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[2011] ZACAC 3
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South African Airways (Pty) Ltd v Comair Ltd and Another (92/CAC/MAR10) [2011] ZACAC 3; 2012 (1) SA 20 (CAC) (11 April 2011)
REPUBLIC OF SOUTH AFRICA
IN THE COMPETITION
APPEAL COURT OF SOUTH AFRICA
HELD IN CAPE TOWN
CASE NO: 92/CAC/MAR10
In the matter between:-
SOUTH AFRICAN AIRWAYS
(PTY) LIMITED
…........................................................
Appellant
and
COMAIR LIMITED
….......................................................................................
First
Respondent
NATIONWIDE AIRLINES
(PTY) LIMITED
….............................................
Second
Respondent
JUDGMENT : 11 April 2011
ZONDI AJA et DAVIS JP
Introduction
[1]
This is an appeal against the judgment and order of the Competition
Tribunal (“the Tribunal”) of 17 February 2010
in which it
found that the override incentive agreements and trust
agreements/payments between the appellant (“SAA”)
and
various travel agents from 1 June 2001 to 31 March 2005 constituted
prohibited practices in contravention of s 8(d)(i)
1
of the
Competition Act 89 of 1998 (“the Act”). The appeal is
also against the costs order made by the Tribunal ordering
SAA to pay
cost of two counsel of the first respondent (“Comair”)
and the second respondent (“Nationwide”).
[2] The bases for the
appeal are two-fold. The first basis is that the Tribunal should not
have entertained the complaints lodged
by Comair and Nationwide as
their referral was precluded by the operation of s 67(2) of the Act.
Secondly the appeal is brought
on the basis that the Tribunal erred
in finding that SAA contravened s 8(d)(i).
[3] The latter finding is
challenged on a number of bases which can be summarised as follows:
3.1 that the relevant
market was the market for the purchase of travel agent services for
the sale of domestic airline tickets.
3.2 that SAA had market
power in the relevant markets.
3.3 that travel agents
have the ability to significantly influence customers’
preferences and they could directionally sell
in any significant
degree and thereby move customers away from rivals and towards SAA.
3.4 that the growth of
alternate marketing channels had not eroded travel agents’
ability to influence customers’ preferences.
3.5 that SAA’s
rivals could not match the incentives offered by SAA.
3.6 that it was
unnecessary to find evidentially that there was harm to the consumer
in determining the anti-competitive effects
of the agreements in
issue. In this regard the Tribunal was criticised for having adopted
a form-based approach.
3.7 that the Tribunal
ignored the significant increases in Comair and Nationwide’s
market share in the relevant period and
erred in finding that Comair
and Nationwide were excluded from the market and that their growth in
the market was curtailed.
3.8 that the Tribunal
erred very significantly when it ignored powerful evidence in the
so-called counterfactual period. The counterfactual
period represents
the period post 2005 when SAA abolished override agreements of the
kind in issue. It is pointed out by SAA that
the Tribunal’s
superficial basis for rejecting the evidence in relation to the
counterfactual period, which is relevant in
testing whether Comair
and Nationwide had been foreclosed, simply does not withstand
scrutiny.
3.9 and finally that the
Tribunal was also incorrect in finding that SAA could shift a
significant portion of the market through
the incentive schemes.
Factual Background
[4]
On 13 October 2000 Nationwide lodged a complaint with the Competition
Commission (“the Commission”) against SAA
relating to the
manner in which SAA was compensating travel agents for their services
(“the Nationwide matter”). Nationwide
alleged that SAA
was a dominant firm in the market for domestic airline travel and
that it used this dominance to engage in exclusionary
practices in
contravention of s 8 (c)
2
and 8
(d)(i) of the Act. The complaint
inter
alia
alleged
that SAA had concluded agreements with travel agents in terms of
which they received commissions on an incremental basis
that had an
exclusionary
effect and that SAA had a reward scheme known as the Explorer for the
employees of the travel agents which it alleged
had an exclusionary
effect.
[5] The Commission
conducted an investigation and thereafter referred the complaint to
the Tribunal on 18 May 2001. In its complaint
referral, the
commission alleged that SAA’s agreement with travel agents and
the Explorer Scheme with employees of the travel
agents constituted a
prohibited practice in contravention of s 8(d)(i) alternatively 8(c)
of the Act, with the exception of the
Explorer Scheme which ended in
June 2002. According to the Commission the alleged abuse commenced in
about April 1999 and was believed
to have continued to exist beyond
the date of complaint referral to the Tribunal.
[6] The Tribunal,
however, decided, on the basis of fairness, that it was necessary to
limit the duration of the abuse to a finite
period. For this reason
it assumed that the evidence of the existence of the abuse commenced
in October 1999 and ended in May 2001
which is the date on which the
Commission concluded its investigation.
[7]
The Tribunal duly heard the complaint and delivered its judgment on
28 July 2005, which is reported in
The
Competition Commission v South African Airways
(Pty)
Ltd
[2005]
2 CPLR 303
(CT). After analysing the material that was before it, the
Tribunal concluded
inter
alia
that:
7.1 The first relevant
market was the market for the purchase of domestic airline ticket
sales services from travel agents in South
Africa.
7.2 The second relevant
market was the market for domestic scheduled airline travel.
7.3 SAA was a dominant
firm in both markets in terms of section 7(a) as it had a market
share in excess of 45% threshold.
7.4 There is respectable
authority for the notion that exclusionary practices should not
require evidence of actual competitive
harm for a finding of abuse.
The Tribunal noted that a finding is still possible if there is
evidence that the exclusionary practice
is substantial or
significant, or has the potential to foreclose the market to
competition. If it is substantial or significant
it may be inferred
that it creates, enhances or preserves the market power of the
dominant firm.
7.5 The practical effect
of the Explorer Scheme and the overrides incentive scheme is that
they induced suppliers not to deal with
competitors of SAA and hence
constituted an exclusionary act in terms of section 8(d).
7.6 The override
incentive scheme provided a compelling commercial inducement to
agents to prefer selling SAA tickets to those of
its domestic rivals
and secondly, that to a significant extent, agents were able to
influence customer preferences so as to give
effect to those
incentives and the Explorer Scheme served to enhance the exclusionary
effect.
7.7 Travel agents
accounted for approximately 75% of sales of domestic airline tickets
during April 2000 till March 2001. SAA had
19 override agreements by
the end of March 2001. A significant portion of the travel agents
market, itself a significant channel
for ticket sales, was subject to
override agreements.
7.8 The override
agreements provided three forms of compensation by way of commission:
the basic, the override and the increment.
Prior to 1999 the basic
commission was set at 9%. In October 1999 SAA dropped the basic
commission from 9% to 7% but increased
the commission payable in
terms of the override and the increment, but only if the agent
reached a more demanding target.
7.9
The effect of the anti-competitive conduct, given the structure of
the market, was to inhibit rivals such as Comair and Nationwide
from
expanding in the market whilst at the same time reinforcing the
dominant position of SAA. The exclusionary act was substantial
or
significant in terms of its effect in foreclosing the market to
rivals and the consumers were likely to have made wrong choices
of
airlines, and hence paid higher prices than
would have been the
case, absent SAA’s
schemes with agents .
7.10 SAA failed to prove
that the override scheme or the Explorer Scheme, provided any
technological efficiency or other pro- competitive
gains that
outweigh their anti-competitive effect.
[8]
On 9 January 2006, the Tribunal issued a certificate in terms of
section 65(6)(b)
3
of the
Act, confirming that the conduct of SAA had been found to be a
prohibited practice in terms of s 8 (d)(i) of the Act.
[9] Nationwide proceeded
with a civil claim for damages in the High Court and issued summons
on 4 July 2006. Nationwide’s
claim was subsequently settled.
[10] On 13 October 2003
Comair lodged a complaint with the Commission against SAA. The
complaint related to the manner in which
SAA was compensating travel
agents for their services. Comair alleged that SAA, being a
dominant firm in the
market for domestic airline travel, uses its dominance to engage in
exclusionary practices in contravention
of section 8(c) and 8(d)(i)
of the Act. In this case, the exclusionary practices relate to the
remuneration of travel agents –
the allegation being that
travel agents are rewarded in a manner that kept them loyal to SAA to
the exclusion of its rivals. Two
remuneration practices were in issue
in the complaint. The first related to the provision of override
commissions to travel agents
in addition to normal flat rate
commission. The second related to what are termed ‘trust
payments’. These are lump
sum payments made to travel agents at
the end of a financial year if they attain certain prescribed targets
in selling SAA tickets.
[11] The Commission
investigated the complaint and thereafter referred it to the Tribunal
on 12 October 2004. The Commission sought
the following remedies in
its referral:
“
A.
It is declared that SAA’s contracts with travel agents whereby
it paid (or pays) to travel agents amounts over and above
the normal
7% commission payments, are prohibited for the purposes of section 65
of the Act.
B. SAA is to pay an
administrative penalty to the National Revenue Fund contemplated in
section 213 of the Constitution of the Republic
of South Africa, Act
108 of 1996, in the amount up to 10% of SAA’s annual turnover
in South Africa.”
[12] Comair later applied
for leave to intervene in the proceedings and was granted this relief
on 6 April 2005. Comair filed its
own complaint referral in which it
sought the following relief:
“
1.
The override commissions and trust payments made by respondent [SAA]
to travel agents, and any other agreements in terms of which
payments
are made by the respondent to travel agents based in considerations
of loyalty rather than efficiency benefits, constitute
prohibited
practices in breach of section 8(c) and/or 8 (d)(i) of the Act;
2. All existing
agreements between respondent and travel agents of the sort referred
to in paragraph 1 above are hereby declared
to be void.
3. The respondent
shall be and hereby is interdicted and restrained from engaging in
any and all of the conduct, or from entering
any agreements of the
sort, referred to in paragraph 1 above.”
[13] On 15 February 2006
Nationwide applied to intervene in the Comair complaint referral
case. The Tribunal granted intervenor
status to Nationwide on 25 May
2006 and it too, filed a complaint referral. Previously, in October
2000, Nationwide had filed a
complaint with the Tribunal in respect
of SAA’s remuneration scheme for travel agents. This culminated
in a finding against
SAA which was fined R45 million for contravening
section 8(d)(i) of the Act.
[14]
Late in 2005 the Commission and SAA commenced negotiations to settle
various complaints that were pending against SAA. In the
course of
this process, the consent agreement was entered into. On 24 May 2006,
the Commission brought the present application
to have the agreement
confirmed as a consent order in terms of section 49 (D)(1)
4
of the
Act, read with section 58(1)(b)
5
.
The Tribunal granted the application.
[15]
Nationwide filed a second complaint in terms of section 49(2)(b)
6
with
the Commission on 22 May 2006. In that complaint, Nationwide made it
clear that it was pursuing a declaration that SAA’s
override
incentive scheme after May 2001 was a prohibited practice in
contravention of s 8(d)(i) of the Act.
[16] On 20 September 2006
the Commission issued a Notice of Non-Referral of Nationwide’s
second complaint and Nationwide duly
referred its complaint directly
to the Tribunal in terms of s 51(1) of the Act.
[17] In March 2007,
Comair launched an application for declaratory relief in terms of s
49D (4) asking the Tribunal to declare that
the override commissions
and trust payments made by SAA to travel agents, from September 1999
to the date of Comair’s section
49D(4) application, constituted
prohibited practices in contravention of s 8(c) and/or 8(d)(i) of the
Act and in terms of s 58(1)(a)(v)
or (iv) of the Act.
[18] On 12 September
2007, SAA filed an application to consolidate Comair’s s 49D(4)
application with Nationwide’s complaint
referral. The
application was granted by the Tribunal, with the consent of the
Nationwide and Comair, on 7 November 2007.
Issues
[19] The present
proceedings flow from that consolidation of Nationwide’s
complaint referral and Comair’s s 49D(4) application.
[20] The Tribunal’s
order against which SAA appeals reads as follows:
“
254.1
We declare the following conduct of SAA to be prohibited practices in
contravention of section 8(d)(i) of the Act –
i. The override
incentive agreements between SAA and various travel agents from 1
June 2001 to 31 March 2005; and
ii. The trust
agreements/ payments between SAA and various travel agents from 1
June 2001 to 31 March 2005.
254.2 An order of
costs, including the costs of two counsel, in favour of Nationwide
and Comair.”
[21] Having sketched this
factual background, we turn now to consider the main issues raised in
this appeal:
1. whether the Tribunal
was correct in rejecting SAA’s objection to the complaint
referrals on the ground that they were precluded
by the operation of
the provision of section 67(2) of the Act;
2. whether the Tribunal
erred in finding that SAA had contravened section 8(d)(i) of the Act.
SAA’s section
67(2) argument
[22] One of SAA’s
grounds of appeal related to the point
in limine
it took
against Comair’s complaint referral to the effect that the
conduct forming the subject matter of the complaint was
substantially, if not completely, the same conduct as in the first
Nationwide matter and that the referral was precluded by section
67(2) of the Act. That section provides as follows:
“
A
complaint may not be referred to the Competition Tribunal against any
firm
that has been a
respondent
in completed proceedings before the Tribunal under the same or
another section of
the
Act
relating substantially to the same conduct”
.
[23] The Tribunal
considered and rejected SAA’s objection, holding that SAA could
not invoke the protection of section 67(2)
for its conduct after 31
May 2001.
[24] It is instructive to
cite the Tribunal’s reasons for dismissing SAA’s point
in
limine:
(Reported as
Nationwide Airlines (Pty) Ltd and another
v South African Airways (Pty) Ltd
[2009] 2 CPLR 509
(CT))
“
[45]
While the Tribunal and the CAC have both interpreted the section to
include the notion of “substantially the same conduct”
or
“similar conduct” both have indicated that where the
particulars of complaint deal with the same or similar conduct
in
a
different time period
,
this would not make such a complaint vulnerable to an attack under
section 67(2).
…
[47] In other words
section 67(2) seeks to protect a respondent from double jeopardy
related to the same or similar conduct in a
specified time period.
For example, a respondent may have been prosecuted for abuse of
dominance under section 8(c) for conduct
in a specified time period.
Once the proceedings have been completed, a complaint of the same
conduct, occurring in the same time
periods, could not be referred to
the Tribunal under another section of the Act, example section
8(d)(i) or section 5. Similarly
by way of example, if in those
completed proceedings the issue of dominance was determined on the
basis of the respondent’s
market share, a subsequent complaint,
for the same conduct occurring in the same time period based on a
notion of collective dominance
could not be referred to the Tribunal
once proceedings in the former complaint are completed.
[48] Substantiality
would thus relate to materiality and would include
both
manner
and time. Both the CAC and this Tribunal have held that conduct
occurring in different relevant time periods constitutes
a
material
difference between two complaints.
[49] SAA’s
a-temporal approach to section 67(2), if adopted by this Tribunal,
would lead to an absurdity as demonstrated the
following example.
Consider the matter of a cartel member who was prosecuted for a
cartel which had lasted for two months. Cartels
are considered to be
the most egregious offences under the Act. On SAA’s
interpretation, this person could now with impunity
engage in any
number of cartel activities after being prosecuted and found guilty
for the first two month long cartel. If the Tribunal
were to adopt
such an approach, it would never be able to prosecute a respondent
for repeated offences. Thus when a party seeks
the protection of
section 67(2), such protection can only be competent where it relates
to substantially the same conduct taking
place in a specified or
defined period. Substantially the same conduct taking place in a
specified or defined period. Substantially
the same conduct or even
identical conduct occurring in a different time period would
constitute new conduct and would not be protected
by s67(2).
[50] Furthermore,
SAA’s suggestion that the time period of the Nationwide
decision extended into 2005 is completely baseless.
The Tribunal in
that case expressly stated as follows –
“
We
declare the following conduct of SAA to be prohibited practices in
contravention of section 8(d)(i) of the Act:
the scheme known as
the override incentive scheme, being a contract between itself and
various travel agents between October 1999
and May 31, 2001; and
the scheme of travel
agents’ compensation known as Explorer, from a date unknown
until 31 May 2001.”
[51] SAA’s
conduct from 1999 to 31 May 2001 has already been evaluated by the
Tribunal in the Nationwide case. This complaint
is therefore
concerned with SAA’s conduct after 31 May 2001, namely the
period from 1 June 2001 to 31 March 2005. Even if
SAA, for argument’s
sake, had not introduced a new incentive scheme in 2001 but had
continued with the same scheme evaluated
in Nationwide, its conduct
in the subsequent period of 1 June 2001 to 31 March 2005 would
constitute conduct that would not be
protected under section 67(2)
precisely because it was occurring in a different time period.
[52] The relevant
period of the Nationwide decision was October 1999 to 31 March 2005.
On this basis alone, we find that SAA’s
approach to section
67(2) is without any merit and the point in limine is accordingly
dismissed. To the extent that the Comair
complaint concerns the
second generation override incentive agreements and the Explorer
scheme in place until 31 May 2001, SAA
is protected from further
prosecution by the provisions of section 67(2). However SAA cannot
seek the protection of section 67(2)
for its conduct occurring after
31 May 2001, even if that conduct was substantially similar in nature
to conduct in the previous
period.
[53] Moreover, and
contrary to SAA’s assertions, the nature of the incentive
scheme under consideration in this matter, consisting
of the third
generation and trust agreements was never considered by the Tribunal
in the Nationwide case. In that decision the
Tribunal was only
concerned with the override incentive agreements (second generation
agreements) and the Explorer scheme for the
period October 1999 to 31
May 2001. The Tribunal took heed of the fact that the incentive
scheme was possibly still in operation
but pointed out that:
‘…
although
the evidence is that the scheme was still in effect at the time of
the hearing, the only evidence we have of its effect
is for the
investigation period, which ends in mid-2001. We do not know for
instance if the
nature of the contracts (our emphasis)
changed in any respect after the investigation period ended. Recall
that this has been an important part of our finding on the
contravention that it is the nature of the override, not the fact of
an override being in existence that is of central concern…’
[25] We agree with the
Tribunal that the effect of section 67(2) is to preclude the
Commission and any complainant from bringing
a complaint against a
respondent whose conduct had previously been the subject of any final
or definitive determination by the
Tribunal .Thus , if a respondent
has already been prosecuted for certain conduct, it ought not to be
prosecuted again for the same
conduct, whether or not the earlier
prosecution resulted in an adverse finding. We also agree with the
Tribunal that a respondent
who wishes to rely on the protection of
section 67(2) bears the
onus
of proving that it is indeed
entitled to protection.
[26] In
SAPPI Fine
Paper (Pty) Ltd v Competition Commission of South
Africa
and another
[2003] 2 CPLR 272
(CAC) at paragraph 52 this
Court held that section 67(2) was enacted to avoid a firm from being
“
tried
” twice for the same or substantially the
same conduct.
[27] In other words, to
trigger the operation of section 67(2) it must be shown that the
complaint relates to substantially the
same conduct and in respect of
which a firm was a respondent in the completed proceedings (
SAPPI
supra at paragraph 42). If new facts are placed before the
Commission or if new facts come to light which were not previously
known
to the Commission, it is enjoined to investigate the complaint
in order to properly fulfil its statutory function as the primary
body responsible for prosecuting any conduct which is alleged to be
prohibited by the Act. (
Omnia Fertilizer Ltd v Competition
Commission and others; Sasol Chemical
Industries v Competition
Commission and others
[2006] 1 CPLR 27
(CAC) at paragraph 25).
[28]
As this court said in
Omnia Fertilizer Limited v
Competition Commission and others
supra
at paragraph 28:
“
It is common
cause the complainants are the same in both the referrals. Further,
the third respondent has embodied allegations of
fact that are in
some measure repeated in the second complaint but, as the papers
reveal, the similarity ends there. Not only new
facts are relied on
in making the second referral but these facts are more extensive and
deal in part with events that occurred
after the filing of the first
complaint. Moreover, the second complaint implicates two new parties,
Omnia and Kynoch. In addition,
new contraventions are identified
which are fully ventilated in the answering affidavits of the third
and fourth respondents. It
will be jejune to repeat. We are therefore
satisfied that the complaints were and are temporally and
qualitatively different
.”
[29]
Mr Subel
, who
appeared with
Mr Bhana
for SAA, submitted that the conduct in
issue in this matter (save for the minor additions of the trust
agreements) was substantially,
if not completely, the same conduct as
that which formed the subject matter of the dispute in the first
Nationwide matter. He correctly
pointed out that, for section 67(2)
to apply, it is necessary for SAA to demonstrate, firstly, that it is
was a respondent in completed
proceedings before the Tribunal and
secondly, that those proceedings related substantially to the same
conduct under the same or
another section of the Act.
[30]
Mr Subel
emphasised that section 67(2) focuses on the underlying conduct and
does not require the conduct to relate to the same period.
He argued
that the date “
May 2001
” was simply an assumed
date for practical purposes only and did not signify a date upon
which conduct on the part of SAA
was found to have changed.
[31] He pointed out that
the referral in issue in the present matter simply introduced
multiple hearings in respect of substantially
the same conduct with
the result that SAA faced the classic double jeopardy in respect of
overlapping issues and which resulted
in SAA being found, on two
occasions, guilty of a contravention of the identical section of the
Act for substantially the same
conduct.
[32] In our view, there
are fundamental differences between the two complaint referrals, both
in terms of the nature of the conduct
upon which the complaint was
based and the time periods during which the conduct occurred.
[33] In this regard, it
is necessary to refer to the Tribunal’s order in the first
Nationwide matter to see how it characterised
the nature of the
conduct that was before it for determination as well as the time
period over which it occurred. It gave the following
order:
“
(b)
We declare the following conduct of SAA to be prohibited practices in
contravention of section 8(d)(i) of the Act:
- the scheme known as
the override incentive scheme, being a contract between itself and
various travel agents between October 1999
and May 31, 2001; and
- the scheme of travel
agents’ compensation known as Explorer, from a date unknown
until May 31 2001.”
[34] It is clear from the
terms of the order that the conduct of SAA which the Tribunal
declared to be prohibited practices in contravention
of section
8(d)(i) of the Act is first, the scheme known as the override
incentive scheme in the form of a contract between SAA
and various
travel agents which took place between October 1999 and May 31, 2001
and secondly, the scheme of travel agents’
compensation known
as Explorer, from a date unknown until May 31, 2001.
[35] As regards the
nature of the agreements which were the subject of the investigation
in the Comair complaint referral it is
important to point out the
following:
35.1 the override
incentive agreements (“2
nd
Generation”
contracts) that were in place as at the date of the Nationwide
referral in May 2001 were replaced by another
set of agreements (the
“3
rd
Generation” contracts) and also the trust
payments that SAA began making to travel agents.
35.2 According to Mr
Viljoen, it became necessary for SAA to replace the 2
nd
Generation contracts with 3
rd
Generation contracts and
trust payments in April 2001 as a result of the initiation of the
Nationwide complaint and after receiving
competition law advice. Mr
Viljoen explained that the trust payments, were introduced by SAA in
order to provide agents with incentives
for incremental growth, and
to compensate them for the introduction of flat rate overrides
following the change from 2
nd
to 3
rd
Generation
contracts. They were made to travel agents on the basis of their
international and domestic support for SAA in terms
of SAA flown
revenues and SAA market share.
35.3 SAA restructured its
travel agent contracts again when the Tribunal handed down its
decision in the Nationwide case in July
2005. It thereafter
introduced the 4
th
Generation contracts.
35.4 It is the 3
rd
and 4
th
Generation contracts and trust payments that form
the subject matter of these proceedings and upon which Comair and
Nationwide
base their case for the declaratory relief that they seek.
35.5
In summary, while 2
nd
and 3
rd
generation
contracts shared certain characteristics in common, there were key
features which distinguished these contracts including
the following:
35.5.1 Whereas 2
nd
generation contracts contained incremental overrides to incentivise
agents incremental performance, the 3
rd
generation
contracts contained flat override payments for the achievement of
base revenues.
35.5.2 Differentiated
override payments depending on the class of
tickets sold by the
travel agent, which did not feature in the 2
nd
generation
contract, were introduced in the 3
rd
generation contracts
during the period 2002/2003.
[36] There are
differences in terms of the structure and specific provisions between
the incentive agreements considered by the
Tribunal in the Nationwide
case and those considered in the Comair referral. It is these
features which are relevant in determining
whether or nor the
agreements were anti-competitive. These agreements took place at
different time periods.
[37] In argument,
Mr
Subel
submitted that the attempt by the Tribunal to simply dilute
SAA’s objection on the basis that the conduct occurred at a
different
time period ignores the fact that the so called “relevant
period” was relevant only in that it was considered to be
sufficiently reliable to arrive at a finding in relation to the
conduct.
[38] He submitted that
the approach adopted by the Tribunal was fallacious in that on the
basis of its reasoning, SAA’s conduct
in each of the years from
1999 to 2001 could justify the referral of three separate
contraventions by the Commission and result
in three findings against
SAA. He argued that on the Tribunal’s reasoning the same
agreement would lead to a finding that
because the conduct occurred
both pre 31 May 2001 and post 31 May 2001 that the conduct was not
substantially similar in nature
because it occurred in a different
time period.
[39] In essence, this
dispute turns on the interpretation of the provisions of section
67(2). The legislature’s intention
must be sought in the first
place by interpreting the words used in section 67(2) according to
their ordinary meaning and in the
light of their context. (
Protective
Mining & Industrial Equipment Systems
(Pty) Ltd (formerly
Hampo (Pty) Ltd v Audiolens (Cape) (Pty) Ltd
1987 (2) SA 961
(A)
at 991 G-H;
Jaga v Dönges, NO and another; Bhana v
Dönges, NO and another
1950 (4) SA 653
(A) at 662 G –
664 H).
[40] In our view, the
construction of section 67(2) contended for by
Mr Subel
must
be rejected as it would lead to a result contrary to the clear
intention of the legislature. We agree with
Mr Unterhalter
,
who appeared with
Mr Wilson
for Comair, that in order for
conduct to fall within the immunity protection of section 67(2) it
must be conduct that takes place
at the same time as the conduct that
forms the subject matter of the “completed proceedings”
and cannot be a repeat
or continuation thereof at a different time
period. It could never have been an intention of the legislature to
grant permanent
immunity for the conduct occurring at different time
periods on the basis that conduct had previously been the subject of
“completed
proceedings” before the Tribunal.”
(
Barnes Fencing Industries (Pty) Ltd and another v Iscor Ltd
(Mittal SA) and others;
[2008] 1 CPLR 17
(CT) at paragraph
39).
[41] Of some significance
was an argument put up by SAA in support of its contention that
section 67(2) was applicable.
Mr Subel
noted that both Comair
and Nationwide interests in prosecuting the present case were solely
for the purposes of obtaining a declaration
as a pre-requisite, in
terms of section 65(6)(b) of the Act, for the institution of an
action in the High Court for alleged damages
flowing from the conduct
of SAA.
Mr Subel
was invited by this court to concede that, if
his argument was correct, there would be no reason why the appellant
(or SAA) would
resist such a declaration in that the initial decision
of the Tribunal would cover all such alleged conduct. Understandably,
it
was an invitation which
Mr Subel
declined which, in itself,
illustrates the fundamental point that even SAA considered that these
disputes constituted different
cases. Indeed, SAA sought to defend
itself on the merits, based on the very nature of the 3
rd
and 4
th
generation contracts as well as the changed
dynamic of the market in order to justify a different decision from
that adopted by
the Tribunal in the first case.
[42]
In the circumstances SAA’s point
in
limine
stands to be dismissed.
[43] We now turn to
consider the merits.
The Relevant Period
[44] The “relevant
period” for the purposes of the complaint referral in the
instant matter is the period between 1
June 2001 to 31 March 2005.
The Tribunal determined 31 March 2005 as marking the end of the
relevant period because the 3
rd
generation agreements and
trust payments, which were subject to the investigation by the
Commission in the Comair referral, were
in force until 31 March 2005.
The Tribunal was, however, mindful of the fact that there might be
some degree of overlap in the
Nationwide and Comair complaint
referrals as some of the 3
rd
generation agreements might
have been concluded with travel agents before 31 May 2001.
[45] It also recognised
the probability that one or two 3
rd
generation agreements
remained in force for a brief period of time after 31 March 2005 and
that some of the 2
nd
generation agreements might have
persisted after the 31 May 2001 date. It, however, reasoned that
these overlaps were of a very
limited duration and would not have a
material impact on its competition analysis for the period 1 June
2001 to 31 March 2005.
The Relevant
Conduct
[46] The 3
rd
generation agreements and trust payments constituted conduct which
fell under scrutiny in this appeal. Their description and how
they
operated was summarised carefully by the Tribunal in its decision as
follows:
“
[55]
In order to understand the third generation (3G) agreements it is
necessary to revisit the essential elements of the second
generation
(2G) agreements. In the second generation agreements, the incentives
to travel agents were structured as follows. Travel
agents were paid
a flat basic commission for all sales up to a target that was set for
them. The target figure was expressed in
rands. If they reached and
exceeded the set target they become eligible for two additional types
of commission, payable over and
above the flat basic commission. The
first of these was a commission calculated not only over the amount
by which the travel agent
exceeded the target but over the total
sales achieved above and below the target.
[56] By way of
example, let us assume that a particular travel agent had a sales
target of R50 million to achieve. The travel agent
would earn a flat
commission of 7% on this volume, expressed in rand value. However if
the travel agent exceeded the target by
R5m it would earn an override
commission, set at typically 0,5%, calculated on all sales earned
namely R55m. Hence the agent at
that stage would earn an additional
commission of R275 000, over and above its 7% flat commission of R3
850 000 In total the agent
would earn an average commission of R4 125
000 translating into an average rate of 7.5%. This is called the
override incentive
and because it is calculated over the total sales
achieved it is referred to as the “back to rand one”
principle.
…
[58] The actual
percentage of the override incentive may have differed from agent to
agent but the basis of its computation was
common across all. In
addition to the override commission travel agents also became
eligible for a third category of commission,
referred to as the
incremental commission. If the travel agent exceeded the first target
for the override commission, also referred
to as base, by a certain
target it became eligible for the incremental commission. This
commission was not calculated back to rand
one but was calculated in
relation to the first target (“back to rand base” or
“back to base” principle)
and was typically much higher
in percentage terms than the override commission.
…
[60] In the course of
2001, SAA changed its override agreements. The changes were announced
around the time when the Commission
had almost finalised its
investigation into the Nationwide complaint and just before it had
referred it to the Tribunal.
[61] The general
features of the 3G agreements were as follows. Override payments were
introduced for the achievement of base revenues.
Base (target)
revenues were usually set on the previous year’s sales of the
particular travel agent and were individually
negotiated with each
travel agent. Payments to travel agents for achieving base were
calculated on a back to rand one basis. In
other words, both the
basic flat commission of 7% and the override incentive commission
that had been offered by SAA in the second
generation agreements
remained in place.
[62] An important
change introduced by SAA in the second generation agreements was that
targets and computation of achievement of
targets would be done on
the basis of flown revenue rather than BSP figures. Flown revenue is
a measurement applied across all
couriers in the determinant of
rebate deals. BSP refers to Billing and Settlement Plan sales which
is the gross bookings by IATA-
accredited travel agents. The
significance of this is that while travel agents could always
calculate their BSP figures through
reconciliations with other
relevant components of gross sales, only airlines would be in
possession of the flown revenue figures.
Third generation agreements
in place for the first two contract years (2001/2002 and 2002/2003)
were based on flown revenues and
those for subsequent years on number
of flown passengers. Flown revenues sold on SAX and SAL were also
included in the override
agreements for major travel agents for the
purposes of computing performance and payments to travel agents.
[63] The basis of
computation of flown revenues however was also adjusted from year to
year or agreement to agreement during this
period by the introduction
of a number of exclusions. The agreements for example excluded the
acquisition of travel agents in the
form of new outlets or new
corporate accounts with in-house travel agents from the computation
of growth for the purposes of meeting
the set targets. Hence if a
particular travel agent acquired another travel agent, opened a new
outlet or acquired new corporate
in-house account, revenue of SAA
sales from these sources were not computed as incremental growth but
were instead included in
the base revenue target and the actual
revenues for that agent.
[64] Differentiated
override payments depending on the class of tickets sold by the
travel agent were introduced during contract
year 2002/2003. The
classes of tickets were differentiated between premium, sub-premium
and discounted. Notwithstanding all of
these changes, the basis of
rewarding travel agents to achieve the set targets was still
calculated on an override basis in that
agents were paid commissions
over and above the standard commission on a back to rand one
principle for achieving targets set by
SAA.
…
[67] Over this period
there was a constant revision of the computation of base revenues in
order to exclude from a particular agent’s
base, those SAA
sales that would in any event have been made by any other player in
the market including SAA itself. The agreements
also became more
specific over time, rewarding agents only for specified classes of
tickets.
[68] Trust agreement
were introduced in contract year 2001/2002 and remained in place
until the first quarter of contract year 2004/5.
TRUST was an acronym
adopted by SAA for “True partnership, Respect, Undivided
support, Sharing of information and Training
of SAA product and
knowledge”. Trust payments consisted of lump sum payments made
by SAA to travel agents for achieving specific
revenue and market
share targets and in exchange for the agent’s support of SAA.
The payments were additional to the domestic
overrides discussed
above..
[69] The precise
formula for trust payments differed across agents and through time.
The formula for the larger agents such as Renfin
and Sure Travel
initially provided for positive revenue growth during 2001 to 2003
and thereafter for maintenance of the flown
revenue levels achieved
in previous years. Trust payments for smaller agents seem to contain
positive revenue targets until 2003/4.
What was common to all of them
was the payments were made upon the achievement of a particular
target. In addition to such above
terms and payments, trust
agreements also included allocations of tickets to agents’
promotional tickets and marketing incentives.
SAA’s
contracts after mid 2005
[47] The structure of
SAA’s travel agent agreements changed in 2005/06, around the
time of the Tribunal’s decision in
the Nationwide case (in July
2005). Documents discovered from SAA and from travel agents show that
this change was implemented
by SAA around the beginning of FY 2005/06
to mitigate the risk of further actions from the competition
authorities, following the
outcome of the Nationwide case.
[48] In May 2006, SAA
entered into a consent agreement with the Commission in terms of
which it
inter alia
agreed to change the structure of its
incentive schemes with travel agents according to a number of
criteria. This consent order
was approved by the Competition Tribunal
in December 2006.
[49] Under the consent
agreement, SAA was required to refrain from entering into agreements
containing the following key features:
Individual growth
targets for each agent (where the commission is paid on the basis of
performance relative to a previous period);
Market share targets
(where incentives are paid conditional on the agent conducting a
given share of its business with SAA);
Differentiated sales
targets across agents where differences do not reflect cost savings;
Retrospective (i.e.
“back to rand one”) commission rates, and
Commission rates
increasing “other than incrementally on a straight line basis
above any base line”.
[50] According to Dr
Federico, the SAA’s agreements which he analysed for the period
2005/06, appeared to comply with the
features of the consent
agreement with the Commission. In particular, the agreements in
2005/06 did not contain “back to
rand one” retroactive
overrides and did not appear to have included trust payments.
Instead, the agreements relied on incremental
overrides (i.e.
override commissions only on sales in excess of a target level) and
set the target level as only a very small fraction
of prior-year
revenue. For example, the target level in the Renfin agreement for
2005/06 was only R1 million, approximately 1%
of their total SAA
sales over the previous year. Using a low target in the calculation
of incremental overrides compensates travel
agents for the
elimination of “back to rand one” overrides. In Dr
Federico’s opinion, the new structure was effectively
the same
as paying a flat commission rate which did not depend on revenues.
[51] He observed that by
lowering the targets to levels that were easily achieved, the change
in the structure of the 2005/06 agreements
reduced the incentive of
travel agents to push additional traffic onto SAA flights. The
revised structure did not have a big jump
in the marginal commission
rate at a growth rate that the travel agent would have to work to
achieve within a given year. Moreover,
absolute sales targets were
not differentiated across agents, which constrained SAA’s
ability to tailor agreements to the
characteristics of each agent in
order to induce more directional selling effort from such agent.
Significantly, Dr Federico continues:
“
However,
one notable difference between the European Commission’s
principles on travel agent commissions on the one hand,
and the
consent agreement on the other is that under the latter SAA is still
allowed to, and does, discriminate in its commission
rate across
agents and across years. Therefore, even if the average rate paid to
agents is simply a flat rate and it does not depend
on the
achievement of a particular sales target within a given year, SAA is
still able to lower such rate during the following
year for a
specific agent if performance by that agent is not seen as
satisfactory. This may discourage agents from moving too
much traffic
away from SAA for fear of losing part of SAA’s base override
during later years. This effect can be expected
to blunt the
pro-competitive impact of the change in SAA’s conduct.”
The Relevant Market
[52] In the Nationwide
decision the Tribunal found that there were two relevant markets.
First, the market for the purchase of domestic
airline ticket sales
services from travel agents in South Africa and secondly, the market
for scheduled domestic airline travel.
The Tribunal found that SAA
was dominant in both markets and that it had abused its dominance in
the first market in order to exclude
its rivals in the second market.
[53] It further found
that travel agents were an important channel of marketing and
distribution of tickets for airlines and that
direct sales by
airlines over the internet or the counter were not substitute
channels of distribution for consumers who wished
to examine their
choices. The Tribunal also found that a significant portion of each
of the three airlines tickets (SAA, Comair
and Nationwide) were sold
through travel agents during the relevant period and which was clear
evidence of the centrality of travel
agents to consumers.
[54] In its decision in
these proceedings, the Tribunal confirmed its definition of the
market for the purchase of travel agents
services for the sale of
domestic airline tickets as the travel agents still remained the most
important avenue through which domestic
airlines could distribute
their tickets despite the growth of the internet and sales through
other channels.
[55] With regard to the
definition of the relevant market for the airline travel, the
Tribunal continued to define it as the market
for domestic scheduled
airline transportation in South Africa. It, however, accepted that in
the relevant period, various offerings
were differentiated and that
SAA’s conduct, if exclusionary, would predominantly have an
effect on its rivals on that part
of the domestic air travel market
which was distributed by travel agents.
[56] SAA objected to the
description of the relevant market by the Tribunal and contended that
the relevant market is the market
for the provision of domestic air
travel services in the conveyance of passengers on particular
domestic airline routes on particular
flights at particular times on
particular days.
[57] In support of its
contention SAA relied on a report compiled by Dr Affuso of RBB
Economics in which she rejected the proposition
that the relevant
market could be defined by reference solely to the extent of the
alleged abuse simply because the subject matter
of the allegedly
abusive agreements is the relationship between SAA and travel agents.
According to Dr Affuso, the market should
be defined by reference to
the competitive constraints faced by the various parties in
accordance with standard market definition
procedure.
[58] She pointed out that
in most abuse of dominance settings the allegedly dominant firm is
dominant in the supply of set of goods
or services. Dominance in
supply would then open up the possibility that dominance may be
abused through exploitation or exclusion.
She noted that in the
instant case, according to the complainants, SAA is a dominant
purchaser of travel agency services. She argued
that the logical
consequence of such position is not that SAA would necessary have
market power, but rather that it would have
buyer power.
[59] In her view there
was nothing in the present case to justify deviation from the
standard practice of defining the market by
reference to the services
supplied. She reasoned that if travel agents are regarded as
distributors of airline tickets to customers,
as opposed to an input
for the provision of air transport services, then one is immediately
directed to consider the relevant issue
of whether customers consider
other forms of ticket distribution, such as buying tickets direct
from the airlines over the internet
or telephone, as demand-side
substitute for the services of travel agents.
[60] The Tribunal
rejected Dr Affuso’s theory stating that it was fundamentally
flawed and was not supported by the evidence.
One of the reasons for
its rejection of Dr Affuso’s theory was based on the fact that
airlines do not on-sell tickets to
travel agents as one would expect
in a wholesale-retail relationship and they do not have any
discretion with regard to the pricing
of the product offered by the
airline, the quantity of supply, the terms and conditions on which
such product is offered and do
not acquire ownership and risk in the
product. Finally it also found that all the witnesses testified that,
during the relevant
period, the alternative channels suggested by Dr
Affuso were not suitable substitutes for travel agents services for
airlines because
the uptake of these channels by consumers was slow
for a variety of reasons.
[61] There is merit in
the Tribunal’s criticism of Dr Affuso’s theory. It fails
to appreciate that travel agents do
not purchase and then on-sell
airline tickets. The analysis fails to give a proper recognition of
the role played by the travel
agents in the distribution of the
airline tickets process. They act as intermediaries in facilitation
of the transaction for the
sale of tickets between the airlines and
the consumers.
[62] Furthermore the
suggestion that the Tribunal’s definition of the first relevant
market failed to consider possible demand-side
substitutes, is
rejected. It was Dr Niels’ evidence that during the relevant
period travel agents continued to be main distribution
channels
representing more than 80% of sales of SAA and more than 60% of sales
of Nationwide. The direct sales mechanisms were
not satisfactory
substitutes for consumers. The internet did not account for a
significant proportion of sales at the time growing
from zero in
2001-2002 to 5% in 2004-2005 for SAA and from 0.1% to 2% for
Nationwide.
[63] SAA also contended
that ,although travel agents are the most prominent and important
booking channels, (particularly for business
travellers), the
internet is a viable alternate route to market .Hence ,bookings
through the internet constitute a competitive
restraint on the travel
agents behaviour and travel agents are thus not insulated from
competition from the internet and direct
sales.
[64] SAA relied on the
evidence of Dr Affuso and Viljoen. The essence of their evidence was
that even though the internet might
have had a small share of the
market, it was certainly quite powerful in exerting a competitive
constraint on travel agents.
[65] The Tribunal
considered and rejected this argument. Although it found that there
was a single market for scheduled domestic
airline travel it,
nevertheless, accepted that during the relevant period under
consideration various offerings were differentiated
and that SAA’s
conduct, if exclusionary, would predominantly have an effect on its
rivals on that part of the market which
was serviced by travel
agents. That segment of the market consisted of the less price
sensitive and more time and comfort sensitive
passengers and excluded
Kulula and 1Time and all Nationwide and SAA fares which were
exclusively distributed through the internet
or other direct
channels.
[66] The Tribunal’s
finding cannot be faulted. There is no doubt that during the relevant
period the internet, call centres
and over-the counter sales could be
and were used as an alternative means of distributing tickets for the
airlines. But the evidence
showed that they were not suitable
substitutes for travel agents services. This is because of the
specialised nature of services
rendered by the travel agents to the
airline and travellers and which the internet was unable to provide.
In any event the overwhelming
number of tickets were purchased
through travel agents.
[67] According to Mr
Venter of Comair, the service provided by the travel agents included
managing the total travel budget and consolidating
all the different
elements of travel into reports to the corporate clients which is the
role which the internet cannot perform.
Dominance
of SAA
[68]
The next question is whether SAA is dominant in the relevant market.
In terms of section 7
7
of the
Act, a firm with a 45% share of the market is irrebuttably presumed
to be dominant for the purpose of the Act, and hence
subject to the
abuse of dominance provisions contained in section 8. Section 7(b)
creates a presumption of dominance if a firm
has less than 35% but
enjoys market power. An enquiry into the market power is only
necessary when a firm’s market shares
are less than 45%.
[69] In calculating SAA’s
market share the Tribunal included South African Express (SAX) and
South African Airlink (SAL) for
the relevant period, which was over
45%, and concluded that SAA was presumably dominant, as provided in
section 7, by virtue of
its market shares not only in the wider
market but also in the market for travel agents services. There is no
attack by SAA on
this finding.
[70] For instance the
SAA, SAX and SAL’s market shares in the market for domestic
airline travel during the period April 2001
to March 2002 was 71% and
58% during the period April 2004 to March 2005. Their combined market
share in the market for travel
agent services calculated in terms of
BSP was 76% during the period April 2001 to March 2002, 77% during
the period April 2002
to March 2003, 79% in April 2004 to March 2004,
77% during the period April 2004 to March 2005 and 74% during the
period April
2005 to March 2006.
Market Power
[71]
“Market Power” is defined in section 1(1)(xiv) of the Act
as “the power of a
firm
to
control prices, or to exclude competition or to behave to an
appreciable extent independently of its competitors, customers or
suppliers”.
[72] SAA submitted that
during the relevant period it did not have the power to control
prices, or to exclude competition or to
behave to any appreciable
extent independently of its competitors. It argued that it had to
react by lowering its prices to match
that of its competitors. It
further argued that it did not have market power in relation to
passengers and travel agents.
[73]
However,
once
SAA’s share of the defined market had been established, section
7(a) of the Act became applicable, namely the provision
that a firm
is dominant when it has a market share of 45% or more. Accordingly,
the Tribunal correctly found that there was no
necessity to engage in
an enquiry into SAA’s market power as this would only be
necessary if SAA’s market share had
been less than 45%. This
finding follows the provision of the Act and obviates the need to
canvass the detailed evidence of Dr
Affuso regarding SAA’s lack
of market power.
Abuse of Dominance
[74] In the Nationwide
case, the Tribunal considered the anti-competitive effect of a
strategy devised by SAA through its incentive
schemes contained in
its override agreements and Explorer Scheme. The incentive scheme
involved incentive contracts between SAA
and travel agents. The
Explorer Scheme was aimed at rewarding individual travel agency staff
with free travel on SAA flights in
return for reaching targets for
sale of SAA tickets.
[75] The override
incentive contracts concluded pursuant to the incentive scheme were
designed such that the agents received a flat
basic commission of 7%
for all of SAA’s sales up to a target specified in the
contract. When the target was reached, the
travel agents were
eligible for two further types of commission in addition to the basic
commission. An “override commission”
was paid if a travel
agent exceeded the base target. This commission was paid not only on
the amount in excess of the target but
on the figure of total sales;
hence the practice was referred to as the “back to rand one”
principle. A second commission
payment was made only on the amount of
growth in excess of the target (the incremental sales), determined
with reference to certain
thresholds. This was known as the “back
to rand base” principle.
[76] In the Nationwide
case, the Tribunal held that SAA through its incentive schemes in its
override agreements and Explorer Scheme
induced travel agents not to
deal with SAA’s rivals in the domestic scheduled air
transportation market and hence constituted
an exclusionary act under
section 8(d)(i). It held further that the exclusionary act had a
significant anti-competitive effect
on SAA’s rivals in that it
foreclosed the market to rivals. It found that while it was highly
likely that this foreclosure
had had an adverse effect on consumers
quantifying this harm was difficult.
[77] As already noted,
the agreements in issue in this appeal are contracts which SAA
concluded with travel agents during the period
June 2001 to March
2005. To recapitulate , those agreements comprised the “3
rd
generation” override contracts and trust payments (an SAA
acronym for “True partnership, Respect, Undivided support,
sharing of information, and Training of SAA product and knowledge).
Trust payments were introduced by SAA during 2001/02 partially
to
offset the effect of the reduction in the override payments in order
that travel agency business could remain viable.
[78] Viljoen pointed out
that the change was made on the basis of legal advice taken by SAA
and in recognition of the fact that
the override agreement was being
criticised by competition authorities and an alternative structure
needed to be put in place to
incentivise travel agencies to focus on
the building of SAA, and its market perception. The measurement of
the payment was not
related purely to growth of sales. Various other
more subjective and qualitative elements were introduced to determine
whether
a travel agency qualified for the trust payment.
[79]
In considering the anti-competitive effects of the override
agreements and trust payments the Tribunal enquired whether travel
agents were financially incentivised by SAA to move customers away
from rivals and towards SAA, and whether the travel agents had
the
ability to do so. The key findings of the Tribunal, in upholding the
complaint, were firstly
that, on the
evidence during the relevant period, travel agents had the ability to
influence customers’ preferences away from
other airlines and
in favour of SAA. A second question arose as to whether the financial
incentives offered by SAA during the period
had, in fact, induced
travel agents not to deal with rivals of SAA. The Tribunal concluded
that, on the evidence, the various agreements
had provided financial
incentives to travel agents to direct customers’ preferences in
favour of SAA and away from its rivals.
Accordingly, the Tribunal
found that the override agreements and the trust payments, both
separately and collectively, contravened
section 8(d)(i) of the Act.
Ability to Divert
[80] We turn first to
consider whether the Tribunal was correct in finding that during the
relevant period travel agents did have
the ability to influence
customer’s preferences to a large extent and whether, on the
basis of SAA’s argument, the
growth of the internet and other
direct sales channels had not eroded this ability to any significant
extent.
[81] SAA submitted that
travel agents do not have any significant ability to embark upon
directional selling. It argued that Comair
did not experience
significant growth despite retaining base commission after SAA
reduced base commission in 2005 and changed the
override agreements
in 2006. It pointed out that Venter of Comair conceded that the
agent’s ability did not allow the agents
to unilaterally decide
whether or not to sell an airline or to switch the tap on or off.
[82] SAA criticised the
evidence upon which Dr Federico relied to conclude that travel agents
have the power to divert passengers
to another airline. In SAA’s
view, the evidence upon which Dr Federico relied to support the
assertion of directional selling
ability, and which indicated that,
during the period between 2001/2002 and 2002/2003, Comair experienced
a 30% reduction, ignored
the reason why Comair’s market share
had reduced, that is that Comair had cannibalised its business in
favour of Kulula.
[83] SAA further argued
that it was significant that, even Bricknell of Nationwide, suggested
that the ability of travel agents
to divert traffic is relatively
small which he estimated to be approximately 10% of the market.
Bricknell accepted that there were
a number of constraints on the
agents’ ability to divert traffic such as loyalty programmes,
corporate agreements, frequency
of flights and scheduling. Viljoen
testified that there is a strong competition between travel agents
and a failure by a travel
agent to fully inform passengers of all
alternatives available to them would lead to a serious loss of
business because airline
travellers are educated and sensitive to
both price and fare restrictions.
[84] Harris also gave
evidence regarding the ability of travel agents to influence the
choice of carriers. She stated that the ability
of travel agents to
engage in directional selling was limited. She was aware that other
agents were doing it although her company
did not. Harris pointed out
the leisure/personal travel market was dictated by the needs of the
consumer , based on time or price.
With regard to the corporate
market ,those who were responsible for procurement were well informed
.Hence it was not likely that
they could be influenced to choose a
particular carrier which was not in the interest of their companies.
[85] The Tribunal found
that, while market conditions may have changed to some extent, the
ability of travel agents to influence
customers’ preferences to
a significant degree had not been affected by the changes. The
changes to which it referred were
the slow growth of internet sales
and introduction of Low Costs Carriers (LCC’s).
[86] The LCCs, which
relied mostly on the internet as a distribution channel, were suited
to and targeted primarily at non-time
sensitive (NTS) passengers,
whilst time sensitive (TS) passengers continued to rely heavily on
travel agents as their sales channel.
Customers and especially TS
passengers continue to rely on travel agents to compare the different
offerings available from the
rival airlines. In this regard Dr
Federico testified that during the relevant period travel agents
remained the route to market
for traditional carriers. Online sales
for full service carriers were very low. They were between 2% and 7%.
[87] Venter testified
that, even if passengers attempt to conduct an exercise in
comparison, it is simply not possible to see whether
in relation to a
particular booking request, a travel agent could have booked a
passenger a cheaper seat on the same or different
airline than the
one that was booked. This is because the information available to
travel agents on the GDS reflects constantly
changing prices
available to passengers on different airlines as a result of the
ongoing “yield management” practised
by airlines during
the period before a flight. Earlier prices and seat availability are
not recorded anywhere to make such a comparison
possible. This then
makes it impossible for passengers to determine whether or not a
particular sale by a travel agent is or was
the cheapest that could
be obtained for the passenger. It is this information asymmetry
between travel agents and passengers which
encourages travel agents
to engage in directional selling.
[88] Travel agents also
play an important role in advising large clients with which airline
to conclude corporate agreements. This
is another dimension in which
travel agents are able to direct traffic towards a particular
airline. Indeed in his witness statement
Viljoen acknowledged the
important role played by travel agents:
“
27.1 travel
agents offer a professional service to travellers;
travel agents ensure
ongoing intense inter and intra brand competition;
intra brand
competition translates itself into innovation in product offering
(including package tours and promotions);
...
27.7 travel agents and
their consultants offer specialised services ancillary
to the distribution of
air travel services. These specialised niche
services require
skills and expertise not currently held by SAA. The
costs required to
develop same would be large and again, could only
be recouped by
increased fares
.”
[89] To show evidence of
travel agents’ ability and incentive to influence airline
choices Dr Federico presented data on Comair’s
share of total
BSP for the five largest travel agent groups in South Africa, namely
Tourvest, Renfin (Bidvest), Sure Travel, SAA
City Centre and Excel
for the financial year 2001 – 2007. The data presented showed
Comair’s share was highest at Tourvest,
which was the group
that was the biggest supporter of Comair. The group of agents that
supported SAA during the period FY 2002
to FY 2005 appears to have
reacted most strongly to SAA’s incentive contracts and reduced
its support for Comair up to mid
2005 (from 18 % in FY 2001 to 13%
during the FY 2003 to FY 2005 period, and back up to above 14% after
June 2005).
[90] An email addressed
by Mr William Puk of Sure Travel to his managers after SAA had
announced its intention to move to a zero
commission structure,
provides evidence of travel agents ability to engage in directional
selling.
[91] The email states:
“…
It
has become very clear that we cannot rely on Saa for a decent
override agreement in future and our basic commission is about
to
disappear altogether. Furthermore I see no signs that their utter
contempt and disregard for travel agents is being reconsidered.
Therefore, I am formerly advising you that our group strategy is to
move our discretionary business away from Saa onto more agent
friendly carriers, hence the new deals with Virgin & Nationwide.
Our international priorities must now lie firmly with British
Airways, Virgin, Lufthansa, Nationwide, Cathay Pacific etc and
domestically with BA/Comair & Nationwide as a first priority.
An
effort and directive to this effect must therefore be communicated by
you to all your staff. It makes sense from a business
point of view,
0% commission from Saa and generally expensive GDS fares to sell to
consumers, versus standard guaranteed commission
from other airlines
(provided we move the business to them) and generally better value
fares for the consumer. We need to show
Saa in the months of Feb/Mar
& April that travel agents are still vital to their business and
that we can and will, direct
the business away from them.’”
Influence of
Overrides on Travel Agents
[92] The Tribunal found
that the override agreements and the trust payments, separately and
collectively were in breach of section
8(d)(i) as travel agents were,
in fact, induced to direct customers’ preferences towards SAA
and away from its rivals because
the incentive agreements rewarded
the agents for maintaining and achieving the sales of the previous
year (base) over the total
sales from rand one and trust payments
rewarded agents for increasing market share in both the domestic and
international markets
and for supporting SAA.
[93] SAA submitted that
the Tribunal erred in finding that the incentive agreements and trust
payments induced the travel agents
to direct customers’
preferences towards SAA and away from its competitors. It argued that
there was no correlation between
the overrides and the volume of
business received from travel agents. Viljoen testified that the
overrides were paid because SAA
did not want to take the chance of
losing business by not paying overrides. In providing for overrides
it merely followed the market
and the other airlines. He denied the
suggestion that overrides had an effect on travel agents’
decision in selling airline
tickets.
[94] Viljoen pointed out
that more than 40% of SAA’s agents were independent agents who
did not have override agreements but
yet they accounted for almost
half of its business. To demonstrate that the override agreements had
no influence on the volume
of business received from travel agents
Viljoen testified, with reference to exhibit 18 which indicated that
in the period when
SAA did not have override agreements with
Tourvest, its business grew by about 19 to 20 %. Viljoen also gave
evidence based upon
on exhibit 15, comparing Amex support during
2004/2005 (when the current generation overrides were in force) with
the years 2006/2007
(when the current generation overrides were
removed) and which revealed that the support received from Amex was
largely unchanged.
[95] SAA also referred to
the evidence of Mortimer who testified that even after
SAA
abolished the 7% base and had less favourable overrides compared to
Comair and Nationwide, SAA continued to be Amex’s
preferred
partner and Amex continued to focus on SAA due to SAA’s natural
market share.
[96] There were at least
three factors which played a major role in influencing travel agents’
decision to divert business
from SAA’s rivals to SAA.
[97] First, SAA offered
very large rewards for achieving base revenues, with additional
rewards for incremental revenues and market
share gains. SAA spent
approximately R300 million per annum on travel agents override
payments and trust payments. The risk of
losing the cash override
incentive retroactively was, in our view, a strong incentive for a
travel agent to reach target.
[98] Secondly, during the
relevant period there was no significant growth in the market for the
sale of tickets through travel agents.
Growth took place in the
market segment served by lower cost carriers and on-line sales by
full service carriers to non-time sensitive
passengers.
[99] Thirdly, travel
agents did not know during the course of the contract year whether
SAA targets had been met. This uncertainty
drove travel agents to
sell more SAA’s tickets.
[100] The Tribunal was
also correct in finding that a small rival trying to match the total
commission revenue offered by SAA, would
have to pay much higher
average commission rates. SAA was able, because of its capacity and
size, to offer alternative commission
rates to the travel agents.
[101] SAA was dominant in
the relevant market. It had a larger market share than its rivals. In
these circumstances it would be
particularly difficult for its rivals
to outbid it in the face of overrides based on overall sales volume.
By reason of its significantly
higher market share, SAA generally
constitutes an unavoidable business partner in the market. In order
to attract travel agents
with whom SAA had incentive agreements,
SAA’s rivals would have to offer them significantly higher
rates of override commissions.
[102] In the present
case, SAA’s market share was higher than that of Comair and
Nationwide in South Africa. Comair and Nationwide
were not in a
position to grant travel agents the same advantages as SAA, since
they were not capable of attaining a level of revenue
capable of
constituting sufficiently broad financial base to allow them
effectively to match override rates offered by SAA.
[103] It was Viljoen’s
evidence that in the 2001 incentive scheme agents were still paid the
standard 7% commission on each
ticket sold. They would still earn an
override commission on a back to rand one basis when they reached a
particular target calculated
on the value of all tickets sold up to
target (base). However, in relation to ticket sales post base, the
agents were no longer
paid a commission calculated on an override
basis but were paid a flat commission. This resulted in less revenue
for the agents
on sales made after reaching target. Trust agreements
were introduced to “compensate” agents for the losses
they would
incur as a result of amendment effected to the commission
structure payable post base.
[104] The overrides
agreements and trust payments were designed to continue providing
travel agents with the same level of reward
received under the 2
nd
generation agreements which the Tribunal in the Nationwide case found
violated section 8(d)(i). SAA employed the override agreements
and
trust payments structure as a tool to maintain its dominance in the
market for the distribution of the domestic airline tickets
through
travel agents. The evidence justifies the time and expense incurred
by SAA in implementing these arguments to maintain
its dominance in
the market.
Anti-Competitive
effects
[105] In the Nationwide
case the Tribunal set out its approach to section 8 (d)(i) and which
it subsequently endorsed and followed
in the present matter. It
stated that the anti-competitive effects for the purposes of section
8(d)(i) can be established either
by evidence of:
1. actual harm to
consumer welfare; or
2. if the exclusionary
act is substantial or significant in terms of its foreclosing the
market to rivals.
[106] The Tribunal
stressed that section 8(d)(i) did not require the showing of actual
harm. It was sufficient if there was evidence
that the exclusionary
practice is substantial or significant or it has the potential to
foreclose the market to competition. If
it is substantial or
significant, it may be inferred that it creates, enhances or
preserves the market power of the dominant firm.
If it creates,
enhances or preserves the market power of the dominant firm it will
be assumed to have an anti-competitive effect.
[107] In the present
dispute, the Tribunal held that for purposes of its enquiry it was
sufficient for it to show that SAA’s
incentive scheme had the
potential or did in fact foreclose its rivals in the domestic airline
market.
[108] Applying the
effects based approach the Tribunal found that there was sufficient
evidence for it to find that SAA’s
conduct had a significant
anti-competitive effect on both Nationwide and Comair in that it
impeded their growth in that segment
of the domestic airline travel
market distributed through travel agents.
[109] It was submitted on
SAA’s behalf that the Tribunal erred in applying a ‘form-based
approach ‘ in considering
the anti-competitive effect of its
conduct and further that even on the approach adopted by the Tribunal
there was insufficient
evidence of anti-competitive effects in the
present matter. SAA argued that the Tribunal significantly
misdirected itself by focusing
on the design of the overrides. It
pointed out that the notion that the form of the agreement per se is
indicative of actual harm
to consumer welfare or indicative of a
substantial or significant foreclosure effect to rivals, was wrong.
[110]
Mr Subel
sought to buttress this argument that, absent
consumer harm in the form of an increase in price or a reduction in
output, there
had been no breach by SAA of section 8(d)(i). He
referred in this connection to an article which had been co-authored
by Nationwide’s
expert Dr Niels in which the following was
stated:
“
EU case law on
abuse has for years been criticised as legalistic and
interventionist, and the current review is seen by many as
an
opportunity for change. Various commentators have stressed the
desirability of moving towards an approach that emphasises the
actual
or expected economic effects of allegedly abusive behaviour by
dominant firms, rather than its form
”.
In short, SAA contended
that the Tribunal had found against SAA, which finding was not based
on evidence of price or output effects
to justify a finding of
anti-competitive effects in the market. There had been no proof of
economic effects and hence the degree
of foreclosure as well as any
evidence of foreclosure was insufficient to justify its finding.
[111] By contrast,
Mr
Subel
emphasized the counterfactual period, the post 2005 when a
new commission structure was introduced, that is in May 2005. As
noted,
this resulted in a significant reduction of the base
commission from 7% to 1%, a flat commission on overrides and the
abolition
of the ‘back to rand one’ principle. From April
2006 the base was the same for all agents (R2 million) and the rates
were the same for all agents (3.5% premium and 3% discount). In this
connection, Viljoen examined Amex’s support of SAA during
the
04/05 period when the 3
rd
generation overrides were in
operation with the 06/07 period when the overrides had been abolished
and, stated that SAA’s
market share support from Amex remained
unchanged. Dr Affuso sought to support this contention by testifying
that, if Comair and
Nationwide’s allegations had been correct,
it would have been expected that they would grow and increase their
market share
after the change in SAA’s agreement structure in
2005 and 2006, but instead no material change was evident.
[112] These submissions
need to be interrogated through the wording of the Act. Section 8 of
the Act makes it clear what is necessary
in order to establish an
anti-competitive effect. It includes the consideration that, if the
exclusionary act is substantially
significant, in terms of its effect
in foreclosing the market to rivals, the section applies. This
approach can be established
either by way of evidence of actual
competitive harm or by evidence that the exclusionary practice is
substantially significant;
that is the practice has the potential to
foreclose the market to competition, in which case an
anti-competitive effect can be
inferred.
[113] As
Mr
Unterhalter
, observed, the overall incentive structure created by
the 3
rd
generation contracts together with the trust
payments contained certain characteristics which were manifestly
designed to achieve
a form of foreclosure. These included:
1. Very high marginal
payments if the target was met;
2. Incentives to travel
agents to concentrate their directional selling efforts in favour of
a single carrier through “back
to rand one” incentives,
the effect of which approximated exclusivity on the part of such
travel agents;
3. Incentives that were
tailored to the market position of each specific travel agent and
which were accordingly designed to have
a maximal impact on the
conduct of each agent; and
4. Targets that were
constructed around measures of flown passengers and flown revenue,
which information typically was not known
to travel agents, with the
result that travel agents were uncertain whether or not they had
achieved such targets and accordingly
had heightened incentives to
support a single carrier.
[114] A key question
therefore was whether this design had the necessary effect to justify
the invocation of section 8.
[115] During the relevant
period, the share of total market sales enjoyed by Comair, for
example through travel agents declined
by less 20%, the level of
Comair’s overall sales with travel agents fell by 14% during
the relevant period whereas correspondently
that of SAA rose by 16%.
[116] Arguably a more
significant piece of evidence was Comair’s share of Amex during
the two year period when Amex did not
have an override agreement with
SAA. During this period, the sale of Comair’s tickets was
contrasted with those tickets sold
through other agents who had
override agreements with SAA. Comair’s share of sales rose from
27% to 36% compared to a comparative
decline from 18 to 13 % of sales
through other agents who had such override agreements.
[117] This conclusion was
also supported by a comparative analyses of SAA’s share of
flown revenue at Amex and Bidvest during
the relevant period when SAA
had an override agreement with Bidvest but not with Amex. During this
period SAA’s share of
revenue through Amex declined by
approximately 6 percentage points whereas its revenue through Bidvest
increased by approximately
5 percentage points.
[118] This evidence,
which did not appear to be contested by Dr Affuso, the chief economic
witness for SAA, revealed the effects
of directional selling by
travel agents. A further examination of the change in flown revenue,
passengers and yields between SAA
and Comair during the period
1999/2000 to 2004/2005 revealed material discrepancies in the growth
between the two airlines. Indeed
during the relevant period the
passenger numbers of Comair declined.
[119]
Mr Unterhalter
noted that SAA sought to explain the discrepancies by way of two
contradictory theories. In the first place Comair’s
underperformance
relative to SAA came about because Comair was more
adversely affected by the entry of Kulula than was SAA; in other
words Comair
cannibalised itself disproportionately to the successful
introduction of Kulula. The second theory was that SAA’s
yields,
relative to those of Comair during the relevant period were
as a result of intense competition from low costs carriers which
presumably
impacted upon SAA more than was the case with Comair.
[120] The first theory is
somewhat implausible for the following reason: Given the common
ownership between Kulula and Comair, there
was no incentive to
cannibalise Comair revenues, nor would the latter have had any
incentives to compete with Kulula on price to
retain non time
sensitive passengers (NTS passengers) on its flights; because Comair
would, in any event, secure the benefit of
those passengers on
Kulula. By contrast, SAA would have had every incentive to lower its
fares in order to prevent its NTS passengers
from migrating to Kulula
because the loss of those passengers would represent a net loss of
revenue to it.
That is what happened
when SAA introduced “X fares” which were low-priced fares
intended to match Kulula on SAA’s
flights. The introduction of
X fares would ordinarily have suppressed its yields relative to
Comair given the low prices of those
fares. However its yields in
fact increased significantly relative to those of Comair during the
period.
[121] The evidence on
relative yields is not explicable in terms of SAA’s first
theory, but it is explicable in terms of Comair’s
explanation,
namely that SAA’s incentive agreements caused directional
selling of time sensitive passengers (“TS passengers”)
from Comair to SAA, thereby resulting in a net increase in the
latter’s yields, notwithstanding the negative effect of the
X
fares introduced by SAA at that time.
[122] The second theory
which is inconsistent with the first theory has similar difficulties.
While this theory could conceivably
account for SAA’s increased
relative yields (in that SAA lost a greater number of NTS passengers
than Comair to LCCs) it
could not explain the data on revenues and
passengers. SAA’s revenues and passenger numbers increased more
than those of
Comair over the relevant period, which is inconsistent
with this second theory. The relative increases in SAA revenues and
passenger
numbers are consistent with Comair’s explanation that
SAA captured greater numbers of TS passengers at its expense as a
result
of its incentive agreements with travel agents.
[123] Significantly,
whilst Nationwide was able to grow the NTS segment of the market,
similarly to Kulula, it suffered significant
foreclosure in the
travel agent’s segment and accordingly, in the far more
lucrative TS passengers segment.
[124]
Mr Gotz
, who
appeared on behalf of Nationwide, referred to the following evidence
in support of this conclusion. Viljoen was provided with
an extract
from SAA’s 2006 Annual Report, which reflects the analysis of
SAA concerning the cutting of the base commission
(with effect from 1
May 2005), and the changes in the override incentive scheme, and
indicating that travel agents directed business
to SAA’s rivals
Mr Viljoen was asked whether he accepted ‘that SAA’s
clear view, as it reports the facts to the
shareholders and to
members of the public, is that the trade can direct business away
from you towards your competitors.’
He replied as follows:
‘
Mr Viljoen
:
That’s certainly the position that Khaya Ngqula has taken in
his report. It’s not my report.
Adv Gotz
:
It’s not your report, but it’s certainly SAA’s
clear view that that’s what happened. Once commissions
were cut
and the overrides disappeared, the structure of the arrangement
followed. Your fears were realised, weren’t they?
MR VILJOEN
:
It could well be. I don’t have the facts of the time and if one
goes on what they are stating, then it must be correct.
ADV GOTZ
:
Every witness in these proceedings so far has testified that as far
as they are concerned, travel agents do have the ability and
did
direct business away from Nationwide and Comair towards SAA’s
consequence of this structure and your view is different.
MR VILJOEN
:
No, I didn’t say that don’t. I said I’m not 100%
sure that it is a powerful ability and an ability to powerfully
move
it. I said right from the start on the one hand I believe they can
affect it, but how much…
…
ADV GOTZ
: I
don’t think anybody is saying that it’s possible to
divert the entire market from one airline to another, but I
think you
fairly conceded that there is that ability.
MR VILJOEN
:
There is some ability. But again, can it be sustained?’
[125] Similarly Ms Harris
accepted that travel agents had the ability to direct business away
from Nationwide and Comair towards
SAA, as is evident in the
following passage.
‘
ADV SUBEL
:
When a client requires a ticket on one of these routes…
MS HARRIS
: One
ticket?
ADV SUBEL
: A
ticket or even a series, your ability to influence,
improperly influence,
in other words, other than in the client’s interest, the
choice.
MS HARRIS
:
Well, again I’m going to say that I suppose the ability could
be there, because one could find or have some relationship
with an
airline where perhaps that airline would seek to influence you
financially or otherwise, but again I don’t believe
that would
be sustainable.’
Ms Harris confirmed that
travel agents in the Rennies Group had a discretion, with which to
influence customers.
‘
ADV
UNTERHALTER
:
But I think you will also accept, as I think you have, but there is
this ambit of discretion and within it you are exercising
a judgment
in formulating the recommendation?
MS HARRIS
:
Correct.
ADV UNTERHALTER
:
And I think you also would accept given all of this that it is a
complex judgment, not just because of the many factors that are
involved in it, but also because you are trying to make an assessment
of, as it were, an answer which is meant to summarise all
kinds of
different preferences that are made up within a corporate as you have
described there are many interests, many specific
preferences and you
are trying to, as it were, summarise all of that up and say well
ultimately this is the recommendation that
we have is that correct?
MS HARRIS
: That
is correct.’
[126] Returning to the
nature of the incentive agreements, viewed within the context of the
dominant position of SAA in the relevant
markets, the following
findings in the first Oxera report are instructive.
SAA’s
competitors are significantly smaller than it, thus it would be
difficult for them to sustain the same marginal
incentives at an
affordable level of overall commissions due to having a base that
is a fraction of the total of SAA. If the
smaller rival adopted the
same override structure (ie, the same override percentage to be
applied back to Rand one), the size
of the reward to the travel
agent for meeting the target would be much smaller. Only by setting
a significantly higher override
percentage would the total reward
for meeting a threshold be equivalent across airlines. However, in
setting a much higher
override percentage to be applied back to
Rand one, the smaller rival would incur a much higher average
commission applied
across its total sales revenue.
or example, in
2002/03, Nationwide’s total revenues were only 16% of SAA’s.
If SAX and SAL revenues are considered
as well, this percentage is
reduced further.
Shifting significant
market share away from SAA to a competitor the size of Nationwide
would imply the need to set much higher
overrides, and consequently
much higher average commission rates. In the Sure Travel 2002/03
example above, reducing SAA’s
market share by 5% (ie, moving
from Base to Base – 5%) would lead to reduced commissions for
the agent of R57.8m. Were
Nationwide to match the lost commission
for Sure Travel, this would imply average commission rates of 43.5%
for Nationwide
on the gained customers.
Nationwide would
need to pay the 43.5% average commission on a significant
percentage of revenue, while paying 7% standard commission
on the
remaining revenue. The example leads to a 15.8% average commission
on Nationwide’s total revenue.
If the travel agent
were to meet the SAA override target, on the other hand, it would
only pay the 43.5% average commission
on 5% of its revenue, and 7%
standard commission on the remaining 95%. This would imply much
lower average commission (8.8%)
on total revenue for SAA.
This higher
commission rate faced by Nationwide would represent a competitive
disadvantage, undermining their potential for
growth. This was also
recognised by the Tribunal, as shown in paragraph 166:
Furthermore, as the
rivals are not dominant firms, their schemes whilst similar to SAA’s,
are always going to be ineffectual
– they simply do not have
the market share to change the incentives of travel agents unless
they drastically increased the
compensation to agents. Holt argues
that this would have to be to a level that is unaffordable to them.
”’
Performance in
terms of sales and yields
[127] These conclusions
are also supported by a further examination of performance based on
sales and yields. The evidence before
the Tribunal showed that SAA
outperformed BA/ Comair during the period 1999/00 and 2004/05 (See
Tribunal decision, paragraph 195,
Table 6). Table 6 indicated changes
in the performance of SAA and BA/Comair over the relevant period in
terms of overall flown
revenue, overall flown passengers and yields.
It showed that SAA’s flown revenue grew by almost 40% over the
relevant period
representing a three-fold difference in absolute
revenue growth. It further showed that SAA also outperformed BA/
Comair in terms
of growth of passengers and yields.
[128] The Tribunal found
that the inference to be drawn from SAA’s superior revenue and
yield performance over BA/Comair was
that SAA was able to capture
more of the high-yield passengers than BA/Comair as a result of
directional selling pursuant to SAA’s
incentive agreements with
travel agents.
[129] SAA argued that the
real and probable reasons for the market share picture in the
relevant period were, firstly, its product
offering; secondly Comair
Cannibalisation Strategy; and thirdly the Nationwide product was less
attractive to the consumers.
[130] As regards its
product offering, SAA argued that the market reflected its natural
market share which it would have had irrespective
of override
agreements because it improved the quality of its product offering
during the relevant period, including the introduction
of an advanced
yield management system which in turn optimised the average yields.
[131] In support of its
contention, SAA referred to the evidence of Mortimer who testified
that factors such as routing, capacity,
brands, investment and
loyalty programmes, sales team and market reputation gave SAA
competitive edge over its rivals. Viljoen
also testified that SAA had
the best fleet compared to Comair, Kulula or Nationwide. He pointed
out that the FAT principle (frequency
availability and timing) was
greater with SAA than any other airline and made it the more
attractive competitor.
[132] But the factors
which SAA argued contributed to its market share were however, not
unique to SAA. There is evidence which
indicated that throughout the
relevant period the quality of BA/Comair’s product offering was
at least as good as that of
SAA, particularly in terms of its
frequent flyer programme, service levels, safety, reliability,
interconnecting passengers and
focus on business class passengers.
The fact that the incentive agreements scheme was conducted by a firm
such as SAA which had
a high degree of dominance in the relevant
market made it an unavoidable trading partner for the major travel
agents and most consumers
would be likely to expect a travel agent to
offer SAA flights.
The contravention
of section 8(d)
[133] In summary, the
strategy devised by SAA through override agreements and trust
payments had anti-competitive effects. The evidence
reveals that SAA
is a dominant firm and it is trite that a strategy which had a
foreclosure effect in the market will be regarded
as contrary to
section 8(d) if it is applied by an undertaking in a dominant
position.
[134]
This principle is succinctly expressed by the General Court of the
European Union in
(
Tomra
Systems ASA and Others v European Commission
)
,
case no T-155/06 delivered on 9 September 2010.
[135] At paragraphs
206-207 the General Court held:
“
[206]
It is appropriate to recall that, according to settled case-law, the
concept of abuse is an objective concept relating to
the behaviour of
an undertaking in a dominant position which is such as to influence
the structure of a market where, as a result
of the very presence of
the undertaking in question, the degree of competition is weakened
and which , through recourse to methods
different from those which
condition normal competition in products or services on the basis of
the transactions of commercial
operators, has the effect of hindering
the maintenance of the degree of competition still existing on the
market or the growth
of that competition. It follows that Article 82
EC prohibits a dominant undertaking from eliminating a competitor and
from strengthening
its position by recourse to means other than those
based on competition on the merits. The prohibition laid down in that
provision
is also justified by the concern not to cause harm to
consumers (Case T-65/98 Van den Bergh Foods v Commission [2003] ECR
II
-4653,
paragraph 157).
[207]
Whilst the finding of a dominant position does not in itself imply
any criticism of the undertaking concerned, that undertaking
has a
special responsibility, irrespective of the causes of that position,
not to allow its conduct to impair genuine undistorted
competition on
the common market (Case 322/81 Nederlandsche
Banden-Industrie-Michelin v Commission
[1983] ECR 3461
, paragraph 57,
and Case T-201/04 Microsoft v Commission ECR
II
-3601,
paragraph 229). Likewise, whilst the fact that an undertaking is in a
dominant position cannot deprive it of its entitlement
to protect its
own commercial interests when they are attacked, and whilst such an
undertaking must be allowed the right to take
such reasonable steps
as it deems appropriate to protect those interests, such behaviour
cannot be allowed if its purpose is to
strengthen that dominant
position and thereby abuse it (Case 27/76 United Brands and United
Brands Continentaal v Commission
[1978] EUECJ C-27/76
;
[1978] ECR 207
, paragraph 189, and
Michelin
II
,
paragraph 55).” [
See
also Eleanor Fox ‘What is harm to competition? Exclusionary
Practices and Anti Competitive Effect’ (70)
Anti
Trust Law Journal
370].
[136]
While this
dictum
reflects
the approach adopted by the European Courts to the competition regime
enshrined in Articles 101& 102 of the European
Treaty, the Act
mandates an approach which is not dissimilar.
The
design of the Act, particularly its objectives as set out in section
2, makes it clear, that the Act is concerned to protect
a competitive
process. That this enquiry entails an examination into the effects of
an exclusionary act means that, if the evidence
supports such a
conclusion, foreclosure of rivals triggers an application of section
8(d). In this case, the design of the impugned
agreements, the cost
to SAA in funding the benefits which were paid to the travel agents,
in themselves constitute clear indications
of the purpose sought to
be achieved by SAA, as a dominant firm .
The evidence showed that
Comair and Nationwide’s share of the total market sales through
travel agents declined over the relevant
period, when the agreements
were operating between SAA and the travel agents. The cross sectional
analysis produced by Comair and
Nationwide’s experts revealed
that the presence or absence of override commissions had a material
effect on the respective
airlines share of the defined market, which
was particularly marked in the directional selling by travel agents
of TS passengers
in favour of SAA and against its rivals.
[137] SAA sought to
counter this conclusion with regard to the Comair strategy, by
arguing that Comair had been less candid with
the Tribunal in
relation to its strategy and how it has operated the Kulula and
Comair brands. It contended that it was significant
that up until
Kulula entered the market, the Comair brand was growing quite
healthily but this changed dramatically when Kulula
came onto the
scene. In other words, it is suggested by SAA that BA/Comair
cannibalised itself disproportionally through the successful
introduction of Kulula.
[138] While this
cannibalisation theory could account for the relative reduction in
BA/Comair’s total revenues and passengers
it cannot, however,
explain the data on yields. If Comair was losing more NTS passengers
as a result of Kulula’s entry than
SAA was, Comair’s
yields would have risen in relation to those of SAA because its
passenger base would be made up of more
high-yield passengers.
[139] As regards
Nationwide products, SAA submitted that Nationwide’s safety
record and the perception that it was unsafe,
together with its
financial upheavals, contributed to its being a less favourable
airline to the consumers.
[140] While it may be
correct that Nationwide’s safety record and financial upheavals
might have been to blame for the drop
of its market share over the
relevant period it is clear that the SAA incentive agreements were
more likely to have an anti-competitive
effect on Nationwide.
[141] The evidence
indicated that whilst the average yield differential between SAA and
Nationwide was 38% in 1999/00 it widened
by almost 20% by 2004/05.
Over the same period, the average yield differential between
Nationwide and Kulula dropped by 50%, from
37% in 2001/02 to 18 % in
2004/05.
[142] There was
accordingly a clear drop in Nationwide’s average fares towards
the bottom end of the market and away from
SAA which suggested that
Nationwide’s growth was achieved only in the non-time sensitive
part of the market, and that it
was foreclosed from the high-yield
time sensitive part of the market as a result of SAA’s
incentive agreements.
[143] Dr Federico
testified that Comair, SAA’s closest competitor in terms of its
business model, under-performed SAA in terms
of overall revenues and
sales to travel agents. He pointed out that during the period
1999/2000, 2004/05, Comair’s overall
revenue actually fell
slightly while SAA’s revenues grew by over R600 million,
equivalent to a 27% growth.
[144] In terms of the
sales to travel agents during the same period, SAA revenues grew by
16% whilst Comair’s revenues fell
by 14 %. He further testified
that the evidence across travel agents, most notably the performance
of Tourvest vis-à-vis
the rest of the travel agents market,
also indicated that travel agents support plays an important role in
explaining its under
performance. For instance Amex, which is part of
the Tourvest Group, did not have an agreement with SAA between
2001/2003 and Comair’s
share at Amex and in part Seekers
increased during this period up to 2003/04 whilst its share at most
travel agents had declined
during that period.
[145] Dr Federico pointed
out that it was unlikely that the entry of Kulula in 2001 could be an
alternative explanation for Comair’s
under-performance for
three reasons. First, Kulula and BA/Comair are under Comair’s
ownership and are designed to offer complementary
offerings rather
than competing against each other. Secondly, SAA’s average
increase relative to BA/Comair during this period
indicates that SAA
did not compete harder than BA/Comair to fight the potential threat
from Kulula in order to protect sales which
in turn implies that
SAA’s better performance is not explained by more competitive
prices and more volumes. Thirdly, there
was a possibility that travel
agents sheltered SAA from the impact of Kulula.
[146] In conclusion SAA’s
conduct substantially foreclosed the relevant market to its rivals
and such conduct accordingly
had the requisite anti-competitive
effect for purposes of establishing a contravention of section
8(d)(i) of the Act.
Efficiency of the
SAA’s conduct
[147] The question is
whether there was any technological, efficiency or other
pro-competitive gain from SAA’s anti-competitive
conduct. The
Tribunal found that there was no credible evidence of any efficiency
achieved through the incentive scheme placed
before it. This finding
was not challenged by SAA and it therefore stands.
The approach to
evidence
[148] Regrettably, the
repetitive nature of the voluminous record coupled with much
irrelevant evidence, particularly from expert
economists, who
provided the Tribunal with the benefit of their views on the proper
interpretation of the wording of the Act which
is manifestly to be
undertaken by the Tribunal and this Court compels some remarks.
[149] In a number of
cases, this court has been subjected to excessively lengthy records
caused by the admission of evidence that
is plainly inadmissible,
such as economists seeking to advise on strictly legal issues,
together with lack of definition of the
issues in dispute and,
arguably some uncertainty about whether the procedure to be adopted
is of an inquisitorial or accusatorial
nature. These problems have
contributed to excessively lengthy and costly proceedings and records
that make it even more difficult
to read than is usually the case to
conduct appellate proceedings.
For these reasons,
consideration needs to be given to the use of the ‘hot tub’
method of hearing evidence of experts.
In terms of this method, the
experts are afforded the opportunity of meeting with each other so as
to determine what is common
cause between them and what remain
relevant disputes. On the strength of these conclusions, the
proceedings before the Tribunal
can be confined to that which is in
dispute. A relaxation of the adversarial system would allow the
Tribunal to assess the merits
of the differences of expert testimony
which, would also add much needed coherence to the record and,
arguably, significantly reduce
the length of proceedings.
[150] Similarly pre-trial
conferences need to be utilised more effectively to define the issues
to be determined. For example, in
this case, great time, energy and
expertise were taken up with questions of market power of SAA, yet
the finding that SAA had more
than 45% of the market was hardly
disputed on appeal. The point is that greater intervention is
required to ensure a crisper and
more nuanced definition of the
issues that are required to be determined.
[151] In the result, the
appeal is dismissed with costs, including the costs of two counsel.
________________
ZONDI AJA
_______________
DAVIS JP
________________
PATEL JA agreed
1
Section
8(d)(i) of the Act provides as follows
:
Abuse
of dominance prohibited
It
is prohibited for a dominant
firm
to-
(a)
…
(d)
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:
(i)
requiring or inducing a supplier or customer to
not deal with a competitor;
2
Section
8 (c)
It
is prohibited for a dominant
firm
to-
(c)
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.
3
Section
65(6)(b) provides
:
(6)
A person who has suffered loss or damage as a result of a
prohibited
practice
-
(a)
…
(b)
if
entitled to commence an action referred to in paragraph
(a)
,
when instituting proceedings, must file with the Registrar or Clerk
of the Court a notice from the Chairperson of the Competition
Tribunal, or the Judge President of the Competition Appeal Court, in
the
prescribed
form-
(i)
certifying that the conduct constituting the
basis for the action has been found to be a
prohibited
practice
in terms of
this
Act
;
(ii)
stating the date of the Tribunal or Competition
Appeal Court finding; and
(iii)
setting out the section of
this
Act
in terms of which the Tribunal or the Competition Appeal Court made
its finding.
4
Section
49D(1) and (4) provides:
49D
Consent orders-
(1)
If, during, on or after the completion of the investigation of a
complaint, the Competition Commission and the
respondent
agree on the terms of an appropriate order, the Competition
Tribunal, without hearing any evidence, may confirm that
agreement
as a consent order in terms of section 58 (1)
(b)
.
(4)
A consent order does not preclude a
complainant
from applying
for-
(a)
a declaration in terms of section 58 (1)
(a)
(v)
or (vi); or
(b)
an award of civil damages in terms of section 65, unless the consent
order includes an award of damages to
the
complainant
.
5
Section
58 (1)(a) and (b) provides:
58
Orders of Competition Tribunal
-
(1)
In addition to its other powers in terms of
this Act
, the
Competition Tribunal may-
(a)
make an appropriate order in relation to a
prohibited
practice
,
including-
(i)
interdicting any
prohibited
practice
;
(ii)
ordering a party to supply or distribute goods or
services to another party on terms reasonably required
to end a
prohibited
practice
;
(iii)
imposing an administrative penalty, in terms of section
59, with or without the addition of any other order
in terms of this
section;
(iv)
ordering divestiture, subject to section 60;
(v)
declaring conduct of a
firm
to be a
prohibited
practice
in terms of
this
Act
,
for purposes of section 65;
(vi)
declaring the whole or any part of an
agreement
to be void;
(vii)
ordering access to an
essential
facility
on terms reasonably required;
(b)
confirm a consent
agreemen
t in terms
of section 49D as an order of the Tribunal;
6
Section
49(2)(b) provides:
49
Conduct of entry and search
-
(1)
…
(2)
During any search under section 48 (1)
(c)
, only a female
inspector or police
officer
may search a female person, and only a male inspector or police
officer may search a male person.
7
Section
7 of the Act provides:
7
Dominant firms-
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
.