoy low pricing, the loss when airlines close is enormous. The destruction of value there is not in anybody’s interest, not in the consumers’ interest in the long term. So it’s a short-term gain, but a long-term negative in my view.
00:10:10:12 – 00:10:23:22 Alec Hogg
But would it not mean that if they were to be levied with a very hefty fine, this is that the rest of the competitors would be able to charge more?
00:10:24:00 – 00:10:38:00
Miles van der Molen
Look into the dynamics of the time and what was done. But yes, if they suffered any penalty, it would move to level the playing field, which is what we need. We all need to work to the same. Look.
00:10:38:02 – 00:10:45:18
Alec Hogg
Why has the South African airline industry had so many of these incidents, like the one that we’re talking about?
00:10:45:20 – 00:11:17:13
Miles van der Molen
The South African airline industry has destroyed value for many years. If you take it on average, it’s incurred losses on an ongoing basis. And the philosophy at some point will have to change. It will have to become a commercial industry where there are reasonable returns on capital, which will make the industry investable and sustainable. While there is artificial financial support for certain players, it is going to keep it skewed, and we’ll just relive the same cycle.
00:11:17:15 – 00:11:23:09
Alec Hogg
And how did you get to your estimate of Safair losing 100 million rand a month?
00:11:23:11 – 00:11:45:03
Miles van der Molen
Look, it is largely a guess, but we’re in the industry. We have an idea of the yields they’re getting, and we chat to other people in the industry. That’s our base case. It’s on an ongoing basis, probably for the last year or so, but basically from when the enormous capacity increase was realized.
00:11:45:03 – 00:11:51:10
Miles van der Molen
So effectively, in the 2023 financial year, that was our best guess.
00:11:51:12 – 00:11:57:15
Alec Hogg
Enormous capacity increase. Does that mean more planes coming into South Africa to serve the South African market?
00:11:57:17 – 00:12:05:14
Miles van der Molen
So if it works like on the leased model, they add a significant number of leased units during last year.
00:12:05:16 – 00:12:08:05
Alec Hogg
Explain that leased model.
00:12:08:07 – 00:12:23:10
Miles van der Molen
The vast majority of the fleet is leased and, again, through ASL Holdings in Ireland, they were able to secure a significant number of Boeing 737-800 units to operate.
Read more: Regulatory bullying threatens Safair’s success in South African aviation: Ivo Vegter
00:12:23:12 – 00:12:57:07
Alec Hogg
So let me understand this. This is an Irish-based European airline operator who’s got a South African company that is not South African-owned, but which they own. If there is extra capacity in the European market, they can lease those planes, bring them into the South African market, undercut the South African players, and presumably with the intention of putting them out of business, and the industry in the long term would suffer as a consequence of that. Is that the argument?
00:12:59:19 – 00:13:13:23
Miles van der Molen
The capacity decision is a long-term capacity increase. The leases they have are not seasonal leases; they are longer-term. So, the committed capacity is for a significant amount of time. And yes, there’s now a capacity situation in the South African market as a result.
00:13:14:00 – 00:13:36:04
Alec Hogg
But Miles, I would have thought that South African Airways, being so close to the government and owned by the government, would be the ones making the running on this. In other words, they would be the ones saying, “Hang on, we can’t get back off the ground again because we’ve got this predatory pricing from an overseas player.” Have they been silent on all of this?
00:13:36:06 – 00:14:01:23
Miles van der Molen
The pricing conversation is separate from the ownership conversation. That is before the Competition Commission as a separate matter. I’m not sure where that is in its process. And, you know, whether SAA would choose to object is ultimately neither here nor there. Where it comes from, the question is, do they comply with the requirements or don’t they? Who the complainant is, is immaterial.
00:14:02:00 – 00:14:04:17
Alec Hogg
So who has complained about this?
00:14:04:17 – 00:14:16:18
Miles van der Molen
To my knowledge, it’s Lyft through the Hollard and Global Airlink to the Licensing Council, and it’s slightly different from the Competition Commission.
00:14:16:20 – 00:14:18:22
Alec Hogg
And what is that process?
00:14:19:00 – 00:14:20:12
Miles van der Molen
The Competition Commission?
00:14:20:14 – 00:14:37:00
Alec Hogg
No, that complaint. So you know that these guys are Irish-owned. They’ve got it in their financial statements. They are breaking the South African laws of aviation. You complain to whom, and what is the process that that goes through?
00:14:37:02 – 00:15:03:05
Miles van der Molen
So there are two structures: the International Service Licensing Council and the Domestic Licensing Council, which are structures under the Department of Transport that adjudicate the issuing of service licenses. It has been put before them to say that the information available shows that Safair doesn’t comply with this requirement. As a result, the International Council is adjudicating, and we expect a decision. The Domestic Council continues to investigate, to the best of my knowledge.
00:15:06:10 – 00:15:28:18 Alec Hogg: So what would the impact be if, say, the council said, “Alright, are we going to change the rules in Safair’s favor so you can be a South African? You can operate in the South African market if you’re 75% foreign owned for argument’s sake, what would the impact of that be on you or on others who are operating airlines here in South Africa?
00:15:28:19 – 00:15:51:18 Miles van der Molen: Well, you’re actually going to see foreign operators getting access to this market. And they would have a cost advantage. So historically, it would change the market. Over time, you would see South African-owned players fading away and, effectively, the large global players that have an interest in moving into the territory and dominating.
00:15:51:20 – 00:15:53:14 Alec Hogg: Is that not a good thing?
00:15:53:16 – 00:16:12:09 Miles van der Molen: Well, some people might say it’s a good thing; there are varying opinions on that. The ECU was set up in this way because it wanted to retain control within South Africa. There are countries that do have foreign ownership models, and either can work, but you need to choose left or right.
00:16:12:09 – 00:16:23:04 Miles van der Molen: So if there’s going to be some different control-type model, everybody has to abide, and if not, then, you know, we can all run off into international investors and there’ll be a structural change.
00:16:23:06 – 00:16:24:14 Alec Hogg: But I understand your argument.
00:16:24:14 – 00:16:27:00 Miles van der Molen: You have different modes.
00:16:27:02 – 00:16:31:20 Alec Hogg: You’re playing according to the rules. Safair isn’t and that’s unfair.
00:16:31:22 – 00:16:34:14 Miles van der Molen: That’s the industry’s complaint at the moment.
00:16:34:16 – 00:16:43:05 Alec Hogg: When markets are all of this change. How long would it be before this actually gets adjudicated on?
00:16:43:06 – 00:17:02:20 Miles van der Molen: Oh well, I can’t speak to that. I would guess it shouldn’t be too long at all. You know, it’s a relatively simple matter. It’s a crisp point and the matter which has been fully heard by the Licensing Council probably more than a month ago, so I wouldn’t expect an excessive delay.
00:17:02:22 – 00:17:18:18 Miles van der Molen: The domestic council, as it is earlier on in their process, they would have some distance to go, but it seems unlikely that they could arrive at vastly different points of view since actual or by and is very similar.
00:17:18:19 – 00:17:44:14 Alec Hogg: As we know, some business people believe ask for forgiveness rather than follow the rules. Is this one of those cases you think where Safair was fully aware of the rules but is just pushing the envelope? And if they are clearly found out, found to be contravening the South African rules, just, so, so sorry about it.
00:17:44:14 – 00:17:50:05 Alec Hogg: We’ll adjust it. But the damage that could have been caused in between could be considerable.
00:17:50:07 – 00:18:09:11 Miles van der Molen: Yeah, the destruction of value that’s resulted in the early stages is significant. So for the remaining players, I can’t speak to that. You know, will they do take the position that I’m sorry, we didn’t know? It’s trivial the second time around. The first time, it’s a weak argument. The second time, it’s almost non-existent outward.
00:18:09:12 – 00:18:34:04 Miles van der Molen: But, you know, even if they’re forced to change their shareholding structure, you know, what follows from the shareholding structure is largely capital structure. So if Safair was down to a 25% shareholding, they would take a very different view on how they would support it, I’m sure, as opposed to the current position where they really believe they have an outright control.
00:18:34:06 – 00:18:42:15 Miles van der Molen: And that change in itself would drive all sorts of things in that business amid a material and operational eventual.
00:18:42:17 – 00:18:44:10 Alec Hogg: You say second time around.
00:18:44:12 – 00:19:07:22 Miles van der Molen: But again, colleagues complained about the ownership structure before they started the South African scheduled service in 2014. And at that time, it was adapted, and then in 2019, effectively, that structure was substantially unwound and they went back to the ASL ownership model.
00:19:08:00 – 00:19:29:22 Alec Hogg: It’s extraordinary that people in this day and age would follow those lines. We must assume that what you wrote in your right of reply is accurate. We’ve had no communication whatsoever from Safair. Attempts to get their side of the story have not met with any success. So it will be interesting to see how all of this plays out.
00:19:29:22 – 00:19:35:21 Alec Hogg: Miles van der Molen is the founder and chief executive of Cemair. I’m Alec Hogg from BizNews.com.
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