COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case no. 92/IR/Oct00
In the matter between
Nationwide Airlines (Proprietary) Limited
Nationwide Air Charter (Proprietary) Limited
Nationwide Aircraft Maintenance (Proprietary) Limited
Nationwide Aircraft Support (Proprietary) Limited Applicants
and
South African Airways (Proprietary) Limited First Respondent
South African Express Airways (Proprietary) Limited Second Respondent
South African Airlink (Proprietary) Limited Third Respondent
______________________________________________________________________
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DECISION ON APPLICATION FOR INTERIM RELIEF IN TERMS OF
SECTION 59
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INTRODUCTION
South Africa’s airline industry has experienced a sharp escalation in operating costs
recently. Between August and November this year jet fuel prices have increased by
56% from their July level. At the same time the randdollar exchange rate has changed
unfavorably. The applicants say these escalations in their costs have forced them to
upwardly adjust their prices over this period. The respondents, who are their
competitors, did not. The applicants claim, that based on the respondents’ own figures
their (the respondents) costs ought to have increased by at least 20% over this period.
The applicants contend that the respondents’ passivity in the face of rising costs
amounts to predatory pricing and request us to order the respondents to increase the
prices of certain classes of their tickets by 20%. They also allege that the respondents
are engaged in two other prohibited practices of an exclusionary nature. The first of
these practices relates to agreements, which the respondents have with travel agents to
provide them with override commissions and other incentives. The second is that they
allege the respondents are engaged in an unlawful campaign to recruit their pilots. They
seek cease and desist orders in relation to the latter two practices.
We have decided that the applicants have failed to establish their claim in terms
of section 59 and have declined to grant them interim relief. Our reasons appear
more fully below.
PART A BACKGROUND
1. PROCEDURE
This application for interim relief is brought by Nationwide Airlines against South African
Airways (SAA), South African Express (SAX) and SA Airlink (SAL). The application is in
pursuance of a complaint which was lodged with the Competition Commission on 13
October 2000. This complaint was accepted by the Commission on 17 October 2000.
On 31 October 2000, the Applicants filed an application with the Tribunal seeking
various orders in terms of Section 59, pending an outcome of the Commission’s
investigation. On 1 November 2000, the Applicants filed a supplementary Notice of
Motion requesting, in terms of Rule 28(5) of the Tribunal Rules, that the Tribunal
shorten the time periods required for the filing of papers and hearing of the interim relief
proceedings. In consultation with the parties the requisite time periods were shortened.
The prehearing conference was held on 7 December 2000 and the hearing on 13
December 2000.
II. THE PARTIES
The Applicants are the Nationwide Airlines Group comprising Nationwide Airlines
(Proprietary) Limited, Nationwide Air Charter (Proprietary) Limited, Nationwide Aircraft
Maintenance (Proprietary) Limited and Nationwide Aircraft Support (Proprietary) Limited
(the “Applicants” or “Nationwide”). Nationwide Airlines makes this application on behalf
of the Group.
Nationwide has been operating its scheduled passenger service since 1995, when it
decided to expand upon its existing express parcel air cargo, passenger and executive
charter operations and introduce a scheduled passenger carrier service in the South
2
African domestic market. Nationwide has since then established itself as a competing
domestic carrier, providing services throughout the South African market. Nationwide
currently operates scheduled passenger services on the primary routes from
Johannesburg to Durban, Cape Town and George. It also operates nonscheduled
flights to Zimbabwe, Mozambique, Mombasa, various destinations in West Africa, and,
on occasion, ad hoc services to Paris and Vienna.
The first respondent is South African Airways (Pty) Ltd, (the “first respondent” or “SAA”),
who operate a domestic and international passenger and cargo scheduled airline. SAA
was incorporated on 1 April 1999. Its major shareholders are Transnet Limited, which
holds 75% of the entire issued share capital, S. Airlines Europe BV, which holds 20%
and the South African Airways Employee Share Trust which holds 5%.
The second respondent is South African Express Airways (Proprietary) Limited (“SAX”)
(the “second respondent”) who operates a domestic and cargo scheduled airline only.
SAX is controlled by Transnet, who holds 76.01% of its issued share capital and Thebe
Investment Corporation Limited, who holds 23.99% thereof.
The third respondent is South African Airlink (Proprietary) Limited (“SAL”). The present
shareholders of SAL are Osprey Airline Investments (Proprietary) Limited who hold
45.9% of the entire issued share capital, Rodger Arnold Foster, who holds a 19.35%
shareholding, Barrie James Webb, who holds 19.35% thereof and SAA, whose
shareholding amounts to 10% of the entire issued share capital.
III. THE COMPLAINT
Nationwide bases its application for relief against SAA on various alleged restrictive
practices outlawed by the Act:
a. The first category of restrictive practices is set out in section 8(d)(iv) and prohibits
a firm from abusing its dominant position by:
“selling goods or services below their marginal or average variable cost”
“selling goods or services below their marginal or average variable cost”
Nationwide alleged that SAA’s failure to increase their air fares on the relevant
three citycity routes in accordance with fuel price increases since August 2000,
as well as their failure to adjust their prices to offset the depreciation of the Rand
against the US Dollar, was tantamount to pricing below their marginal or average
variable cost on these routes.
b. The second category of abuse in terms of 8(d)(i) prohibits a dominant firm from
engaging in exclusionary acts, more specifically:
3
“requiring or inducing a supplier or customer not to deal with a
competitor”
Nationwide referred to certain “preferredcarrier” agreements SAA had concluded
with certain travel agents, insofar as they are a supplier of services to an airline,
which essentially provided the agents with certain loyalty rebates and
performancerelated commissions (in accordance with predetermined growth
targets), thereby inducing such travel agents to channel business to SAA to the
exclusion of Nationwide.
c. Alternatively to paragraph (b) above, Nationwide relied on section 5(1) of the Act
which proscribes restrictive practices in a vertical relationship, more particularly:
“Any agreement between parties in a vertical relationship is prohibited if it
has the effect of substantially preventing or lessening competition in a
market, unless a party to the agreement can prove that any technological,
efficiency or other procompetitive gain resulting from that agreement
outweighed that effect.”
Nationwide contended that insofar as the agreements concluded by SAA with the
various travel agents had the effect of substantially preventing or lessening
competition, they should be cancelled.
d. Finally Nationwide relied on the general exclusionary provision under section 8
(c) prohibiting a dominant firm from:
“engaging in an exclusionary act, other than an act listed in paragraph (d),
if the anticompetitive effect of that act outweighs its technological,
efficiency or other procompetitive gain.”
Nationwide averred that SAA’s alleged conduct in soliciting and employing a
number of the Applicants’ staff, specifically Boeing 737 pilots, amounted to an
anticompetitive exclusionary act by a dominant carrier.
The nature of the relief being sought under section 60(1)(a) is to order SAA to refrain
The nature of the relief being sought under section 60(1)(a) is to order SAA to refrain
from committing the aforementioned acts or practices, pending an investigation by the
Competition Commission and possible referral to the Competition Tribunal for
adjudication. Specifically, Nationwide sought an order ordering SAA to:
1. cease and desist from the practice of granting travel agents, their employees or
particular groupings of travel agents, loyalty and special rebates, discounts and
all other forms of reward which require or induce such persons to channel
4
business to the Respondents; 1 and
2. to declare null and void all agreements and arrangements currently in force in
support of such practice; and
3. upwardly adjust their airfare prices (published and unpublished) on the
JohannesburgCape Town, JohannesburgDurban and JohannesburgGeorge
routes by a percentage that is in line with the cumulative cost increases
experienced since August 2000 as outlined in paragraphs 37,38,39 of the
Founding Affidavit; 2 and
4. cease and desist from the practice of soliciting and offering employment to
Nationwide’s pilots and in particular, its Boeing 737 Captains.
PART B – ASSESSMENT
I. REQUIREMENTS FOR INTERIM RELIEF
Nationwide seeks relief in terms of section 59 of the Act. Section 59(1) states that:
“At any time, whether or not a hearing has commenced into an alleged prohibited
practice, a person referred to in section 44 may apply to the Competition Tribunal for an
interim order in respect of that alleged practice, and the Tribunal may grant such an
order if:
a) there is evidence that a prohibited practice has occurred;
b) an interim order is reasonably necessary to:
i) prevent serious, irreparable damage to that person; or
(ii) to prevent the purposes of this Act being frustrated;
(c ) the respondent has been given a reasonable opportunity to be heard,
having regard to the urgency of the proceedings; and
(d) the balance of convenience favour the granting of the order.”
We must now examine whether Nationwide’s claim meets the requirements of section
59.
1 Subsequently amended, see page 21.
2 Subsequently amended, see page 20.
5
II. SECTION 59(1)(A) IS THERE EVIDENCE THAT A PROHIBITED PRACTICE
HAS OCCURRED?
Section 59(1)(a) requires “evidence” of a prohibited practice.
Nationwide has alleged that SAA has perpetrated three different prohibited practices.
We will now examine each one in turn.
1. Alleged contravention of section 8(d)(iv), alternatively section 8(c)
(Predatory Pricing)
1.1 Are the respondents dominant in the relevant market?
In order to succeed under this section, a complainant needs to show that the
respondent is:
1. a dominant firm in the manner contemplated in section 7; and
2. that it has abused its dominance in the manner contemplated in section 8.
We must therefore first establish whether the respondents are dominant firms. A firm is
not dominant in a vacuum, it is dominant in relation to a relevant market. Nationwide
originally contended that the relevant market was the domestic South African air travel
market and that SAA had 45% of this market. (See Notice of Motion paragraph 4 page 3
of the Record). SAA then in its answer agreed that this was the relevant market but
alleged that their share amounted to only 43%. (See page 49 of the Record). The
significance of the 45% threshold is to be found in the provisions of section 7 which
states,
7. A firm is dominant in a market if
a) it has at least 45% of that market
b) it has at least 35%, but less than 45%, of that market, unless it can
show that it does not have market power; or
c) it has less than 35% of that market, but has market power.
If Nationwide has established that SAA has 45% or more of the market, dominance is
presumed without further evidence of the existence or absence of market power being
required.
The second and third respondents have on their version 13% and 11% respectively of
the domestic air travel market. Nationwide has included them as respondents alleging
6
that they form part of the same control structure as the first respondent, SAA and that
hence the market shares of all three respondents should be combined which would give
them a market share in excess of 45%. Be that as it may, by the time it came to its reply
Nationwide contended that the relevant market was not the domestic air market, but
was instead the relevant city to city parings. (See Bricknell replying affidavit para 4.3 –
4.4 pg 196 of the Record).
Nationwide has identified three routes or city pairs as the relevant markets. These are
the JohannesburgCape Town, JohannesburgDurban and the JohannesburgGeorge
routes.
Nationwide alleges that SAA is predating by pricing below average variable cost on
these three routes. In the logic of predation, consumers of air travel services on these
routes will ultimately be forced to pay supracompetitive prices as SAA move, in the
wake of successful predation, to recoup the losses incurred during the period in which
price was held below average variable cost. When prices rise in the newly concentrated
postpredation market the consumers of services on this route will, naturally, not be able
to substitute another route. For this reason these three routes are then the relevant
markets.
As other international cases show the use of citytocity parings as the relevant market
is the conventional approach in antitrust cases in the airline industry.
To determine whether a scheduled route does constitute a separate market, the
European Court of Justice stated in Case 66/86 Ahmed Saeed Flugreisen (1989)
ECR 803 paragraph 40 :
“ The test to be employed is whether the scheduled flight on a particular route
can be distinguished from the possible alternatives by virtue of specific
characteristics as a result of which it is not interchangeable with those
alternatives and is affected only to an insignificant degree by competition with
them.”
alternatives and is affected only to an insignificant degree by competition with
them.”
Similarly, in Virgin/British Airways, OJL 30/1 of 14 February 2000, at para 42 , the
Commission applied this test to determine that BA flights were sold on a variety of
product markets for air transport to and from the UK, depending on the needs of
passengers and the alternative modes of transport available.
We accordingly find that the three citytocity pairs constitute the relevant market
for the purpose of the predatory pricing complaint.
We now turn to the question of whether Nationwide has established that SAA is
dominant in these markets.
7
Nationwide in its reply evidenced its claim by putting up data establishing that SAA’s
seat capacity on the routes in question exceeds 45% of total seat capacity on these
routes.3 Nationwide submitted two schedules setting out SAA’s seating capacity for
each of the three routes on two selected days, as a percentage of the total market, both
in relation to that of Comair and itself. This schedule is reproduced below:
On Friday 24/11/00:
Route SAA Nationwide Comair
JNBCPT 59% 13% 28%
JNBDBN 62% 15% 22%
JNBGRG 77% 24%
On Monday 27/11/00:
Route SAA Nationwide Comair
JNBCPT 64% 10% 26%
JNBDBN 63% 10% 27%
JNBGRG 68% 32%
SAA points out that seat capacity data are not identical to passengers’ conveyance
data, the ultimate test of market share. We should add that total seat capacity shares
may differ from seat capacity shares in the lower fare classes. This latter is the market
segment in which the complainant principally competes and accordingly one may
expect that its share of seat capacity in these fare classes may be somewhat higher
than its share of total seat capacity.
We should also note that SAA has not itself presented data contesting the allegation of
dominance in the three relevant markets. SAA had ample opportunity to do so as the
3 The complainant arranged at the last minute – during the hearing in fact – for the Airports Company of South
Africa to submit data that, Nationwide allege, would have conclusively established SAA’s dominance. However
ACSA insisted that this information be made available only to the Tribunal and not to the parties and we have
accordingly decided not to admit this information to the record.
8
Tribunal had allowed both parties to file supplementary affidavits. It has contented itself
with presenting data for the domestic air travel market which, it concludes, establishes
that SAA has a 43% market share. It is not clear why if SAA has data on total domestic
market share, they do not have data on citytocity routes. We suspect they do and their
reluctance to disclose their data on the routes but to instead rely on a methodological
quibble only strengthens Nationwide's contention that they enjoy more than 45% of
these routes. It is not unknown in competition analysis to utilize a surrogate for sales in
calculating market share where actual sales are not known. 4 For instance in
Virgin/British Airways, OJL 30/1 of 14 February 2000, at paragraph 90, the Commission,
in evaluating BA’s dominance in the market for air travel services, analysed its position
on the UK markets for air travel. The Commission identified a combination of factors
that lead to the conclusion that BA enjoyed a dominant position in the market for air
travel one of which was to examine how many slots BA held at airports as the extract
below demonstrates:
“BA’s dominance arises from its position on the UK markets for air travel. …BA’s
position on the markets for air transport is reinforced by the substantial portion of the
slots it holds in the relevant airports and by the system of grandfathering that
currently exists for their reallocation. This system, hampers new entries and
reinforces the position of wellestablished airlines…for example in winter 1998
BA held 38% of the weekly slots available at Heathrow.”
What further strengthens Nationwide’s contention is that SAA’s domestic market share
figure of 43% is very close to the threshold of 45%. Even if the seat capacity figures
exaggerate SAA’s actual share they are all sufficiently well above the 45% figure to
exaggerate SAA’s actual share they are all sufficiently well above the 45% figure to
suggest that SAA is dominant on all three routes is established by reason of the
presumption contained in section 7(1)(a). Even if SAA’s market share is below this
figure of 45% the onus in terms of section 7(b) is on it to rebut the inference of market
power5. Nothing in the record on the history of pricing and of SAA’s strategic
maneuvering since 1998 suggests that it had done this. For this reason, it is also
unnecessary for us to decide whether the respondents constitute a single controlled
entity and hence their market shares be combined as we find SAA dominant based
solely on its share of the relevant market.
We conclude then that Nationwide has established that SAA is dominant in the
three relevant markets for the purpose of the claim of predatory conduct.
1.2 Is there evidence of abuse?
We must then go on to consider the question of whether an abuse or prohibited practice
4 In the Tribunal case of Nasmedia and Paarl Post Web Printers (Pty) Ltd, 65/LM/May00 , the Commission and
Tribunal, because sales figures were not available, utilized another statistical proxy.
5 This is because on its on version it has less than 45% but at least 35%.
9
has been established, in terms of section 59(1)(a).
The restrictive practice alleged here is commonly referred to as ‘predatory pricing’.
Predatory pricing or ‘predation’ is a term of art in competition law and economics and its
meaning is precisely captured in Section 8(d)(iv) of the Act which prohibits dominant
firms from engaging in the practice of ‘selling goods or services below their marginal or
average variable cost’ 6. This pricecost relation must be established for a predatory
pricing charge to be sustained in terms of this section. Once this relationship is
established an anticompetitive act is presumed and the respondent then has the
burden of showing that there are “ technological, efficiency or other procompetitive,
gains which outweigh the anticompetitive effect of its act.”
By way of example a respondent could explain that its conduct is justified in order to
meet the competition, introduce new products or get rid of obsolete stock. 7
In this respect section 8(d)(iv) assists a complainant with the aid of the presumption.
The logic of the presumption is that once a firm is pricing below these costs its behavior
is prima facie either unlawful or irrational and the onus should shift to the firm to explain
which it is. Economists would no doubt regard this presumption with caution given the
scepticism that exists in the literature around predation. They would indeed argue that
something in addition to evidence of below cost pricing must be shown before a finding
of predation can be sustained. 8 We however must enforce a statute and not academic
opinion and we cannot add a qualification to a section, which the legislature did not
seek to impose. Nevertheless we also do not favour an approach that completely
ignores the caution the literature and international case law suggest we adopt with such
ignores the caution the literature and international case law suggest we adopt with such
cases. Our approach is to limit the scope of this subsection by critically construing any
evidence when considering a complaint of predation under this section. Unless the
record shows unequivocally that a respondent is pricing below the prescribed cost
levels the Tribunal should not make a finding under section 8(d)(iv) but consider the
complaint in terms of section 8(c).
What then is the difference in proof between these sections? Section 8(c) is the residual
category or “catch all” of abuse practices. Unlike section 8(d) where a closed list of
abuses is catalogued this section is nonspecific and flexible. The crucial difference is
6 This test is known as the AreedaTurner test. The test itself is subject to some controversy. See Bishop and Walker
“Economics of EC Competition Law” pg 130.
7 See Bishop & Walker,op cit, pg30 “Also there is a range of benign reasons why prices might be below variable
costs. These include promotional pricing, using spare capacity in an economic downturn, learning by doing, product
obsolescence and so on.”
8 One should not of course exaggerate the potential problem. The literature suggests that establishing cases where a
firm has priced below these levels is rare because of the difficulties with rigorously analyzing another firm’s costs.
See Bishop & Walker,op cit, pg 30 “ First the implicit assumption that average variable costs are easy to measure is
dubious.” The authors then refer to the AKZO case cited below as an example of the kind of “ arcane debate about
what constitutes a variable cost”.
10
that under 8(c) the onus is on the complainant to establish that the anticompetitive
nature of the act “outweighs the technological, efficiency or other procompetitive gain.”
The burden on the complainant in a complaint of predatory behavior is higher under this
section therefore than under section 8(d)(iv). On the other hand the complainant is not
bound to follow the prescribed cost formula suggested in 8(d)(iv). In other words if a
complainant, relying on section 8(c), can show that a respondents costs are below
some other appropriate measure of costs not mentioned in the section it may prevail
provided it adduces additional evidence of predation beyond mere evidence of costs 9.
To determine what that should be we need to examine the phenomenon of predatory
pricing and then examine some of the approaches taken in other jurisdictions.
Viewed in isolation selling below cost for a sustained period is simply tantamount to
commercial suicide. Such a strategy then must, perforce, be predicated on a
calculation by the alleged predator that it will be able both to survive a sustained period
of pricing its product below cost and, moreover, that this period will be succeeded by
one in which the successful predator will be able to price above cost, that is,
monopolistically, in order to recoup, indeed overcompensate for, the losses sustained
in the period of predation. 10 For these reasons predation is proscribed only in respect
of dominant firms. Nondominant firms would not be able to mount a predatory attack on
a more powerful competitor – they generally do not have the resources to mount such
an attack and because they generally cannot expect to eliminate their more powerful
competitor they cannot reasonably expect to recoup their losses in the postpredation
period.
In short, predation is a monopolization strategy and, for that reason, it must be
period.
In short, predation is a monopolization strategy and, for that reason, it must be
vigorously opposed by the competition authorities. However, it must be adjudicated
with extreme caution because the likelihood of judicial error is considerable and the
costs of error are impressive. Missing a genuine case of predation will likely lead to the
elimination of a viable competitor and give rise to monopoly. On the other hand, ‘over
deterrence’ can also lead to problems. In the first place, overdeterrance may create a
disincentive for firms to pass on any efficiency gains to consumers lest lower prices be
construed as predation. Secondly, overdeterrance can lead to confusing robust
competitive practices with predation. The result is the competition authority penalizing
and thus imposing disincentives on precisely those procompetitive practices that it is
mandated to promote. There is a thin line between predation and robust competition.
The Supreme Court in the United States has observed that:
9 The U.S. courts do not adopt as we do in section 8(d)(iv) a standard for what an appropriate level of costs should
be. In Brooke Group Ltd the courts refer to “prices above a relevant measure of costs”. See judgement pg 2588.
10 As explained later, in the context of predation, recoupment may not always take place because there may be other
strategic benefits to a predatory firm.
11
“To hold that the antitrust laws protect competitors from the loss of profits due to
such price competition would, in effect, render illegal any decision by a firm to cut
prices in order to increase market share. The antitrust laws require no such
perverse result.” Brooke Group Ltd. V. Brown & Williamson Tobacco Corporation
509 US 209 (1993)
The approach in the United States, as evidenced from the Brooke Group case is that
two elements must be proved to establish predatory pricing:
“First, a plaintiff seeking to establish competitive injury resulting from a rival’s low
prices must prove that the prices complained of are below an appropriate
measure of its rival’s costs… The second prerequisite….is a demonstration that
the competitor had a reasonable prospect [in a primary line RobinsonPatman
case], or, under S2 of the Sherman Act 11, a dangerous probability, of recouping
its investment in belowcost prices…”
The approach taken in European case law seems to be that where anything less than
pricing below average variable cost is established, the European competition authorities
will find abuse where it is established that the dominant firm’s strategy is to eliminate a
competitor.
In the leading European case on predatory pricing, AKZO Chemie BV v EC Commission
[1991] ECR I3359 at para. 7172 , AKZO was found guilty of an attempt to drive ECS, a
rival competitor, out of the flouradditives market in the UK and Ireland 12. The
European Court of Justice considered the cost and strategy of the dominant firm, and
developed the following test:
“Price below average variable cost … by means of which a dominant undertaking
seeks to eliminate a competitor must be regarded as abusive. A dominant
undertaking has no interest in applying such prices except that of eliminating
competitors so as to enable it subsequently to raise its prices by taking
advantage of its monopolistic position, since each sale generates a loss, namely
the total amount of the fixed costs… and, at least part of the variable costs
relating to the unit produced.
Moreover prices below average total costs, that is to say, fixed costs plus
variable costs, but above average variable costs, must be regarded as abusive if
they are determined as part of a plan for eliminating a competitor…” 13
11 S2 of the Sherman Act states: “Every person who shall monopolize , or attempt to monopolize , or combine or
conspire with any other person or persons, to monopolize any part of the trade or commerce amoung the several
States, or with foreign nations, shall be deemed guilty of a felony.”
12 Competition Law of the European Community, 3 rd Edition, Van Bael, Bellis, at page 593.
13 This case was decided on the basis of Article 82 (previously Article 86) of the Treaty of
12
When it comes to recoupment, the European approach differs to that in US law. In the
case of Tetra Pak II 1997 4 CMLR 662 the Court of Justice has held that the prospect of
recouping losses is not a prerequisite for establishing predatory pricing.
“Furthermore, it would not be appropriate, in the circumstances of the present case, to
require in addition proof that Tetra Pak had a realistic chance of recouping its losses. It
must be possible to penalize predatory pricing whenever there is a risk that competitors
will be eliminated. The Court of First Instance found, at paragraphs 151 and 191 of its
judgement, that there was such a risk in this case. The aim pursued, which is to maintain
undistorted competition, rules out waiting until such a strategy lead to the actual
elimination of competitors.” 14
Although the EU and US approaches differ some common strands exist. Firstly there
must be evidence of below cost pricing although neither adopt a formulaic approach as
to what that should be. Secondly both require some additional evidence beyond that of
pricing below an appropriate measure of costs. In the U.S. this relates to evidence of
likely recoupment. In the EU this is left vague and the requirement in AKZO is evidence
of a plan to eliminate a competitor .
In our view, the correct approach to a predatory pricing claim under section 8(c) is a two
fold test.
First the complainant must establish that the respondent is pricing below cost for a
sustained period. This pricecost relationship need not be the one referred to in 8(d)(iv)
but should have some support in the literature as an appropriate measure of costs.
Secondly there must be some additional evidence of predation. We do not wish to be
prescriptive as to what this should be, but evidence of recoupment would meet this
second test.
Rome which states that “Any abuse by one or more undertakings of a dominant position within
Rome which states that “Any abuse by one or more undertakings of a dominant position within
the common market or in a substantial part of it shall be prohibited as incompatible with the
common market insofar as it may affect trade between Member States:
Such abuse, may, in particular, consist in:
a) directly or indirectly imposing unfair purchase or selling prices or other unfair trading conditions;
b) limiting production, markets or technical development to the prejudice of consumers;
c) applying dissimilar conditions to equivalent transactions with other trading parties, thereby placing them at
a competitive disadvantage;
d) making the conclusion of contracts subject to acceptance by the other parties of supplementary obligations
which, by their nature or according to commercial usage, have no connection with the subject of such
contracts.”
14
The European approach, as exemplified in this quote, may err in too easily finding predation and protecting
competitors from the hazards of the market place.
13
We would prefer not to insist on recoupment as a requirement as do the U.S. courts.
For instance a firm operating in multimarkets may use predation as a form of investment
in a reputation for being a tough competitor. Thus a predation strategy in market A
would send a message to its competitors not only in market A, but also in markets C, D
and E. Predation here has a broader strategic value beyond any recoupment it may
attain in market A. 15
We must now examine whether Nationwide has established evidence of a prohibited
practice that meets either the standard in 8(d)(iv) or the test we have proposed above in
terms of section 8(c).
Before examining Nationwide’s arguments through the lenses provided by these tests
we must comment upon a highly unusual aspect of this case, a feature which, if
anything, demands greater vigilance from a competition authority called upon to support
an allegation of predation. Predatory pricing generally, indeed, in the scholarly literature
and case law, invariably, takes the form of a cut in prices by the alleged predator. In
this case Nationwide alleges that the predation takes the form of a failure on the part of
SAA to increase the price of its product, its airfares, in the wake of an increase in the
price of a key input, namely jet fuel, an increase exacerbated by the recent sharp
depreciation of the local currency relative to the US Dollar, the currency in which fuel
prices are denominated.
We agree with Nationwide that from a strict accounting perspective the effect of this
‘omission’ to increase output prices in the wake of an increase in the price of an input,
may be identical to a proactive cut in the output price in the face of stable input prices.
However, we cannot accept that these are identical from a competition perspective. We
are extremely reluctant to signal that a ‘failure’ to pass on input price increases to final
are extremely reluctant to signal that a ‘failure’ to pass on input price increases to final
consumers will be construed as anticompetitive. Indeed it is precisely an increase in
the price of an input that frequently triggers the search for procompetitive strategies in
downstream markets where competition prevents a simple passthrough of the increase
to consumers. We would want to reward those firms who, as a result of their efficiency,
are able to absorb price increases of their inputs without passing them onto their
consumers.
The scant evidence provided by Nationwide does not assist their case. SAA has
submitted evidence that establishes that, in the relevant period, its revenues on the
routes in question exceed its operating costs. While Nationwide has suggested that the
designated operating costs are not a true reflection of average variable costs this
15 See Albert A Foer in Antirust Law and Economics Review 1998 pg 71.Also Simon and Walker op cit pg 1258.
The authors state that the fact that there have been virtually no new airline start ups in the United States in the recent
past, at least raises the possibility that the major airlines have built up a reputation for predation that successfully
deters new entry.(pg 128)
14
argument has not been substantiated. There is no evidence that SAA is pricing below
marginal cost so this alternate leg to 8(d)(iv) need not be considered.
Nationwide’s case is further weakened by the fact that SAA has put up several plausible
explanations for its ability to absorb the rise in the price of petrol. These are:
• Firstly, SAA points out that it has increased the price of its fares by an average of
22% in the period between November 1999 and July 2000 admittedly the
period immediately preceding the recent sharp petrol price increase and currency
depreciation. Moreover, SAA points out that it has announced an average 8,7%
fare increase scheduled to take effect from the 2 nd January 2001. We should
note that this may conflict with the requirement that the alleged predation should
be ‘sustained’ – the period in which SAA has maintained stable fares in the face
of the alleged increase in its costs is of a limited duration. Hence even if certain
of their fares are set below average variable cost, the limited duration for which
this is applicable may constitute a rational and legal shortterm commercial
strategy.
• Secondly, SAA has made much of the efficiencies introduced by its management
over the past 23 years, efficiencies which, SAA argues, have enabled it to
absorb the recent cost increases while maintaining profitability. These claims
have not been countered by Nationwide.
• Thirdly, and a particularly pertinent aspect of its cost reducing strategy, has been
SAA’s apparently successful decision to hedge against an increase in fuel prices
and a currency depreciation. Nationwide accurately characterize the hedge as
similar in effect to an insurance policy but then argue that this should not be
construed as a strategy that has lowered the effective price of petrol. This
argument is, frankly, incomprehensible. Given the importance of fuel prices, and
given the volatility of commodity markets and of international currency markets,
this strikes us as a commercially prudent and farsighted strategy on the part of
SAA. It would, in the face of this cost reducing strategy, a strategy that has
enabled it to absorb the price increases, be intolerable to oblige the company to
increase its fares, thereby penalizing its customers by denying them the benefits
of the successful hedging strategy.
Nationwide contended that SAA had not increased its fares since 31 July 2000 and in
fact had reduced its fares in respect of the JohannesburgCape Town route in two fare
classes in October and November 2000. SAA replied that such decreases were in
response to price reduction by Comair. Over the relevant period, SeptemberOctober
2000 it does seem that SAA has reduced its prices in the Y (full economy) and K
classes. However, Comair seem to have done the same in respect of the K class only,
15
not the Y class. This would suggest that SAA and Comair’s prices have dropped in
respect of the K class only. However one cannot know which of the two competitors,
Comair or SAA, reduced their prices first. (see pgs 350351 of record). SAA’s contention
that it reduced prices to meet the competition must in the absence of rebutting evidence
be accepted.
Having failed to establish that the SAA is pricing below marginal or average
variable cost, the predatory pricing charge falls to be dismissed under section
8(d)(iv). In its heads of argument Nationwide’s representatives concede as much,
but seek to rely on circumstantial evidence. We fail to find such evidence in the
record. Similarly, Nationwide has failed to establish evidence that satisfies either
of the tests referred to above for the purpose of 8(c) 16. On this count as well the
complaint fails.
2. Alleged contravention of section 8(d)(i) and/or section 5(1) (agreements
with travel agents)
2.1 Relevant Market
We now turn to the allegation that SAA has, in violation of Section 5(1), entered into
anticompetitive vertical agreements with travel agents which substantially lessen
competition. Alternatively, that it has abused its dominant position by entering into
agreements with certain travel arrangements in violation of section 8(d)(i) proscribing
conduct by a dominant firm that has the effect of ‘requiring or inducing supplier or
customer to not deal with a competitor’. In respect of both these claims too, a
necessary prerequisite is establishing the relevant market in which competition is
‘prevented or lessened’ (Section 5) or in which an abuse is perpetrated (Section 8 read
with Section 7).
The complainants drew our attention to similar agreements between British Airways and
The complainants drew our attention to similar agreements between British Airways and
travel agents in the United Kingdom. Here, in finding for the complainant, Virgin
Airways, the European Commission prefaced its analysis of the agreements complained
of by an analysis of the market for ‘air travel agency services in the United Kingdom’
and it then proceeded to find that the respondent, British Airways, was dominant in this
market. Certainly BA’s dominance in the relevant market – the market for air travel
agency services – derived from its dominance of the market for air travel services in and
from the UK.
16 Nationwide contended that SAA was anticipating Nationwide ceasing operations in January 2001, therefore its
proposed January increase on the JohannesburgCape Town route of between 4% and 9%, effective only after the
peak festive season, was evidence of possible recoupment by SAA. However, these figures in no way approximate
the 20% price increase Nationwide are requesting us to order.
16
We should not be surprised to find that, on a similar analysis, SAA too was a dominant
purchaser in the market for air travel agency services in South Africa. However the
complainant has not made its case and, though we may go to the limits of our
inquisitorial powers, this cannot extend to the panel of the Tribunal making the case for
the complainants. It is a case, even at the interim stage, that cannot be based on
assumption and supposition alone. Nowhere are we told what proportion of airline
tickets are purchased through travel agents as opposed to direct purchase from the
respective airlines themselves – that is, can the services of travel agents be substituted
for by other channels for purchasing air tickets? Clearly airlines all over the world are
attempting through internet sales to limit the role of the ‘middleman’ or travel agent. Nor
are we told how many travel agents are party to the allegedly restrictive agreements
with SAA and what proportion of travel agency ticket sales they represent. In short we
are not provided with the market analysis necessary to underpin the claimants case on
the alleged restrictive practices. This analysis is required both in respect of section 8(d)
(i) and section 5(1).
We accordingly are of the view that this claim falls to be dismissed because of
the complainant’s failure to identify the relevant market.
2.2 The alleged restrictive practice
We do not have direct evidence of the alleged prohibited practice. Nationwide ask us to
infer this from a letter from a travel agent, Sure, which refers inter alia to aspects of the
scheme.( See Record page 230). We do not have the contract in question before us nor
do we know if the letter adequately or indeed accurately sets out the terms of the
agreement that we are expected to void. This kind of evidence where we are expected
to draw inferences from a third party’s documents as to what the prohibited practice is,
is not acceptable to us.
is not acceptable to us.
We find accordingly that there is insufficient evidence as to the terms of the
prohibited practice alleged to be perpetrated between the respondents and the
travel agents.
3. Alleged contravention of section 8(c), alternatively section 8(d)(iv)
(Recruitment of staff)
3.1 Relevant Market
If the allegations pertaining to SAA’s alleged poaching of Nationwide staff, in particular
its Boeing 737 pilots, and those regarding the allegedly anticompetitive impact of SAA’s
various arrangements with travel agents had been invoked merely to evidence SAA’s
general predatory intent, that is, simply as part of the evidence to sustain a charge
17
under 8(d)(iv), then we would have no need to enquire further into the question of the
relevant market.
However, these alleged actions on the part of SAA are presented in order to establish a
violation of section 8(c).( See Record page 4 para 9 and page 25 para 15) In their
heads of argument Nationwide rely on both 8(c) and 8(d )(iv).( See Heads of argument
page 24)
We will for this reason consider the allegations under section 8(c) first.
Nationwide alleges that SAA has sought to induce key staff, notably its Boeing
Captains, to leave its employ in preference for employment with the first respondent,
South African Airways. In its replying affidavit (page 203), Nationwide alleges that since
February 2000, 7 pilots have joined the employ of SAA, of which 4 are captains on
B737’s. SAA contends that of the 60 pilots employed by SAA since February 2000 only
10% thereof were previously employed by Nationwide. (at page 87 of the record).
Nationwide expressed concern that such highlytrained captains were not being utilized
on command positions on the aircraft for which they had been trained, but instead they
were being used as relief pilots on Boeing 747’s, indicating sinister intentions on behalf
of SAA, who could just as easily have sourced relief pilots from the pool of unemployed
pilots within the SA market place. SAA maintains that Nationwide’s staff had not
received the required training on their aircraft. Its policy toward all new recruits is that
they fly as relief pilots initially, prior to flying independently. (See record page 88).
Nevertheless Nationwide alleges that this conduct when assessed in the context of
SAA’s cumulative pattern of behaviour constitutes an exclusionary act that contravenes
the provisions of Section 8(c), which proscribes any exclusionary act that cannot be
shown to have countervailing efficiency gains.
The markets relevant for the purposes of establishing predation – the three city pairs
The markets relevant for the purposes of establishing predation – the three city pairs
referred to above have no necessary bearing on these allegations, that is, they are not
necessarily the markets relevant to an assessment of these alleged restrictive practices.
The fact is that we are presented with little evidence that would allow us to determine
markets relevant to the restrictive practices allegedly perpetrated under these sections
of the act.
Hence, at a cursory glance, the market relevant to the charge under 8(c), SAA’s alleged
poaching of Nationwide’s staff, in particular its Boeing 737 pilots, appears to be the
market in which operators of air travel services hire staff, to wit pilots, for the purpose of
providing this service. We are told next to nothing about this market. Pilots,
presumably of varying degrees of qualification and experience, are hired by a myriad of
organizations and individuals – scheduled airlines, charter operators, the military,
private companies and individuals. However, we have not been provided with the
18
information that would allow us to make a meaningful determination of this market. For
example. we are not told whether we are meant to regard the market in which the
services of ‘Boeing Captains’ are hired as a market separate to that in which other pilots
are hired – are ‘Boeing Captains’ substitutable by ‘Airbus Captains’ or ‘executive jet
captains’, that is, are these pilots all part of the relevant market? We are not told.
The only information with respect to the market in which the services of pilots are hired
is provided by Nationwide when it alleges that there are many unemployed pilots
available in South Africa. However, this snippet of unsubstantiated (though
unchallenged) evidence suggests that, even if SAA was employing Nationwide’s pilots,
this does not preclude Nationwide or any other purchasers of these services from
recruiting suitably qualified personnel in the open market either because there are
ample ‘Boeing Captains’ available or because the market for these services is
significantly wider than ‘Boeing Captains’.
In any event this is supposition on our part. Nationwide has not succeeded,
indeed has not attempted, to define the relevant market, a necessary prerequisite
to establishing dominance in terms of Section 7, and, in turn, a necessary
prerequisite for establishing an abuse of dominance in terms of Section 8.
3.2 The alleged restrictive practice
Notwithstanding that the essential prerequisite of establishing the relevant market has
not been met, we should, again, point to other defects in the application, defects
sufficient to dismiss the application even if the relevant market and dominance therein
had been successfully established.
We are asked to remedy this alleged restrictive practice by ordering SAA to cease and
We are asked to remedy this alleged restrictive practice by ordering SAA to cease and
desist from the practice of soliciting and offering employment to the complainant’s pilots.
We are effectively being asked to suppress competition in the labour market for pilots
on the allegation that it is part of a general predatory attack designed to lessen
competition in a related, though unspecified, market. Support for this far reaching
remedy is sought in the judgment by Van Dijkhorst in the case of Atlas Organic
Fertilizers (Pty) Ltd v Pikkewyn Ghwano (Pty) Ltd 1981 (2) SA 173 (T).
In this case the court held that enticing an employee away from a competitor does not
amount to unlawful competition where the aim was to benefit one’s business. Van
Dijkhorst J went on to state at 200F:
“Is it unfair competition to induce an employee to terminate his contract of
employment lawfully? Put differently, can it be unlawful conduct to exhort
someone to do something lawfully? This proposition falls strange on the ear. I In
our competitive economy it is normal for employers to bid for their labour, the
19
price of which is subject to the law of supply and demand. As long as the
employee is free to leave others are entitled to offer him better terms of
employment. The fact that the loss of the employee might cause damage to the
employer is incidental and irrelevant…This does not mean that should a
businessman systematically induce his competitor’s employees to leave, his
conduct would necessarily be lawful. In my view, public policy would dictate that,
where the aim in inducing a competitor’s employees to terminate their
employment is not to benefit from their services but to cripple or eliminate the
business competitor, this action be branded as unlawful competition.”
Applying this test to the facts the court found that Pikkewyn Ghwano, who had enticed
employees of Atlas, a competitor, to join it, had not engaged in unlawful competition
since their intention in doing so had been to gain market share. The court found that the
fact that Pikkewyn Ghwano’s conduct had an adverse effect on the business of Atlas
was incidental and irrelevant since the aim was legitimate. Damages were however
granted against Pikkewyn Ghwano’s two managers, previous employees of Atlas, for
breach of a fiduciary duty to Atlas for enticing other employees to join Pikkewyn
Ghwano while they were still employed by Pikkewyn Ghwano as directors.
It is difficult to see how the finding of the court in this case supports Nationwide’s
argument. The court’s finding in that case that there was a breach of fiduciary duty
where a director of a company induces the company’s employees to join a competitor is
clearly of no consequence to the instant case. Secondly, SAA has been able to
demonstrate that the former Nationwide pilots it has employed are being used to its
benefit.
demonstrate that the former Nationwide pilots it has employed are being used to its
benefit.
The inapplicability of common law provisions of unlawful competition to a case of
predatory pricing is illustrated as well in the case of Brooke Group which we
referred to above where the court held at page 12, relying on Hunt v Crumboch,
325 US 821, L. Ed. 1954 (1945) :
“Even an act of pure malice by one business competitor against another does
not, without more, state a claim under the federal antitrust laws; those laws do
not create a federal law of unfair competition or “purport to afford remedies for
all torts committed by or against persons engaged in interstate commerce.”
In so far as the allegations are meant to constitute an independent and separate
allegation under section 8(d)(iv) we fail to understand them at all given the wording of
8(d)(iv) which as we have seen above relates solely to pricing below marginal or
average variable cost. If as we have indicated above they are intended to strengthen a
claim under 8d iv of predatory pricing the evidence of recruitment of pilots is superfluous
and unnecessary. If the evidence is intended to bolster the predatory pricing claim
under section 8(c) and not intended as a separate act of abuse itself it also fails for the
20
reasons we have given above that there is nothing to indicate that the conduct is
anticompetitive.
Conclusion
In conclusion, insofar as Nationwide has not sufficiently proven that a prohibited
practice has in fact occurred, either under sections 8(d)(iv), 8(c ), 8(d)(i), 5(1), it is
the Tribunal’s decision that the claim in terms of section 59(1)(a) must fail.
III. SECTION 59(1)(b) IS AN INTERIM ORDER REASONABLY NECESSARY TO
PREVENT SERIOUS IRREPARABLE DAMAGE
It is necessary however to comment on the remedies sought by Nationwide if only to
point out that even if predation had been successfully identified they have asked for
remedies which we could not have provided.
A claimant needs to show that there is a rational link between the harm alleged and the
order sought in order to establish the requirement of “reasonably necessary” set out in
section 59(1)(b).We will examine the relief sought in relation to the three alleged
prohibited practices outlined above.
1. Predatory Pricing
Nationwide have asked that we order a price increase equivalent to the increase in
costs occasioned by the fuel price increase and currency depreciation. When, in the
course of the hearing, it was pointed out that each of the respondents had been
differently affected by the cost increases and that these differed from the effect on
Nationwide and that, hence, there was no uniform standard to which the order could
adhere, Nationwide amended their prayer for relief from that contained in their Notice of
Motion so that it now reads:
“The respondents upwardly adjust their air fares published and unpublished on
the Johannesburg Cape Town, Johannesburg Durban, Johannesburg George
and return routes by an amount which represents twenty percent (20%) of such
fares as they were on the 2 nd of October 2000 which fares will include all
classes below and up to and including the full economy fares. ”
Although SAA objected to the amendment, coming as it did at the eleventh hour, we
21
have decided to allow the amendment.
The relief sought, however, will not remedy the alleged harm Nationwide is suffering.
Should the order as requested be granted, and SAA are ordered to increase their
airfares in accordance with the above, it will not reverse the harm already alleged to be
suffered by Nationwide. They conceded in argument that the bulk of the harm may
have already been suffered for the initial phase of the holiday period. However they
argued that this should not dissuade us from making an order increasing prices in
respect of the remaining period. They contended that they were currently and would
continue to suffer harm in respect of the remainder of the holiday period. Nevertheless,
the fact remains that by now (mid December) most leisure class travellers have already
booked their seats. This reduces extensively the effectiveness of the relief. Even if we
accept that there are many still who have not booked flights, they would not necessarily
change to Nationwide, they may prefer to fly Comair, or even elect to travel by train or
by car. Accordingly there is an insufficient nexus between the alleged harm suffered
and the redress which is sought.
Secondly, whilst in the appropriate circumstances the Tribunal might grant an order
which elevates prices, we would only do so if a complainant could establish a
compelling and rational connection between the harm experienced as a result of the
predation and the relief sought. We would be extremely cautious before granting such a
remedy, which might reverse active competition in the market place. Nor are we
convinced that the alternate case for relief in terms of section 59(1)(b)(ii), which requires
evidence that the purposes of the Act have been frustrated, has been made out. In the
present case, granting the proposed remedy might itself frustrate the purposes of the
Act.17
present case, granting the proposed remedy might itself frustrate the purposes of the
Act.17
The defects in the relief sought have not been cured by the amendments proposed
during the hearings, rather they have highlighted the fact that Nationwide too, at the
eleventh hour, saw the difficulty, the remedial action has not removed the cause of
complaint. Nationwide assume that because SAA’s costs have increased by
approximately 20% its prices should increase by the same amount for them not to be
predatory. This assumption may have simple arithmetical elegance but is not an
17 Ordering a predator to raise prices is not the only remedy in predatory pricing cases. Damages and administrative
fines would also be possible, although not in an interim relief application. Note that in our law damages can only be
awarded by a civil court following a finding by the Tribunal (section 65(6)). An administrative fine could be
imposed in a final relief hearing for a contravention of section 8(d)(iv), but note only for a repetition of the conduct
if the finding is made in terms of section 8(c). (See section 61(1)(a)(b) of the Act). Academic writers have
suggested another novel remedy. They recommend that a predatory firm be ordered to maintain its prices at the
predated level for a period to prevent the possibility of recoupment regardless of whether the rival has been forced to
exit the market. (See Bishop and Walker op cit pg 132 and Foer op cit). Foer, who writes on the problem of
predation in the US airline industry, recommends, as a Department of Transport policy proposal, that if a major
carrier drops prices in response to the announcement of a new entry, that the carrier be obliged to maintain its prices
for a specified number of seats for a period of two years without regard to whether the entrant remains in the market.
(See Foer op cit at page 7576)
22
inevitable one from an economic point of view. The relationship between the two
increments need not be equivalent, indeed what it should be is a matter for evidence.
As there was no evidence on this point, we find the nature of the relief sought has not
been justified.
2. Orders relating to the Travel agents .
In relation to the travel agents we are asked, on scant evidence, to declare long
standing agreements ‘null and void’. SAA points out that the interests of the travel
agents party to these alleged agreements are directly affected by the order sought and
that, accordingly, they should have been joined in the application. Secondly it complains
that the orders sought are vague. What conduct, it asks, must “be ceased and desisted
from”? Again, Nationwide sought to amend its prayers during the hearing to cure these
difficulties. The amended order now reads:
‘The first respondent shall immediately bring to an end the operation of all systems of
commission and other incentives with travel agents from which it purchases its travel
agency services in South Africa which by rewarding loyalty from the travel agents and by
discriminating between travel agents had the object and effectively excluding or limiting
the applicants from competing on the three routes which are set out here. ”
We have again allowed this amendment despite SAA’s objections. It is not clear,
however, that the amended prayer overcomes any of the criticisms. Indeed it is in some
respects vaguer than it was before. 18
3. Recruitment of the Pilots
SAA criticized this order which seeks not just to prohibit solicitation but also the offering
of employment to Nationwide’s pilots. This type of relief is far wider than the alleged
anticompetitive conduct which as we understand it related to solicitation. An order on
these terms is again inappropriate.
Apart from the absence of a link between the relief sought and the harm alleged, all the
Apart from the absence of a link between the relief sought and the harm alleged, all the
orders referred to above suffer from the problem that they are vague and ambiguous.
As the Competition Appeal Court has pointed out in the case of Glaxo Wellcome (Pty)
Ltd & Others and Terblanche & Others Case No: 04/CAC/Oct00 as per Davis JP,at
page 16:
“When the Tribunal grants an order which is different from that contained in a
notice of motion great care should be given to its meaning and purport and
further there should be no inherent linguistic difficulty for the parties being able to
18 SAA had other criticism of the orders but we need not consider them in view of our decision.
23
comply therewith. The consequence of noncompliance with such an order can
be serious in that noncompliance can be visited with severe penalties.
For these reasons I find that on the ground of review for vagueness and
ambiguity, there is a clear basis for applicants to approach this Court for a stay.”
Giving effect to such an order as we have in this case would no doubt be grounds for
review on the basis of the order being objectionable.
It is therefore the finding of the Tribunal that the claim must also fail in terms of
section 59(1)(b) insofar as the applicants have failed to establish that the orders
sought are reasonably necessary to prevent serious, irreparable damage to them.
PART C ORDER
1. During the hearing Nationwide abandoned its case against the third respondents
but still proceeded against the first and second respondents. The application
against these two parties is dismissed.
2. The applicants jointly and severally are liable to the respondents for costs.
3. Costs of two legal representatives are allowed. The fees of the second
representative must not exceed one half of the first.
_______________ __________________
Norman Manoim Dated
David Lewis and Diane Terblanche concurred
24