Sun Air, in desperate need of a cash injection following the eight-month price war on South Africa's domestic routes, has been in negotiations with KLM, SAA and Virgin Atlantic Airways in an effort to find an equity partner.
But SAA says that it has won an agreement that precludes Sun Air from further negotiations with Virgin and KLM. SAA chief executive Coleman Andrews says that, if Sun Air breaks the agreement, it will result in a massive damages claim.
"We are exploring different possibilities with the board and shareholders of Sun Air and have three months to come to an equitable commercial arrangement," says Andrews. He will not say, however, what type of deal is envisaged; a straight take-over or an equity share in the airline.
Sun Air has been operating in the red for the past few months, mainly because of high overheads and the continuing price war on domestic routes. According to the World Economic Forum's Global Competitiveness Report 1999, South Africa's domestic fare structure is the most competitive in the world.
SAA already holds 63% of the domestic market and Sun Air about 10%, but Andrews says that the country's competition board is being kept informed of developments. Three domestic carriers, British Airways franchise partner Comair, Nationwide and Sun Air complained to the board last November over SAA's alleged flooding of the market with extra capacity.
The airlines claimed that the move was designed to bring fares down to unprofitable levels and to drive SAA's less cash-rich competitors to the wall. Sun Air, however, later withdrew its complaint.
Sun Air employees view a relationship with SAA as hostile, but Andrews says that the flag carrier would take the necessary steps to protect their jobs.
He also seeks to dispel fears that fares will rise steeply if SAA takes control of nearly three-quarters of the market, saying: "Just recently, it was announced that South Africa had the lowest fares in the world. As long as I'm SAA chief executive that will remain the case, or very close to it."
Johan Borstlap, Sun Air managing director, acknowledges that his airline is in negotiations with SAA, but adds that there will be further discussions with Virgin and KLM.
Source: Airline Business
