The number of medium to large-sized airline privatisations on the market or expected in the near to medium-term future is high. Regions such as Africa, the Middle East and Eastern Europe still have a significant level of state ownership in airlines.

At the same time, the number of possible buyers has effectively shrunk because of the formation of large alliances linking most airlines, which has resulted in those alliances delegating responsibility for a particular transaction to one of their members, hence considerably reducing competition among airlines to buy into any airline that is being privatised.

The privatisation option is ideal when there is an attractive and profitable airline, when the industry is in an economic boom and when potential strategic airline partners have expressed interest in cooperation or acquisition. Unfortunately, these requirements are rarely present on the African market.

Due to the high accumulated losses and numerous legal, financial and operational problems, most African airlines cannot be privatised in the traditional sense. The trend is to either delay privatisation and restructure – a troubled airline begins restructuring to become more attractive to investors when the time is right for privatisation – or to privatise through a process of 'liquidation-privatisation' – liquidation of the 'old' airline and the establishment of a new company into which the strategic partner invests. This option is not a privatisation in the strict legal sense of the word because investors are not invited to buy into an existing and ongoing company. Rather, they invest and subscribe in shares in a newly-established entity, with new shareholders, new employees and new operations.

The transactions are usually structured in such a manner that there is a minimum of disruption in air services. The old airline ceases its operations on the date the new entity begins operating.

The new business does not have any link with the former airline. Few assets of the old airline, sometimes none at all, are transferred or contributed to the share capital of the new entity by the state. The country's Government undertakes to meet the financial obligations towards the creditors of the old airline and absorbs all of its losses and discharges all of its liabilities. Under the liquidation procedure, the liquidator will dispose of all assets of the old airline and will settle and pay the creditors. Any aircraft and/or ground-handling equipment from the old airline that is requested by the new entity will be valued and paid over by the new entity to the liquidator.

The new company is thus not burdened with any of the debts or liabilities of the defunct airline and will start with a debt-free balance sheet. The new entity is free to select staff from the old airline, while the Government undertakes to handle all retrenchment costs/redundancy programmes of the staff of the old airline prior to the start of the activities of the new company.

The new entity also has complete freedom to set its strategic direction, routes, frequencies, aircraft and staff. The Government accepts to designate and appoint the new entity as the new beneficiary of the route rights negotiated by the Government.

A few airlines have ceased operations in Africa, such as Air Afrique, Nigeria Airways, Air Senegal, Air Gabon, Ghana Airways, Air Tanzania and Air Mali, while new entrants have begun operations. These include Virgin Nigeria, in which institutional Nigerian investors own 51% and Virgin Atlantic 49%; Air Gabon International, in which Royal Air Maroc owns 51% and the Gabon Government 49%; Air Senegal International, in which Royal Air Maroc owns 51% and the Senegalese Government 49%; Ghana International Airlines, in which the Ghanian Government owns 70% and international private investors 30%; Compagnie Aerienne du Mali, in which the Aga Khan Fund for Economic Development & Industrial Promotion Services owns 51%, national private investors own 29% and the Malian Government owns 20%; and Air Tanzania, which has been entirely state-owned since September 2006 when South African Airways sold back its 49% stake to the Tanzanian Government.

Royal Air Maroc recently announced its interest to acquire 51% of the share capital of Air Mauritanie. In June, a consortium led by Belgian aviation company SN Brussels was announced as the provisional winning bidder of a tender for the subscription of shares representing 51% of the share capital in a new national airline to replace Cameroon Airlines.

The airline industry is slowly moving away from national ownership and control restrictions, spawning growth in new, private operators holding a majority of the share capital of airlines.

The Chicago Convention of 1944 provides the basis for the provision of international air services via bilateral air services agreements (BASAs). The standard form BASA allows each state to designate one or more airlines to provide agreed services on a reciprocal basis. However, a state that is a party to a BASA has the right to refuse to grant the operating authorisation to a carrier it believes is not majority-owned or effectively controlled by the state and/or nationals of the designating state, or to impose conditions on the carrier.

Some BASAs affecting certain of the new entrants listed above may thus have been amended to allow private control or the states concerned may have asked for a derogation from the ownership and control restriction requirement.

In March 2003, the International Air Transport Association prepared a policy paper entitled Airline Views on Liberalizing Ownership & Control for the International Civil Aviation Organization (ICAO) Worldwide Air Transport Conference that called on states to liberalise bilateral ownership and control rules.

The ICAO conference recommended that, given the flexibility already existing in the framework of air service agreements, states could at their discretion take more positive approaches to facilitating liberalisation by accepting designated foreign air carriers that may not meet the traditional ownership and control criteria. The conference even proposed some model clauses as an option for use in the BASAs in which the restriction on ownership and control was removed.

The Yamoussoukro Decision of 1999 – relating to the implementation of the Yamoussoukro Declaration on the liberalisation of access to air transport markets in almost all African countries – establishes an agreement between member states for a progressive and gradual liberalisation of both regular and non-regular intra-African air transport services.

Article two of the decision provides that the Yamoussoukro Declaration prevails over any other multilateral or bilateral agreement relating to air services between member states. Each state party shall have the right to designate at least one airline to operate intra-African air transport services. It may also designate an eligible airline from another state party to operate air services on its behalf.

To be eligible, the airline must be effectively controlled by a state party or an entity belonging to a state party. Thus, the 'nationality' requirement has been expanded to include all member states in a manner similar to what will soon be implemented in the European Union. However, it is likely that certain new entrants that did not comply with such eligibility criteria would have negotiated ad hoc exceptions to allow them to acquire majority control.

John Crothers is a partner and Sophie Germain an associate at Gide Loyrette Nouel.