Nationwide Airlines and South African Airways (92/IR/Oct00) [2001] ZACT 1 (5 January 2001)

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Nationwide Airlines and South African Airways (92/IR/Oct00) [2001] ZACT 1 (5 January 2001)

.RTF of original document

COMPETITION TRIBUNAL

REPUBLIC OF SOUTH AFRICA

Case no. 92/IR/Oct00

In the matter between

Nationwide Airlines (Proprietary) Limited

Nationwide Air Charter (Proprietary) Limited

Nationwide Aircraft Maintenance (Proprietary) Limited

Nationwide Aircraft Support (Proprietary) Limited Applicants

and

South African Airways (Proprietary) Limited First Respondent

South African Express Airways (Proprietary) Limited Second Respondent

South African Airlink (Proprietary) Limited Third Respondent

________________________________________________________________________

DECISION ON APPLICATION FOR INTERIM RELIEF IN TERMS OF SECTION 59

________________________________________________________________________

INTRODUCTION

South Africa’s airline industry has experienced a sharp escalation in operating costs recently. Between August and November this year jet fuel prices have increased by 56% from their July level. At the same time the rand-dollar exchange rate has changed unfavorably. The applicants say these escalations in their costs have forced them to upwardly adjust their prices over this period. The respondents, who are their competitors, did not. The applicants claim, that based on the respondents’ own figures their (the respondents) costs ought to have increased by at least 20% over this period. The applicants contend that the respondents’ passivity in the face of rising costs amounts to predatory pricing and request us to order the respondents to increase the prices of certain classes of their tickets by 20%. They also allege that the respondents are engaged in two other prohibited practices of an exclusionary nature. The first of these practices relates to agreements, which the respondents have with travel agents to provide them with override commissions and other incentives. The second is that they allege the respondents are engaged in an unlawful campaign to recruit their pilots. They seek cease and desist orders in relation to the latter two practices.

We have decided that the applicants have failed to establish their claim in terms of section 59 and have declined to grant them interim relief. Our reasons appear more fully below.

PART A - BACKGROUND

PROCEDURE

This application for interim relief is brought by Nationwide Airlines against South African Airways (SAA), South African Express (SAX) and SA Airlink (SAL). The application is in pursuance of a complaint which was lodged with the Competition Commission on 13 October 2000. This complaint was accepted by the Commission on 17 October 2000. On 31 October 2000, the Applicants filed an application with the Tribunal seeking various orders in terms of Section 59, pending an outcome of the Commission’s investigation. On 1 November 2000, the Applicants filed a supplementary Notice of Motion requesting, in terms of Rule 28(5) of the Tribunal Rules, that the Tribunal shorten the time periods required for the filing of papers and hearing of the interim relief proceedings. In consultation with the parties the requisite time periods were shortened. The pre-hearing conference was held on 7 December 2000 and the hearing on 13 December 2000.

II. THE PARTIES

The Applicants are the Nationwide Airlines Group comprising Nationwide Airlines (Proprietary) Limited, Nationwide Air Charter (Proprietary) Limited, Nationwide Aircraft Maintenance (Proprietary) Limited and Nationwide Aircraft Support (Proprietary) Limited (the “Applicants” or “Nationwide”). Nationwide Airlines makes this application on behalf of the Group.

Nationwide has been operating its scheduled passenger service since 1995, when it decided to expand upon its existing express parcel air cargo, passenger and executive charter operations and introduce a scheduled passenger carrier service in the South African domestic market. Nationwide has since then established itself as a competing domestic carrier, providing services throughout the South African market. Nationwide currently operates scheduled passenger services on the primary routes from Johannesburg to Durban, Cape Town and George. It also operates non-scheduled flights to Zimbabwe, Mozambique, Mombasa, various destinations in West Africa, and, on occasion, ad hoc services to Paris and Vienna.
The first respondent is South African Airways (Pty) Ltd, (the “first respondent” or “SAA”), who operate a domestic and international passenger and cargo scheduled airline. SAA was incorporated on 1 April 1999. Its major shareholders are Transnet Limited, which holds 75% of the entire issued share capital, S. Airlines Europe BV, which holds 20% and the South African Airways Employee Share Trust which holds 5%.

The second respondent is South African Express Airways (Proprietary) Limited (“SAX”) (the “second respondent”) who operates a domestic and cargo scheduled airline only. SAX is controlled by Transnet, who holds 76.01% of its issued share capital and Thebe Investment Corporation Limited, who holds 23.99% thereof.

The third respondent is South African Airlink (Proprietary) Limited (“SAL”). The present shareholders of SAL are Osprey Airline Investments (Proprietary) Limited who hold 45.9% of the entire issued share capital, Rodger Arnold Foster, who holds a 19.35% shareholding, Barrie James Webb, who holds 19.35% thereof and SAA, whose shareholding amounts to 10% of the entire issued share capital.

III. THE COMPLAINT

Nationwide bases its application for relief against SAA on various alleged restrictive practices outlawed by the Act:

a. The first category of restrictive practices is set out in section 8(d)(iv) and prohibits a firm from abusing its dominant position by:

“selling goods or services below their marginal or average variable cost”

Nationwide alleged that SAA’s failure to increase their air fares on the relevant three city-city routes in accordance with fuel price increases since August 2000, as well as their failure to adjust their prices to offset the depreciation of the Rand against the US Dollar, was tantamount to pricing below their marginal or average variable cost on these routes.

b. The second category of abuse in terms of 8(d)(i) prohibits a dominant firm from engaging in exclusionary acts, more specifically:

“requiring or inducing a supplier or customer not to deal with a competitor”

Nationwide referred to certain “preferred-carrier” agreements SAA had concluded with certain travel agents, insofar as they are a supplier of services to an airline, which essentially provided the agents with certain loyalty rebates and performance-related commissions (in accordance with pre-determined growth targets), thereby inducing such travel agents to channel business to SAA to the exclusion of Nationwide.

Alternatively to paragraph (b) above, Nationwide relied on section 5(1) of the Act which proscribes restrictive practices in a vertical relationship, more particularly:

“Any agreement between parties in a vertical relationship is prohibited if it has the effect of substantially preventing or lessening competition in a market, unless a party to the agreement can prove that any technological, efficiency or other pro-competitive gain resulting from that agreement outweighed that effect.”

Nationwide contended that insofar as the agreements concluded by SAA with the various travel agents had the effect of substantially preventing or lessening competition, they should be cancelled.

Finally Nationwide relied on the general exclusionary provision under section 8 (c) prohibiting a dominant firm from:

“engaging 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.”

Nationwide averred that SAA’s alleged conduct in soliciting and employing a number of the Applicants’ staff, specifically Boeing 737 pilots, amounted to an anti-competitive exclusionary act by a dominant carrier.

The nature of the relief being sought under section 60(1)(a) is to order SAA to refrain from committing the aforementioned acts or practices, pending an investigation by the Competition Commission and possible referral to the Competition Tribunal for adjudication. Specifically, Nationwide sought an order ordering SAA to:

cease and desist from the practice of granting travel agents, their employees or particular groupings of travel agents, loyalty and special rebates, discounts and all other forms of reward which require or induce such persons to channel business to the Respondents; and

to declare null and void all agreements and arrangements currently in force in support of such practice; and

upwardly adjust their airfare prices (published and unpublished) on the Johannesburg-Cape Town, Johannesburg-Durban and Johannesburg-George routes by a percentage that is in line with the cumulative cost increases experienced since August 2000 as outlined in paragraphs 37,38,39 of the Founding Affidavit; and

cease and desist from the practice of soliciting and offering employment to Nationwide’s pilots and in particular, its Boeing 737 Captains.

PART B – ASSESSMENT

I. REQUIREMENTS FOR INTERIM RELIEF

Nationwide seeks relief in terms of section 59 of the Act. Section 59(1) states that:

“At any time, whether or not a hearing has commenced into an alleged prohibited practice, a person referred to in section 44 may apply to the Competition Tribunal for an interim order in respect of that alleged practice, and the Tribunal may grant such an order if:-

(a)

there is evidence that a prohibited practice has occurred;

(b)

an interim order is reasonably necessary to:-

(i)

prevent serious, irreparable damage to that person; or

(ii) to prevent the purposes of this Act being frustrated;

(c ) the respondent has been given a reasonable opportunity to be heard, having regard to the urgency of the proceedings; and

(d) the balance of convenience favour the granting of the order.”

We must now examine whether Nationwide’s claim meets the requirements of section 59.

II. SECTION 59(1)(A) IS THERE EVIDENCE THAT A PROHIBITED PRACTICE HAS OCCURRED?

Section 59(1)(a) requires “evidence” of a prohibited practice.

Nationwide has alleged that SAA has perpetrated three different prohibited practices. We will now examine each one in turn.

1. Alleged contravention of section 8(d)(iv), alternatively section 8(c) (Predatory Pricing)

1.1 Are the respondents dominant in the relevant market?

In order to succeed under this section, a complainant needs to show that the respondent is:-

a dominant firm in the manner contemplated in section 7; and

that it has abused its dominance in the manner contemplated in section 8.

We must therefore first establish whether the respondents are dominant firms. A firm is not dominant in a vacuum, it is dominant in relation to a relevant market. Nationwide originally contended that the relevant market was the domestic South African air travel market and that SAA had 45% of this market. (See Notice of Motion paragraph 4 page 3 of the Record). SAA then in its answer agreed that this was the relevant market but alleged that their share amounted to only 43%. (See page 49 of the Record). The significance of the 45% threshold is to be found in the provisions of section 7 which states,

7. A firm is dominant in a market if-

(a)

it has at least 45% of that market

(b)

it has at least 35%, but less than 45%, of that market, unless it can show that it does not have market power; or

(c)

it has less than 35% of that market, but has market power.

If Nationwide has established that SAA has 45% or more of the market, dominance is presumed without further evidence of the existence or absence of market power being required.

The second and third respondents have on their version 13% and 11% respectively of the domestic air travel market. Nationwide has included them as respondents alleging that they form part of the same control structure as the first respondent, SAA and that hence the market shares of all three respondents should be combined which would give them a market share in excess of 45%. Be that as it may, by the time it came to its reply Nationwide contended that the relevant market was not the domestic air market, but was instead the relevant city to city parings. (See Bricknell replying affidavit para 4.3 – 4.4 pg 196 of the Record).

Nationwide has identified three routes or city pairs as the relevant markets. These are the Johannesburg-Cape Town, Johannesburg-Durban and the Johannesburg-George routes.

Nationwide alleges that SAA is predating by pricing below average variable cost on these three routes. In the logic of predation, consumers of air travel services on these routes will ultimately be forced to pay supra-competitive prices as SAA move, in the wake of successful predation, to recoup the losses incurred during the period in which price was held below average variable cost. When prices rise in the newly concentrated post-predation market the consumers of services on this route will, naturally, not be able to substitute another route. For this reason these three routes are then the relevant markets.

As other international cases show the use of city-to-city parings as the relevant market is the conventional approach in antitrust cases in the airline industry.

To determine whether a scheduled route does constitute a separate market, the European Court of Justice stated in Case 66/86 Ahmed Saeed Flugreisen (1989) ECR 803 paragraph 40:

“ The test to be employed is whether the scheduled flight on a particular route can be distinguished from the possible alternatives by virtue of specific characteristics as a result of which it is not interchangeable with those alternatives and is affected only to an insignificant degree by competition with them.”

Similarly, in Virgin/British Airways, OJL 30/1 of 14 February 2000, at para 42, the Commission applied this test to determine that BA flights were sold on a variety of product markets for air transport to and from the UK, depending on the needs of passengers and the alternative modes of transport available.

We accordingly find that the three city-to-city pairs constitute the relevant market for the purpose of the predatory pricing complaint.

We now turn to the question of whether Nationwide has established that SAA is dominant in these markets.

Nationwide in its reply evidenced its claim by putting up data establishing that SAA’s seat capacity on the routes in question exceeds 45% of total seat capacity on these routes. Nationwide submitted two schedules setting out SAA’s seating capacity for each of the three routes on two selected days, as a percentage of the total market, both in relation to that of Comair and itself. This schedule is reproduced below:

On Friday 24/11/00:

Route	SAA	Nationwide	Comair
JNB-CPT	59%	13%	28%
JNB-DBN	62%	15%	22%
JNB-GRG	77%	24%

On Monday 27/11/00:

Route	SAA	Nationwide	Comair
JNB-CPT	64%	10%	26%
JNB-DBN	63%	10%	27%
JNB-GRG	68%	32%

SAA points out that seat capacity data are not identical to passengers’ conveyance data, the ultimate test of market share. We should add that total seat capacity shares may differ from seat capacity shares in the lower fare classes. This latter is the market segment in which the complainant principally competes and accordingly one may expect that its share of seat capacity in these fare classes may be somewhat higher than its share of total seat capacity.

We should also note that SAA has not itself presented data contesting the allegation of dominance in the three relevant markets. SAA had ample opportunity to do so as the Tribunal had allowed both parties to file supplementary affidavits. It has contented itself with presenting data for the domestic air travel market which, it concludes, establishes that SAA has a 43% market share. It is not clear why if SAA has data on total domestic market share, they do not have data on city-to-city routes. We suspect they do and their reluctance to disclose their data on the routes but to instead rely on a methodological quibble only strengthens Nationwide's contention that they enjoy more than 45% of these routes. It is not unknown in competition analysis to utilize a surrogate for sales in calculating market share where actual sales are not known. For instance in Virgin/British Airways, OJL 30/1 of 14 February 2000, at paragraph 90, the Commission, in evaluating BA’s dominance in the market for air travel services, analysed its position on the UK markets for air travel. The Commission identified a combination of factors that lead to the conclusion that BA enjoyed a dominant position in the market for air travel one of which was to examine how many slots BA held at airports as the extract below demonstrates:

“BA’s dominance arises from its position on the UK markets for air travel. …BA’s position on the markets for air transport is reinforced by the substantial portion of the slots it holds in the relevant airports and by the system of grandfathering that currently exists for their reallocation. This system, hampers new entries and reinforces the position of well-established airlines…for example in winter 1998 BA held 38% of the weekly slots available at Heathrow.”

What further strengthens Nationwide’s contention is that SAA’s domestic market share figure of 43% is very close to the threshold of 45%. Even if the seat capacity figures exaggerate SAA’s actual share they are all sufficiently well above the 45% figure to suggest that SAA is dominant on all three routes is established by reason of the presumption contained in section 7(1)(a). Even if SAA’s market share is below this figure of 45% the onus in terms of section 7(b) is on it to rebut the inference of market power. Nothing in the record on the history of pricing and of SAA’s strategic maneuvering since 1998 suggests that it had done this. For this reason, it is also unnecessary for us to decide whether the respondents constitute a single controlled entity and hence their market shares be combined as we find SAA dominant based solely on its share of the relevant market.

We conclude then that Nationwide has established that SAA is dominant in the three relevant markets for the purpose of the claim of predatory conduct.

1.2 Is there evidence of abuse?

We must then go on to consider the question of whether an abuse or prohibited practice has been established, in terms of section 59(1)(a).

The restrictive practice alleged here is commonly referred to as ‘predatory pricing’. Predatory pricing or ‘predation’ is a term of art in competition law and economics and its meaning is precisely captured in Section 8(d)(iv) of the Act which prohibits dominant firms from engaging in the practice of ‘selling goods or services below their marginal or average variable cost’. This price-cost relation must be established for a predatory pricing charge to be sustained in terms of this section. Once this relationship is established an anti-competitive act is presumed and the respondent then has the burden of showing that there are “technological, efficiency or other pro-competitive, gains which outweigh the anti-competitive effect of its act.”

By way of example a respondent could explain that its conduct is justified in order to meet the competition, introduce new products or get rid of obsolete stock.