SAA, which was granted a R5 billion bail out by government in 2012, followed by another R6.5 billion in 2014, has filed a complaint with the Competition Commission accusing Comair of anti-competitive behaviour.
Who could have ever imagined SAA claiming victim status in the battle for domestic passengers, but that day has finally arrived.
SAA has accused Comair of offering travel agents incentives for which SAA, as the dominant carrier, was itself slapped down for by the commission in 2006. SAA reached a settlement agreement with the commission to stop this practice.
SAA spokesperson Tlali Tlali says the complaint relates to “past and ongoing abuse of dominance conduct by Comair which is in contravention of various provisions of the Competition Act. The conduct has been ongoing for a number of years, which to our best estimates could go as far back as 2008″.
SAA has had various engagements with the competition authorities since 2014 and formally lodged the complaint with the Competition Commission on April 8.
SAA says the alleged transgressions by Comair have had a severely detrimental impact, not only on SAA but on the entire domestic aviation industry as a whole. “SAA welcomes fair competition in every market it competes in, particularly bearing in mind its mandate as a driver of growth for South Africa. By referring Comair’s anti-competitive conduct to the competition authorities, SAA solely seeks to ensure fair participation for all carriers in the domestic aviation market and to prevent abuse of dominance practices by carriers such as Comair,” says Tlali.
“Comair’s past conduct indicates that its interests lie in the elimination of competition. It is notable, for instance, that the now defunct 1Time was compelled to seek redress to the competition authorities as early as 2010 against anti-competitive conduct by Comair. Comair was also vehemently opposed to the commencement of domestic airline passenger services by Safair in 2013 and launched a court bid to halt the licensing of that operator.”
SAA’s complaint comes just two weeks after Comair lost a case in the South Gauteng High Court seeking to declare government bail outs for SAA unlawful and unconstitutional. Judge Hans Fabricius ruled in favour of ongoing state funding to SAA. Jeremy Gauntlett SC, representing the ministers of finance and public enterprises, argued the decision to grant loan guarantees was an executive decision that was Constitutionally permissible, even if it meant “throwing good money after bad”.
“Exactly why this settlement agreement reached between the commission and SAA should be applicable to Comair is unclear, but we will leave that to the Competition Commission to resolve,” says Comair CEO Erik Venter, who adds that the complaint is probably a desperate tactical move by SAA, which has a long history of anti-competitive behaviour.
This is not the first time the commission has had to deliberate on incentives paid to travel agents. The now-defunct domestic carrier Nationwide brought a case against SAA in 2000, followed by two complaints by Comair in 2003 and again in 2012. In the first two cases, SAA was found guilty by both the Competition Tribunal and the Appeal Court. The Tribunal found that SAA had acted in breach of the Competition Act by using its market dominance to offer incentives to travel agents that competitors could not match. The Commission failed to refer the third complaint.
These incentives encouraged travel agents to move business away from other airlines to SAA, even though other airlines might offer a better product or price for the passenger.
“SAA is a serial offender when it comes to anti-competitive misbehaviour, so we find it amusing that they accuse Comair of anti-competitive behaviour,” says Venter.
On the issue of SAA’s complaint against Comair, Venter says SAA offers travel agents incentives of up to 8.5% on ticket value provided the agents’ support for SAA does not decline. Comair, he says, pays on average 2.5%. “With a profit margin of 4% it is obvious that for Comair to pay any greater percentage of revenue is not feasible.”
“This certainly explains why SAA has been able to retain its market share of more than 70% within the travel agent community, using incentives that have the same effect as those which were declared illegal by the Competition Tribunal.
“In addition to this, SAA is offering discounts on domestic tickets of up to 18% to its large corporate clients and government departments, while Comair’s discounts average 7%. This does not include SAA’s promise of a further 5% benefit to its Voyager members. In effect, SAA is giving away over 30% of its published ticket price before even covering its operating expenses. If Comair were to match SAA’s incentives and discounts, we would be out of business in very short order. It is the South African taxpayer that is footing the bill for SAA’s reckless behaviour,” says Venter, adding that SAA is technically insolvent and should be placed in business rescue.
Bail outs for national air carriers is nothing new, but they typically come with strings attached. In Europe, competition law requires that troubled national carriers must present a restructuring plan before receiving bail outs, and these must include compensation to competing airlines to negate the anti-competitive advantage of the bail out, such as by reducing the capacity of the assisted airline. European airlines that fail to demonstrate a financial turnaround cannot re-apply for more bail outs, and are shut down, as happened in the case of Malev in Hungary, Swissair, Sabena of Belgium and Spanair in Spain. Italy’s Alitalia has been through several rescues, most recently at the hands of Etihad, the Gulf carrier. Aer Lingus, the Irish national carrier, was partly privatised to stave off bankruptcy, and is once again likely to end up in the hands of the much larger International Airlines Group.
In the US, all major carriers have been subject to Chapter 11 bankruptcy proceedings, resulting in massive consolidation over the last 20 years.
But SAA seems to have a blank cheque book and no rescue plan. Venter estimates that SAA could save R1.7 billion a year just by matching Comair’s level of commissions and incentives. SAA generates income of R30 billion a year, but in 2014 posted a loss of R2.6 billion.
Over 20 years government has bailed out SAA to the tune of R30.5 billion. Privately-owned carriers have argued in vain that this is in violation of the Competition Act, the Constitution, as well as finance and national transport policy.
The conclusion is inescapable: by handing over such massive bail outs to SAA with no real rescue plan in sight, SA taxpayers are subsidising the travel budgets of government departments and SA’s largest corporations. And, of course, the travel agent industry.
South Africa’s domestic market share (12,5 million passengers p.a.)*