/ 13 November 2009

Taxed to the sky

The construction of La Mercy Airport in Durban is at the centre of the recent turbulence in South Africa’s air transport sector.

The R6.8-billion airport is the most significant of a range of infrastructure investments being completed by Airports Company South Africa (Acsa) and is at the heart of the 133% increase in airport taxes requested from its regulator.

But private airline companies Comair and 1Time claim there is no need for the new Durban airport, arguing that a R1.5-billion upgrade to the current airport would have sufficed and would have extended its lifespan by 15 years.

Comair’s joint chief executive, Erik Venter, said the La Mercy airport was being built solely for political reasons. ‘Acsa claim that it wasn’t their initiative, that it was a government initiative,” said Venter.

‘If the customer is not the airlines, then why are the airlines expected to pay for it?”

1Time chief executive Glenn Orsmond is also opposed to La Mercy, claiming there is ‘no justification” for the new airport.

Sources close to the development have backed up the claims of Venter and Orsmond, telling the Mail & Guardian the new airport was forced on Acsa by government and that Acsa did not want to build it.

Venter told the M&G the International Air Transport Association (Iata) came to Durban to look at the airport and they recommended a R1.5-billion upgrade.

Acsa spokesperson Solomon Makgale said the company is not aware of any formal study done by Iata. ‘There was an opinion by a member of Iata at an airports consultative committee meeting where in his opinion there was the ability to expand Durban International,” said Makgale.

‘Acsa has never denied this but the cost of developing additional capacity at the existing site would have been approximately that estimated for the development at La Mercy, as that investment would have only given a capacity until approximately 2015. ‘Thereafter investments in La Mercy would have had to take place,” said Makgale.

Sizwe Mohammed, chairperson of the regulating committee for Acsa, said the major reason Acsa is feeling the financial squeeze is that Cabinet approved the construction of La Mercy after the committee decided against Acsa pre-funding investments.

‘This was largely under-provided for as it coincided with the finalisation of the last [tariff] permission,” said Mohammed. ‘This has resulted in the pressures that Acsa feels at the current time and seems to drive the request for exponential increases to the tariff regime.”

Orsmond and Venter argued that since the low-cost airlines entered the market six years ago, there has been a 100% increase in domestic passenger numbers.

Orsmond said the impact of a 133% increase in airport taxes would be ‘catastrophic” for the domestic airline industry. ‘It’s absurd that they can even ask for a number like that.”

Venter and Orsmond also argued that Acsa should recoup its investment over the lifespan of the airport rather than in a once-off three-to five-year permission period.

Makgale said the proposed increase in tariffs comes off a low base and will increase the current passenger service charge of R42 to R99, which he claimed is ‘reasonable in relation to total price of a single-trip air ticket”.

Makgale said the airlines have not passed on the benefits of lower fuel costs to consumers and because of this Acsa is of the view that the proposed tariffs increase will not necessarily
be detrimental to the aviation industry.

Makgale said an independent survey recently ranked OR Tambo International airport the 46th cheapest of 50 monitored international airports in terms of passenger service charges and aircraft landing and parking fees.

Mohammed said the previous tariff structure allowed for Acsa to be inefficient and therefore regulatory intervention was required, which meant that Acsa can recoup only what it has spent, not what it is planning to spend.

Mohammed said the committee’s policy has always been to try to ease the impact of any tariff adjustment during and beyond the permission period. ‘It is our belief that no business can afford to recoup its investment over a period of one or two years if it intends to remain in business over the long term.

‘This is even more applicable to monopolies such as Acsa, which we encourage to have long-term investment horizons and returns on investment that are matched by the investment horizons.”

Makgale said the major driver of the tariff increase is the regulating committee’s decision not to allow Acsa to base tariffs on assets under construction. ‘This came at a time when Acsa was due to embark on a massive capital investment required by the industry over the next five years,” said Makgale.

‘Due to the additional borrowings Acsa had to incur to fund these investments, the costs associated with the asset when completed are much higher.”

Competition allegations fly
Allegations of anti-competitive behaviour have begun to fly, following the offer by Comair’s joint chief executive, Gidon Novick, to take the old Durban airport off Acsa’s hands.

Last month Novick made a public offer to buy the Durban airport and when Transport Minister Sbu Ndebele announced that the airport would not be sold to a competitor, the government was accused of being anti-competitive.

The Commercial Aviation Association of South Africa (Caasa) has since entered the fray, with chief executive Kim Gorringe announcing that if the government insisted on shutting down the old Durban airport, it would consider lodging a complaint with the Competition Commission.

But critics argue that Novick’s song and dance about the old airport is hypocritical considering that Comair has an exclusive agreement with the Lanseria private airport in Johannesburg, which prevents other companies from using it.

1Time chief executive Glenn Orsmond said his company has been trying to get into Lanseria for three years but has been blocked by Comair’s exclusivity contract.

He says 1Time laid a complaint with the Competition Commission two years ago and is expecting an outcome from the commission’s investigation by the end of November. ‘Comair are real whiners,” said Orsmond.

‘They are always whining about SAA being anti competition, but they have this exclusivity agreement at Lanseria.”

Comair’s joint chief executive, Erik Venter, said that it had had to spend a substantial amount of money on marketing and infrastructure when it started flying out of Lanseria and therefore needed the exclusivity agreement to make sure it recouped the money spent.

‘1Time are always one step behind us. If they decide to come along after we have established the market at Lanseria, then tough,” said Venter.

Comair has been in talks with a number of parties who are interested collaborating in the purchase of the old Durban airport he said. ‘We could operate it much more efficiently than Acsa was.”

Acsa spokesperson Solomon Makgale said the land on which the old Durban airport stands will be disposed of as soon as possible once the airport has been decommissioned after the 2010 World Cup.