Competition Commission Case Series – Competition Commission vs South African Airways (2005)

Abstract

In July 2005, the BA/Comair (Comair) executives were eagerly awaiting the Competition Tribunal's decision in the case brought by the Competition Commission against South African Airways (Pty) Ltd (SAA), South Africa's dominant domestic airline. The case had been brought on behalf of the Nationwide Group, a domestic air travel rival to SAA. Nationwide lodged its complaint in October 2000, contending that, since 1999, SAA's incentives schemes to travel agents were so attractive as to force travel agents into selling SAA domestic travel tickets to the exclusion of Nationwide. Comair had lodged a similar complaint in October 2003, starting from the same period, but alleging that the incentives were continuing. Its case was yet to be heard. Would the Tribunal judge SAA's schemes as anti-competitive, thus paving the way for Comair's case?

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Resources

Exhibit 1 Timeline for Nationwide and Comair Cases

Date

Event

1934

SAA began flying on 1 February 1934 after the South African government took over the assets and liabilities of Union Airways. SAA started operating three services per week between Durban and Johannesburg and a weekly Durban–East London–Port Elizabeth (overnight stop)–George or Mossel Bay (depending on the weather)–Cape Town service.1

1990

SAA became a division of Transnet, a state-owned organisation operating several transport companies.

1990/1991 ff

Deregulation of the domestic airline industry; entry of several airlines including Rek, Flitestar, Sunair, Comair, SAL, SAX; increased competition with SAA; aggressive marketing.

1991 – 1995

The Nationwide Air Group started operations in the charter industry in 1991 and, in 1995, Nationwide Airlines was formed. Owned by CEO Vernon Bricknell and the Vernon Bricknell Trust, the company had 12 jet planes in its fleet and employed over 700 people.

Comair and Nationwide both enter scheduled domestic airline market.

Circa 1994

SAA starts override schemes with local travel agents.

1996

In 1996, Comair Limited, which had started operations in 1946 as Commercial Air Services, underwent major changes when it became a franchise partner with British Airways. On 27 October 1996, Comair became known as British Airways Comair.

1997

SAA forms alliance with SA Airlink (SAL) and SA Express (SAX).

SAA started online ticket sales.

13 Oct 2000

Nationwide's first complaint

Companies in Nationwide Group lodged the first complaint with the Commission concerning allegations that SAA (and SAL and SAX) abused its dominant position in the market by entering into override incentives with travel agents as well as their consultants and employees, which had an exclusionary effect and contravened Section 8(d) or 8(c) of the Act.

These incentives ran from 1999 to May 2001.

April 2001

SAA introduced a new set of incentives to local travel agents.

May 2001

Commission referred first Nationwide complaint to the Tribunal.

Aug 2001

Comair launched kulula.com, a low-cost carrier, in the South African market.

Oct 2003

Comair lodged complaint about incentives run by SAA.

2004

1time entered the South African passenger air service market.

Oct–Nov 2004

Failed attempts to get the complaint against SAA consolidated.

Nov/Dec 2004–28 July 2005 Tribunal hears CC vs SAA

Tribunal heard the first Nationwide complaint as referred by the Competition Commission, and found that an abuse of dominance amounting to a contravention of the Act had occurred, and imposed a fine of R45 million on SAA (Case no 18/Cr/Mar01). At the time, R45 million was the highest penalty awarded.

Dec 2005–Sept 2006

Various hearings, including an appeal by SAA to the Competition Appeal Court; a settlement with the Commission by SAA for a further R15 million in May 2006 in respect of a second complaint lodged by Comair; dissatisfaction on the part of Comair and Nationwide about the second period of SAA incentives and the fact that the agreement with the Commission in May 2006 didn't constitute an admission of liability.

Sept 2006

Nationwide self-refers complaint to the Tribunal for the second period of incentives.

April–June 2008

Nationwide Airlines placed under liquidation. Case continued under the auspices of the liquidators. According to the 2010 Tribunal case: “Nationwide's entire fleet was grounded sometime in 2008 after it had experienced what Mr Bricknell euphemistically referred to as ‘engine separation', which ultimately led to its liquidation. However, the fact that Nationwide may have had a poor safety record does not mean that SAA's agreements did not have a foreclosing effect on it.”2

March 2007–March 2008

Comair applies on notice of motion for an order declaring override commission and trust payments for the whole period 1999 to 2007 to be declared prohibited practices in contravention of section 8(c) and/or 8(d)(i) of the Act, as well as declaring void all existing agreements, arrangements and/or understanding containing provisions held to be anti-competitive between SAA and travel agents. (Nationwide and Comair's cases were consolidated.)

May 2009–Feb 2010

Tribunal hearing and decision in favour of Nationwide and Comair.

Source: Based on Competition Tribunal Decision Summary Annexure 1, available www.comptrib.co.za, 80CRSep06%20annexure1–5[1].pdf link (accessed 5 May 2010).

References
  • South African Airways, ‘A Brief History, SAA Museum Society’, available www.saamuseum.co.za/index.php/saa-history.html (accessed 11 May 2010).
  • Competition Tribunal Republic of South Africa, ‘In the matter between Nationwide Airlines (Pty) Ltd (Complainant), Comair Limited Intervening (Complainant) and South African Airways (Pty) Ltd (Respondent)’, Case number 80Crsep06, available www.comptrib.co.za (accessed 5 May 2010).

Exhibit 2 Competition Act – Section 8

8. Abuse of dominance prohibited

It is prohibited for a dominant firm to –

  • charge an excessive price to the detriment of consumers;
  • refuse to give a competitor access to an essential facility when it is economically feasible to do so;
  • engage in an exclusionary act, other than an act listed in paragraph (d) if the anti-competitive effect of that act outweighs its technological, efficiency or other pro-competitive gain; or
  • engage in any of the following exclusionary acts, unless the firm concerned can show technological, efficiency or other pro-competitive gains which outweigh the anti-competitive effect of its act –
    • requiring or inducing a supplier or customer to not deal with a competitor;
    • refusing to supply scarce goods to a competitor when supplying those goods is economically feasible;
    • selling goods or services on condition that the buyer purchases separate goods or services unrelated to the object of a contract, or forcing a buyer to accept a condition unrelated to the object of a contract;
    • selling goods or services below their marginal or average variable cost; or
    • buying up a scarce supply of intermediate goods or resources required by a competitor.

Source: Competition Act 1998 (Amended), available www.polity.org.za (accessed 19 April 2010).

Exhibit 3 SAA's Override Incentive Schemes

Back to rand one scheme

The “back to rand one” commission was paid on the whole amount below and above the target reached. According to the Tribunal's summary of the case: “Assume the firm has a target of sales set at R100 million. If it exceeds this target by R10 million it will receive an override commission, typically set at 0.5% on all it sales, that is, R550 000. Note, because the firm continues to receive its basic commission of 7% as well, the average rate would now be 7.5%. Because the override commission is now payable on all sales earned, even those below the target, it is referred to as the ‘back to rand one’ principle.” In some cases the commission increased as the sales over target increased: “Thus in the American Express contract the override rate is a constant 0.5%. In the Luxavia agreement, the override rate increases the more the agent exceeds its target. The rate starts at 0.5% when the firm reaches its target, but moves to as high as 1.55%, if it exceeds its target by 25%.” If Luxavia “attains its peak override commission at this level, it would not only earn a base commission of around R37 million, it would also earn an override commission on top of that of R8 million.” 1

Back to rand base scheme

The “back to rand base” commission or incremental commission was paid only on the amount in excess of the target (that is, the incremental sales). The incremental commission rate was typically much higher than the override and base commission rate and, in some agreements, was subject to escalation as well. The Commission used the agreement with American Express as a model: “Its incremental commission kicks in when it achieves sales in excess of 15% of its base target. The incremental rate commences at 14% for sales 15% above target, but rises steeply so that sales 35% above target are rewarded at a rate of 31%. Note the effect this has on the respective commissions. When American Express gets to 15% above target its basic commission is about R6.3 million while its incremental commission (14%) amounts to R1.6 million. When it reaches its peak at 35% sales above target its basic commission is R7.4 million, but its incremental commission (31%) is now R 8.5 million thus exceeding the basic commission.” 2

Source: Competition Tribunal Republic of South Africa, In the matter of The Competition Commission and South African Airways (Pty) Ltd, Reason and Order, Case Number 18/CR/ Mar01, paragraphs 15 and 16, available www.comptrib.co.za (accessed 5 May 2010).

References

1. Competition Tribunal Republic of South Africa, In the matter of The Competition Commission and South African Airways (Pty) Ltd, Reason and Order, Case Number 18/CR/ Mar01, op. cit.

2. Ibid.

Exhibit 4 SAA's Market Share Relative to it Competitors – June 2000 to July 2001

SAA

BA/Comair

Nationwide

Sales – Domestic

65.7%

27.6%

6.6%

Airline's sales through travel agents

69%

25.3%

5.7%

Proportion of sales through travel agents relative to total sales

85%

74%

70.2%

Source: Competition Tribunal Republic of South Africa, In the matter of The Competition Commission and South African Airways (Pty) Ltd, Reason and Order, Case Number 18/CR/ Mar01, p 12, available www.comptrib.co.za (accessed 5 May 2010).

Exhibit 5 Domestic Market Share of SAA Using Various Data Sources – 2001

Airlines

Flown revenues for domestic travel agency sales (%)

Domestic passenger numbers via Johannesburg that purchased tickets in South Africa (%)

SAA only

69

56.9

SAA and SAX

n/a

66.7

SAA, SAX and SAL

n/a

71.7

Source: Competition Tribunal Republic of South Africa, In the matter of The Competition Commission and South African Airways (Pty) Ltd, Reason and Order, Case Number 18/CR/ Mar01, p 19, available www.comptrib.co.za (accessed 5 May 2010).

Exhibit 6 Market Share of SAA Based on Revised Estimates

Description of market

Data

Market share (%)

Market share for SAA for travel agency sales

Flown revenue

69

Market share for SAA (by value)

Flown revenue

65.7

Market share of SAA by passenger numbers (with SAX and SAL) (by volume)

Passenger numbers

SAA 66.8

SAL 5

SAX 9.7

Market share by passenger numbers (excluding SAX and SAL) (by volume)

Passenger numbers

56.9

Source: Competition Tribunal Republic of South Africa, In the matter of The Competition Commission and South African Airways (Pty) Ltd, Reason and Order, Case Number 18/CR/ Mar01, p 19, available www.comptrib.co.za (accessed 5 May 2010).

This case was prepared for inclusion in Sage Business Cases primarily as a basis for classroom discussion or self-study, and is not meant to illustrate either effective or ineffective management styles. Nothing herein shall be deemed to be an endorsement of any kind. This case is for scholarly, educational, or personal use only within your university, and cannot be forwarded outside the university or used for other commercial purposes.

2024 Sage Publications, Inc. All Rights Reserved

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