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Record:
| Header: |
Nationwide and SAA |
| Case No : |
80/CR/Sep06 |
| Parties: |
Nationwide Airlines (Pty) Ltd Comair Ltd
AND
South African Airways (Pty) Ltd |
| Case Rating: |
3 |
| Date: |
17/2/2010 |
| Time: |
10:00:00 AM |
| Case summary: |
The Competition Tribunal (Tribunal) on 17 February 2010, ruled that South African Airway’s (SAA) incentive schemes during the period 1 June 2001 until 31 March 2005 were prohibited practices in contravention of section 8 (d)(i) of the Competition Act. This decision effectively paves the way for complainants, Comair and Nationwide to pursue a civil claim for damages against SAA in the High Court.
In this decision the Tribunal found that SAA’s incentive scheme consisting of override incentive agreements and trust agreements with travel agents during the period 1 June 2001 until 31 March 2005 induced travel agents not to deal with SAA’s rivals and contravened section 8(d)(i) of the Competition Act.
This complaint was a follow up complaint to that decided by the Tribunal in Competition Commission v SAA in 2005. In that case the Tribunal had evaluated SAA’s agreements with travel agents in the marketplace from 1999 to 31 May 2001. The Tribunal had imposed an administrative penalty of R45 million on SAA in that case.
This decision involves two complaints that had been referred to the Tribunal. The first complaint was the Comair complaint which resulted in a settlement agreement between the Competition Commission (Commission) and SAA in terms of which SAA paid a penalty of R15m. However in that settlement agreement SAA had not admitted to any contravention of the Act. This meant that the consent order could not amount to a declaratory order for purposes of civil damages. An affected party seeking damages against SAA in the High Court would have to first obtain a declaratory order from the Tribunal that the conduct of SAA constituted a prohibited practice. Comair was entitled to approach the Tribunal for such an order in terms of s49D.
The second complaint was referred by Nationwide directly to the Tribunal and dealt with SAA’s agreements from June 2001 onwards (the period after the first Nationwide decision).
Nationwide was of the view that the Commission had not referred and the Tribunal had not adjudicated all aspects of its complaint in the first Nationwide decision.
The Tribunal found that Comair’s allegation of “ongoing conduct” from 1999 to 31 May 2001 had already been dealt with in the first Nationwide matter. Hence it could only consider the SAA’s conduct for the period 1 June 2001 until 31 March 2005, the period over which SAA continued to have override incentive agreements and trust agreements with travel agents in the domestic airline travel market.
The Tribunal found that during this period SAA was still overwhelmingly dominant in the scheduled domestic airline travel market and, in alliance with SAL and SAX, was presumptively dominant in the purchase of travel agent services for airline tickets. The Tribunal stated
“We have examined this scheme in light of market developments during the period 1 June 2001 until 31 March 2005 and have concluded that not only was this scheme in contravention of section 8(d)(i) but resulted in ongoing foreclosure effects in the domestic airline travel market. SAA sought to “lock in” the gains it had made in the earlier period with this scheme.
During the relevant period we find that the launch of the low cost model Kulula created price awareness in the market and led to the growth of the domestic airline travel market. This development also promoted the use of cost effective distribution channels such as the internet. We see the emergence of nascent market segmentation between price sensitive /non time sensitive passengers and price insensitive/time sensitive passengers during this period. Despite these developments, travel agents remained the single most important route to market and distributed some 70% of total domestic airline tickets representing approximately R3.3bn. Internet and direct sales represented only 30% of the total domestic air travel market.
Through this incentive scheme, SAA sought to immunise its fares distributed through travel agents against competition and to extend its market power in that segment of the market. Travel agents had the ability to divert sales away from rival products and engaged in such practices in order to receive the handsome rewards for achieving the volume or revenue targets set by SAA. This inducement foreclosed SAA’s rivals from the domestic airline travel market, the impact of such foreclosure likely to be greater in that segment of the air travel market that was distributed by travel agents. Rivals could not match the financial incentive, in rand value, offered by SAA. SAA had concluded agreements with approximately 70-90% of the airline sales distributed through travel agents which suggested that the foreclosure of rivals in the domestic airline travel market was likely to be substantial.
Instead of engaging in competition on the merits, SAA sought to extend its dominance in that segment of the domestic airline travel market distributed through travel agents which qualitatively represented higher margins with aggressive override incentives. While the foreclosing effects of its conduct were greater in this segment of the market, competition in the overall domestic airline travel market was muted by SAA’s incentive scheme.
Given that we have found that SAA’s incentive scheme consisting of the third generation agreements and trust payments contravened section 8(d)(i) of the Act and resulted in or had the potential of foreclosing its rivals from the segment of the scheduled domestic airline travel market there is no need for us to conclude whether the scheme resulted in harm to consumer welfare. However the fact that SAA’s revenue share of the market was higher than its passenger share because it carried more high yielding passengers tends to suggest that consumers were harmed by paying higher prices or making poorer choices. Furthermore, no credible evidence of any efficiencies achieved through this scheme was placed before us.”
The Tribunal drew an adverse inference from SAA’s failure to produce critical strategic documents for the relevant period under assessment in this case.
As far as the remedy goes the Tribunal said that SAA has already paid an administrative penalty in the consent order of R15m. The parties in these proceedings had not asked for a further penalty and section 49D(4) did not contemplate the imposition of any penalty. However the Tribunal declared SAA’s override agreements and trust payments to travel agents in force from 1 June 2001 to 31 March 2005 in contravention of section 8(d)(i) of the Competition Act. This now paves the way for Comair and Nationwide to pursue a damages case against SAA.
An order of costs, including the costs of two counsel is granted in favour of Comair and Nationwide respectively.
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| Keywords: |
complaint, airline, purchase of travel agent services for the sale of domestic airline tickets, domestic scheduled airline transportation, south africa, prohibited practice - section 8(d)(i) |
| Judgment source: |
Competition Tribunal |
| Documents: |
80CRSep06 travel agents.pdf
80CRSep06 annexure1-5.pdf
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| Last update user: |
tebogo mputle |
| Last update date: |
19/2/2010 9:04:34 AM |
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