SAA and Qantas – sharing the pain

Matthew Stern

 

South African Airways has applied to the Competition Commission for permission to have its long-standing codeshare agreement with Qantas extended for a further three years. In terms of this codeshare, SAA and Qantas have carved up the routes between South Africa and Australia between themselves – with SAA flying to Perth and Qantas to Sidney – thereby circumventing the need to compete with each other. No other airline flies directly between the two countries.

SAA readily acknowledges that this practice is prohibited by law and it is for this reason that they are required to apply for an exemption from the Commission. My objection to this extension is two-fold. Firstly, there is strong evidence to suggest that SAA has taken advantage of this exemption to charge abnormal fares on the routes governed by this agreement, to the harm of all passengers flying between these two countries. Secondly, the grounds under which SAA has applied for this exemption do not hold in this circumstance, and in fact, the opposite would seem to be the case.

With reference to my first point above, my own (preliminary) analysis suggests that SAA is charging a significant premium on the two routes covered by the code-share agreement. For the purpose of this analysis, I obtained five random quotes from the flysaa.com website for the same travel dates, over a 11 month period (excluding peak season), for all of SAA’s international routes (outside of Africa). The results are plotted in figure 1 below – which compares the price of these flights against the distance travelled. Of the 55 flights assessed, the 3 highest charges overall and six of the ten most expensive flights were recorded on the South Africa-Australia routes. This despite the fact that these are far from SAA’s longest flights. On average, the flights between Johannesburg and Sydney and Johannesburg and Perth, were 27% and 23% more expensive respectively, than would be predicted by the trendline shown in Figure 1 below.

Figure 1: SAA international flights (costs vs distance)

The Commission has previously concluded that this agreement constitutes a prohibitive practice and SAA provides two reasons for this exemption to be considered. Firstly, they argue that the codeshare agreement supports South African exports; and secondly; they claim that it is necessary to prevent the decline of the airline industry. No further justification is provided in their application to the Commission. Without supporting evidence or argument from SAA, it is hard to understand how either of these two grounds could apply in this situation; rather, the converse would seem to be more applicable.

With respect to section 10(3)(b)(i) of the Competition Act, SAA’s pricing policy on this route harms South African exports to Australia in general, and possibly of SAA in particular. Charging excessive fees on these routes would make it more costly for South African business people (and presumably freight) to land in Australia and market or sell their goods. The impact of excessive fees, on passenger and freight volumes, would need to be carefully analysed before any firm conclusion could be reached in this regard. Moreover, from a travel and tourism export perspective, SAA’s pricing policy on this route clearly discriminates against exports. This is shown in figure 2 below. In this case, the average price charged to passengers departing from South Africa on two routes across three different travel times is compared to the price charged to passengers departing from Australia on the same routes and dates. In economic and trade terms, most of the expense of the former would be considered as imports and most of the expense of the latter as exports. It is therefore hard to conceive how a price premium of between 40% and 50% on passengers departing from Australia could be deemed to promote South African exports.

Figure 2: SAA international flights (departing Australia vs departing RSA)

With respect to section 10(3)(b)(iii) of the Competition Act, it is equally difficult to understand how an anti-competitive arrangement between SAA and Qantas on one specific route could possibly generate a change in productive capacity necessary to halt a decline in the airline industry. This arrangement is of benefit to just one South African airline, and the premiums charged on these specific routes are likely used to cross-subsidise its activities in the domestic market and/or on other more competitive routes. This is clearly not in the overall interest of an industry that is already struggling to compete with SAA, the dominant airline in the South African aviation market.

The above analysis is hardly definitive; but it does raise serious questions about the past behaviour of SAA and suggests that the airline has abused the exemptions previously granted by the Competition Commission in order to reap excessive profits on these routes. In doing so, it would seem that SAA has acted in a way that undermines the public interest by discouraging exports and distorts the playing field in the local airline industry.

The long-term costs of this exemption have likely been substantial and the onus should be on SAA to demonstrate otherwise. The current application, as presented by SAA and Gazetted by the Commission, is far from sufficient to justify any further extension to a known and harmful prohibited practice.