IN THE COMPETITION TRIBUNAL
REPUBLIC OF SOUTH AFRICA
Case Number: 18/CR/Mar01
In the matter between:
The Competition Commission Complainant
and
South African Airways (Pty) Ltd Respondent
REASONS AND ORDER
Introduction
1. This case concerns the legality of two incentive schemes, which the
respondent, South African Airways (Pty) Ltd (“SAA”), the country’s
largest domestic airline, has with travel agents. The Commission brings
this complaint referral pursuant to a complaint brought by the Nationwide
Airlines Group (“Nationwide”) a domestic rival of SAA. 1 The Commission
alleges that the incentives constitute an abuse of dominance designed to
exclude or impede SAA’s rivals in the domestic airline market. The
Commission seeks an order declaring that the schemes constitute
prohibited practices and the imposition of a fine of R 100 million. SAA
denies liability and has put all the issues in dispute. We have found that
SAA has contravened Section 8(d)(i) and our reasons for this conclusion
follow.
Background to the case
2. On 13 October 2000 Nationwide lodged a complaint with the
Competition Commission against SAA. 2 In brief the complaint alleged
1 The Nationwide Airlines Group comprises Nationwide Airlines (Proprietary) Limited,
Nationwide Air Charter (Proprietary) Limited, Nationwide Aircraft Maintenance (Proprietary)
Limited and Nationwide Aircraft Support (Proprietary) Limited. Nationwide is not only a
domestic competitor of SAA, but the complaint is confined to the domestic market.
2 Under the old rules of the Commission a complaint had to be accepted by the Commission
before it constituted a complaint – it appears that this complaint was accepted on the 17
1
that SAA was trying to exclude it from the domestic airline market by
engaging in a number of practices that were prohibited under the
Competition Act (the ‘Act’). Four anticompetitive practices were
alleged – (i) SAA was engaged in predatory pricing (ii) SAA was
poaching key staff (iii) SAA had concluded agreements with travel
agents in terms of which they received commissions on an incremental
basis that it alleged had an exclusionary effect (iv) SAA had a reward
scheme for employees of travel agents, known as “Explorer”, which it
was also alleged had an exclusionary effect.
3. These claims formed the subject matter of an interim relief application
that Nationwide then brought unsuccessfully against SAA in October
2000. The reasons for the failure of Nationwide’s application are set out
in our decision in Nationwide Airlines (Pty) Ltd and Others versus
South African Airways (Pty)Ltd and Others and no more need be said
of that here, although it suffices to say the incentive schemes which are
at the heart of the present case were the subject matter of the interim
relief application, although they were alluded to in passing. 3
4. Subsequently, the Commission concluded its investigation into the
Nationwide complaint. It referred the complaint to the Tribunal on the
18 May 2001. In its complaint referral the Commission relies on only
two of the alleged restrictive practices that were in the original
Nationwide complaint, viz. those that relate to the incentive schemes
for travel agents and the Explorer scheme. The other practices
complained of have not found their way into the case before us nor has
Nationwide pursued them by way of a nonreferral. 4 It would appear
that the reason for the Commission’s selection of certain practices to
that the reason for the Commission’s selection of certain practices to
constitute the basis of its present referral, are that similar practices
October 2000. Note that in the complaint referral the Commission dates the filing of the
complaint on 18 October 2000.( See paragraph 5.1 of the complaint referral, Record page 4).
3 Case number 92/IR/Oct00. On the issue of the incentive schemes the Tribunal said the
following “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).”
4 At the time of the referral in casu the Commission stated that it was continuing to investigate
the predatory pricing and the poaching complaints. See paragraph 5.2 of the complaint
referral, Record, page 5.
2
have been scrutinised in cases in other countries and the Commission
has sought to rely on this jurisprudence in this case. 5
5. It is worth noting at this stage that although this case is most commonly
associated with Nationwide it is not confined to it. On 23 August 2001
the Commission amended its complaint referral to refer, inter alia , for
the first time to the alleged exclusionary effects of the scheme on the
complainant and “other competitors”. 6 It is common cause that the only
other competitor at the time was Comair Limited a company which
operates a passenger service in the Southern African region. By virtue
of a licence from British Airways, it uses the name BA/Comair. We will
for this reason refer to this firm as BA/Comair.
6. According to the Commission the abuse that is alleged in this case
commenced in about April 1999 and by the end of the hearing
(December 2004) was believed to still be continuing. Nevertheless the
evidence we have had presented in this case has not always correlated
with that period or with any consistent time period. The Commission
has provided some figures for the period ending March 2001 (travel
agents sales figures and sales of airline tickets at Johannesburg
International), others for the period ending May 2001(Table B in figures
bundle 2 a comparison of travel agency flown revenue and BSP), some
for June 2001 (Table E2 which relates to passenger information on BA/
Comair), and yet others until October 2004 (Table G figures bundle 2
which relates to passenger sales on Nationwide).
7. Perhaps the reason for this unevenness in selection is that information
was collected at different times during the long life of this case and
earlier information was not updated to conform to a common endpoint. 7
We do not wish to exaggerate the difficulties in these inconsistencies
as some of the information is of less probative value than others or the
as some of the information is of less probative value than others or the
use of different periods has been appropriate because the data is being
employed to illustrate different points.
8. Nevertheless from the point of view of fairness the case had to be
pinned down to a finite period. For reasons that will become clearer
later it is not the existence of the schemes in question that is pertinent
but their nature, which has changed over time. For this reason, we
have decided that for the purpose of assessing the duration of the
abuse, we shall assume that the evidence of its existence commences
in October 1999 and ends in May 2001, the latter date being the date,
5 We refer to these cases later in this decision in the section dealing with the efficiency
justification.
6 See amendment to the Complaint referral Record page 185.
7 The Commission is not solely culpable on this count. SAA has also sought information, from
BA/Comair for instance, over a wide period. See summons to BA/Comair for periods 1997 to
the present. See transcript 19 August 2004 at page 321.
3
according to the Commission, when its investigative period ended. 8 We
will refer to this from now on in the decision as the ‘relevant period’.
This is a period for which most of the more important information on
effects is presented, although we will, for the purpose of interpreting
information, make use of figures that come before and after that period.
It is common cause however that the Explorer scheme ended in June
2002 and that the override scheme was still in existence at the end of
this case.
9. Thus what we are saying is that it may well be that the effects of these
two schemes may have been in existence for long after our reference
period, but we believe that it is necessary to confine our findings to a
finite period which corresponds with a period where evidence on
market shares, sales of tickets through travel agents and effects on
rivals’ sales of tickets can reasonably be correlated.
10. As will be evident from the date that this complaint was lodged by
Nationwide (October 2000), and the date we heard final argument, (5
March 2005), this case has taken a long time to conclude. The blame
for this delay has itself been a subject of contention between the
Commission and SAA, and is discussed more fully below. It suffices to
say at this stage that we find it highly undesirable for litigation to take
so long to reach conclusion and that it satisfies neither the interests of
complainants, consumers or respondents.
Synopsis of our approach
11. We first examine the operation of the two schemes at issue in these
proceedings, as this is necessary to understand the case before us.
We then examine briefly the theory of harm advanced by the
Commission and SAA’s response to it. We then consider the various
elements of the case that the Commission needs to establish in order
to prove a contravention. We first, as is customary, analyse the
to prove a contravention. We first, as is customary, analyse the
relevant markets, then consider if the respondent is dominant in these
markets and then move on to consider the abuse. The section on the
abuse first considers arguments on what the legal test is and then
examines the factual issues in light of that conclusion.
12. Finally, since we have found that SAA has contravened section 8(d)(i),
we consider what remedy is appropriate.
PART I – THE MERITS
The incentive schemes
8 See affidavit of Menzi Simelane on remedies paragraph 11.
4
13. The three airlines that competed in the domestic market during the
relevant period, all made use of travel agents’ services to sell domestic
tickets, for which they paid by way of commissions. 9
14. Initially it appears that the structure of the commissions was quite
straightforward and travel agents received a standard basic
commission. At some stage, and it is not clear from the evidence
exactly when, but certainly well prior to the relevant period, airlines
began introducing what is known as an override incentive scheme for
paying commission.
15. The SAA override incentive scheme works in this way. Agents receive
a flat basic commission for all sales up to a target figure that is set for
them in the contract. The target figure is expressed in rand value. If
they exceed the target they become eligible for two further types of
commission that are paid over and above the basic commission, which
continues to be paid on sales over the target. The first category is what
is termed the ‘override commission’. This is an additional commission
paid if the agent meets and exceeds the target. However, the override
commission is not limited to the amount above the target, but is
payable on the total of all sales achieved above and below the target.
Thus assume the firm has a target of sales set at R 100 million. If it
exceeds this target by R 10 million it will receive an override
commission, typically set at 0,5%, on all it sales i.e. it will amount to R
550 000. Note because the firm continues to receive its basic
commission of 7% as well, the average rate would now be 7,5%.
Because the override commission is payable on all sales earned, even
those below the target, it is referred to as the ‘back to rand one’
those below the target, it is referred to as the ‘back to rand one’
principle. In some contracts the override commission is set at a
constant rate, in others, it is subject to a continual increase as the
firm’s sales reach continually higher targets. Thus in the American
Express contract the override rate is a constant 0,5%. 10 In the
Luxavia agreement, the override rate increases the more the agent
exceeds its target. 11 The rate starts at 0,5% when the firm reaches its
target, but moves to as high as 1,55%, if it exceeds its target by 25%.
The figures show that if it attains its peak override commission at this
level, it would not only earn a base commission of around R 37 million,
it would also earn an override commission on top of that of R 8 million.
16. But there is also a second category of commission for which the firm
that exceeds its target is eligible and this is referred to as the
‘incremental commission’. If the travel agent earns a certain
percentage of sales above target it then becomes eligible for this
9 They are Nationwide, SAA and the remaining competitor at the time, BA/Comair.
10 See figures bundle 1 page 14 and Appendix 1 of this decision .
11 See Appendix 1 of this decision.
5
additional commission. This commission, unlike the override
commission, is payable only on the amount above the target and is not
therefore back to rand one, but is ‘back to rand base’. For this reason
the incremental commission rate is typically much higher than the
override and base commission rate, and in some agreements, is
subject to escalation as well. Going back to our two models; in the
American Express agreement, its incremental commission kicks in
when it achieves sales in excess of 15% of its base target. The
incremental rate commences at 14% for sales 15% above target, but
rises steeply so that sales 35% above target are rewarded at a rate of
31%. Note the effect this has on the respective commissions. When
American Express gets to 15% above target its basic commission is
about R6,3 million while its incremental commission (14%) amounts to
R1.6 million. When it reaches its peak at 35% sales above target its
basic commission is R7,4 million, but its incremental commission (31%)
is now R 8,5 million thus exceeding the basic commission.
17. The Luxavia agreement also has an incremental commission although
it is structured differently. Here the incremental commission kicks in
when sales are 5% above target, although the rate starts at only 5%
and increases to a rate of 20% for sales that exceed the target by 25%.
It thus differs slightly from the American Express structure in that the
incremental commission starts becoming payable earlier, but at a lower
rate and reaches a lower peak commission.
18. The target is a key feature in these agreements. Agencies do not face
a common target that they must meet. Each firm is set a custom made
target based on its previous annual sales figures with a percentage
increment. Even the increments are not uniform and appear to be the
increment. Even the increments are not uniform and appear to be the
subject of negotiation between the firm and SAA. In the agreement
with American Express, the agency is required to achieve an annual
growth of 25% from its target in the preceding financial year. 12
19. It is not clear from the evidence as to whether SAA introduced the
override scheme into the market or whether they reacted to what
British Airlines was doing internationally. Nothing turns on this. What
we do know is that when SAA first introduced the scheme there was no
complaint in the market place. Mr Viljoen, the chief executive officer of
South African Airways at the relevant time, has testified that he found
these types of agreements in place when he joined SAA and that an
agent had told him that they had been around since 1980. 13
20. In October 1999, SAA, according to the evidence of Viljoen, adopted a
more aggressive approach to the override scheme. In Viljoen’s words,
12 See clause 5.4, Record page 438
13 See Transcript page 478.
6
he was not prepared to reward agents for generic growth i.e. growth
that came about from inflation, as opposed to an increase in sales.
SAA remedied this by firstly reducing the basic commission from 9% to
7%. Then it made the attainment of override and incremental
commission more challenging, either by raising targets annually over
and above the rate of inflation, and/or raising the point at which
incremental commission became payable. At the same time, it
increased the rate of the incremental and override commission. 14 It is
common cause that in order to retain their previous level of profitability,
agents would not only have to exceed their targets, but also exceed
them by some margin to take advantage of the override and
incremental commissions. However for those who could ascend the
peaks the rewards were bountiful. It is this mechanism and the alleged
incentives it entails that are at the heart of the Commission’ s case on
the abuse.
Explorer Scheme
21. The Explorer scheme rewarded individual travel agent consultants with
a free international air ticket based on their achieving SAA’s sales
targets. Conceptually it resembles frequent flyer schemes for
passengers. The crucial distinction between the override scheme and
Explorer is that Explorer is targeted at employees of the agency while
the override scheme is aimed at the firm and hence its shareholders
benefit.
22. SAA was the only airline offering this type of incentive to local travel
agents. Mr Venter, the Financial Director of BA/Comair, testified that
his airline could not match such a scheme because BA/Comair’s
volume base of sales was too low in relation to that of SAA, to make it
viable.
23. A second aspect of the Explorer Scheme was a bonus pool that
allocated points to an agency as whole, based on the sales of all its
allocated points to an agency as whole, based on the sales of all its
consultants. More points are obtainable depending on the agency’s
share of total SAA sales. According to Viljoen, this aspect of the
scheme incentivises not only the individual consultant, but also the
staff of the travel agency as a whole. 15
24. The Commission state that the Explorer Scheme was in full operation
during the relevant period and, in conjunction with the override
incentive scheme, aggravated the anticompetitive effect of the
override incentive schemes.
14 Transcript page 5778.
15 See transcript page 583 read with the Explorer conditions set out at page 624 of the
record.
7
The Commission’s case
25. The Commission’s case is that the abuse of dominance relates to two
relevant markets. The first is the market for domestic scheduled airline
travel and the second is the market for South African travel agency
sales of domestic scheduled air travel in South Africa. 16 SAA is alleged
to be dominant in both. It alleges that SAA has used its dominance in
the travel agency market to impose on travel agents a system of
compensation that not only rewards them in terms of an
unobjectionable basic commission, but also rewards them additionally
by means of commission calculated on the override and incremental
incentives we referred to above. For the sake of convenience we refer
to these latter two additional methods of compensation, collectively, as
the override incentive scheme. The Commission argues that the effect
of the override incentive scheme is to induce travel agents to sell more
SAA tickets and less of those of its rivals when the agent has an
opportunity to do so. The reason is that as the agent sells more SAA
tickets its, rewards increase significantly. These rewards would be
foregone if the agent instead sells tickets of SAA rivals. Thus agents
have a compelling financial incentive to prefer to sell an SAA ticket to a
customer over that of a rival. Crucial to the Commission’s case, is the
fact that SAA redesigned its override compensation in 1999 by
reducing the basic commission and increasing rewards via the override
and incremental incentives, but travel agencies needed to achieve
much higher levels of sales before these additional rewards became
payable to them. Once attained however, the rewards became
increasingly lucrative.
26. How does the travel agent manage this if the customer wants to fly with
a rival? The Commission argues that the travel agents are not always
a rival? The Commission argues that the travel agents are not always
able to influence the customer’s choice, but can do so frequently
enough for their intervention to matter. The reason agents have this
ability, is that airline ticket prices are so volatile that they are not
transparent to customers and hence they are willing to accept the
agent’s advice. The increased business that the scheme brings to SAA
does not come so much out of new business, but rather at the expense
of SAA’s rivals who, because their compensation schemes are less
lucrative, since they sell less tickets, will never be in a position to
reward the agent in the way the SAA scheme does. Thus the agent
earns more by selling its next ticket on an SAA flight than on a
Nationwide flight.
27. This, says the Commission, is what makes the conduct exclusionary in
nature. The imposition of the Explorer scheme on top of the override
16 See Commission’s Heads of argument page 10 paragraph 2.5.1
8
scheme serves to enhance its exclusionary nature as the Explorer
scheme operates at the level of individual consultants and employees.
28. The Commission goes on to argue that because travel agents can and
do distort consumer choices to accomplish their own commercial
objectives, this leads to two competitive harms. The first is that
consumers in the short run will be flying on more expensive tickets and
at less preferable times than if the ticket offering had been unbiased.
Secondly, that SAA is able to perpetuate its existing dominance and to
restrict new entry into the market and to inhibit its existing rivals from
expanding in the market.
29. The net result of an anticompetitive exclusionary strategy is a less
competitive market in which there are higher fares, less choice for
consumers and less innovation. 17
SAA’s case
30. SAA embarked on a war of attrition against the Commission’s case.
Not only does it dispute the Commission’s approach to market
definition as we later discuss, but it goes on to deny that it is dominant,
even if these definitions are accepted. Secondly, it contests the notion
that travel agents either have the inclination or the ability to move
passengers away from their airline of choice to SAA. Thirdly, SAA
disputes the Commission’s case on the effects of the schemes. SAA
argues that not only has the Commission failed to establish a causal
link between the schemes and the expansion of SAA in the market,
and the corresponding demise of its rivals, but that it has also failed to
demonstrate harm to consumers. 18
31. SAA does not deny having redesigned its override scheme in 1999,
but claims that this was not done to introduce exclusionary incentives,
but rather to lower the costs of its distribution system by making
but rather to lower the costs of its distribution system by making
agencies more efficient and not to reward them for sales growth that
they had no part in i.e. increases due to ticket price inflation.
32. Finally SAA invokes the efficiency defence contemplated in sections
8(c) and 8(d). It argues that even if the scheme is found to be anti
competitive, it nevertheless enhances the efficiency of its distribution
network because travel agents are incentivised to become more
familiar with SAA products and hence better able to guide consumer
choice.
17 See Commission Heads of Argument page 52 paragraph 5.1.7.
18 SAA contests the evidence of this trend but also offers an alternative theory, assuming the
trend is correct, for why it happened that is not causally linked to the incentive scheme in
operation at the time.
9
The Relevant Markets
33. As this case concerns an alleged abuse of dominance, it is trite law
that the Commission needs to establish that SAA is dominant in
respect of some market for the conduct alleged to be abusive to be
unlawful. In most abuse cases only one potential market is implicated
and the relevant market debate turns on whether it has been defined
with sufficient precision with respect to potential substitutes. In this
case the debate is somewhat different, as we are dealing with the
relationship between two possible relevant markets. These are not
alternative market definitions, as SAA in its heads of argument
suggests, but interdependent markets – without the one, the abuse
could not be effected, without the other, the exclusion would be
ineffectual.19
34. In our view this is an aspect of the case that SAA has failed to grasp
and hence its counterdefinition of the relevant market as one premised
on specific routes at specific times ignores the possibility of the
relationship.
35. That more than one market can be implicated in an abuse case is not
novel in competition law. Cases in the European Union have dwelt
upon these possibilities. Whish states that in the EU, it is not required
that the abuse, dominance and the effects of the abuse all occur in the
same market. For instance, in the Commercial Solvents case ,
Commercial Solvents ceased supplying its downstream customer with
a raw material to manufacture a particular drug, since it wanted itself to
enter the downstream drugmanufacturing market. 20 It was found to
have abused its dominant position in the market for the supply of the
raw material in order to better its own position in the downstream drug
market, in which it had no presence, let alone being dominant. In the
market, in which it had no presence, let alone being dominant. In the
European cases of tieins, it is common for the abuse to be perpetrated
in one market, while the effect is felt in another market. 21
36. There is nothing in our Act that suggests that an abuse of dominance
cannot be perpetrated in one market and the effect thereof be
experienced in another related market. Any contrary interpretation
would mean that a dominant firm could leverage its market power from
one market into another, with impunity.
19 See SAA Heads of argument page 62 paragraph 141.7, “The Competition Commission
has argued alternatively,…” and later at 141.8 “if the Competition Commission’s alternative
market is accepted, …’
20 Case 6/73 etc [1974]ECR 223, [1974] CMLR 309. See also Sealink/b and IHolyhead
[1992] 5 CMLR 255 and of course, Virgin/British Airways OJ [2000] L30/1, [2000] CMLR 999
21 See Whish Competition Law, Fourth Edition, at pages 173, 609
10
First relevant market – travel agency services
37. The Commission first alleges that there is a relevant market for “South
African travel agency sales of domestic scheduled air travel in South
Africa”. 22
38. Let us see how they get to this conclusion. Airlines use travel agents to
sell their tickets. To do this they remunerate travel agents for their
services by way of a commission. This is not the only model for their
remuneration, but was during the period of complaint. 23 Airlines have
various options besides travel agents for selling their tickets. They may
do so directly themselves, or use some other method such as the
internet. The Commission argues that the latter two options are not
adequate and hence not competitively relevant substitutes for the
services of travel agents. In any event, the evidence is that during the
relevant period 7085% of domestic airline tickets, depending on the
airline, were sold through travel agents. 24 It is also the evidence of
Viljoen that if travel agents did not provide this service, each airline
would have to set up satellite offices to provide these services. He
states:
“This of necessity would require enormous capital expenditure and
overheads which could only be recouped by airlines by way of possible
fare increases. Such a result is clearly detrimental to passengers.” 25
39. There is a prior question – is the travel agent, the agent of the
customer or the airline? The question is answered by understanding
what we are analysing. Where the practice complained of relates to the
effect of a remuneration scheme for travel agents, then the appropriate
definition is that of a market in which airlines purchase ticket
distribution services from travel agents.
40. The best evidence for the centrality of travel agents as a distribution
40. The best evidence for the centrality of travel agents as a distribution
mechanism is that of Viljoen who, in an effort to justify the override
scheme, has argued that for airlines to duplicate these services by
creating networks that replicate those of travel agents would be
prohibitive.
“If I had to replicate that overnight, I don’t know how I will, we will have
to treble, as I said our IT platforms. We would have to employ staff at a
huge cost and train them.” 26
22 See Commission’s Heads of Argument paragraph 2.5.2.
23 We are told by SAA in its most recent filings that it is negotiating with the industry on a fee
based form of remuneration. See SAA Remedies Affidavit page 26.
24 See Transcript 16 August 2004 at page 10, Commission’s Heads page 24.
25 See SAA answering affidavit paragraph 9.2, Record page 38 .
26 See Transcript page 503.
11
41. The reason for this is fairly clear, as the Commission argues. Internet
sales, at least at this time, did not account for a significant number of
sales during the relevant period. This is evidenced by the airline’s own
Internet sales data: in 2001, SAA sold less than 0.3% of its ticket
revenue through its own website. 27
42. Direct distribution channels are not an alternative for consumers who
want to examine their choices. Thus although these channels are
alternative means for airlines to sell tickets to consumers, they were
not during the relevant period, satisfactory substitutes for consumers
shopping for the best available options on domestic flights and the
preponderance of consumers choosing travel agents over the other
options speaks most powerfully to this point. Nor indeed is it likely that
airlines would need to bother with incentive schemes if this outlet was
not of such centrality. The best evidence for their centrality during the
period is the significant percentage of each of the three airlines’ tickets
sold through travel agents during the relevant period. (See Table 1 that
appears below)
43. The figures show that all three airlines relied, during the relevant
period, on travel agents for the sale of the bulk of their domestic airline
tickets. By comparison, other vehicles for ticket sales cannot be
regarded as competitively significant substitutes.
44. We find that first relevant market is the market for the purchase of
domestic airline ticket sales services from travel agents in South
Africa.
Dominance
45. Having defined this market we now turn to the question of whether
SAA is dominant in this market. 28 Table 1 below sets out the
respective sales of SAA, BA/Comair and Nationwide for one year
during the relevant period, July 2000 to June 2001. These figures
during the relevant period, July 2000 to June 2001. These figures
come from tables prepared by the Commission based on documents
discovered by the three respective airlines. SAA has not challenged
the veracity of the figures, insofar as they purport to represent the
respective ticket revenues from sales through travel agents, and they
constitute a useful proxy for the market shares in the travel agent
27 Commission’s Heads, page 9 paragraph 2.4.2 and Record page 299 and 307.
28 Section 6 of the Act excludes from the dominance provisions of the Act, a firm that has a
turnover lower than five million rand in its annual turnover. It is not disputed that this exclusion
is of no application to either relevant market in this case.
12
market during the relevant period. 29
46. SAA’s dominance as a seller of tickets emerges from these figures. Not
only does it account for 65,7% of total sales but also 69% of sales
through travel agents.
Table 1: SAA’s Market Shares Relative to its Competitors *
SAA BA/Comair Nationwide
Sales
Domestic
65.7% 27.6% 6.6%
Airline’s Sales
through travel
agents
69% 25.3% 5.7%
Proportion of
sales through
travel agents
relative to
total sales
85% 74% 70.2%
Source: Tables A.1A.3 Pages 13 Figures Bundle 2 * (July 2000 to June 2001)
47. As Table 1 shows, SAA’s sales dwarf those of its two domestic rivals.
This difference in volumes is relevant to the theory of exclusion that the
Commission advances. It is not only SAA’s absolute size that matters,
but also its size relative to that of its rivals.
48. SAA sales constitute over 45% of sales of domestic airline tickets
through travel agents and hence it is presumed to have market power
in terms of section 7(a). 30
Second relevant market Market for domestic airline travel
49. The Commission’s second relevant market is the market for
“scheduled domestic air travel in South Africa.” 31
29 See figures bundle 2 page1. SAA had challenged the methodology behind earlier figures
of the Commission insofar as they relate to the second relevant market, more on what this is
later on, and so the Commission revised these figures in Figures bundle 2, but still not to the
satisfaction of SAA. The earlier figures which were for a slightly different reference period
April 2000 to March 2001 showed SAA having 73,9% of the domestic market and 71,79% of
travel agency sales.
30 We deal later with an argument by SAA, which seems to suggest that even if market
shares exceed 45% evidence of market power must still be established or at least is capable
of being rebutted.
31 See Heads of Argument paragraph 2.5.1.
13
50. This relevant market definition was the subject of great contestation.
SAA disputes the way the Commission has defined the market not, as
is usual, in a debate over possible substitutes, but at the conceptual
level as to what market is relevant given the nature of the complaint.
Secondly, even if the Commission’s definition is accepted, SAA
disputes the method that the Commission has adopted to count market
shares.
51. SAA has not presented a consistent position on the relevant market.
In its answering papers, Viljoen argues for a market for the provision of
domestic air travel services in the conveyance of passengers on
particular domestic airlines routes, on particular flights, at particular
times on particular days. 32 Its experts, whose report came later in the
proceedings, had a different view. They defined two types of relevant
market. Firstly, that of all domestic flights on three citypairs where
SAA and Nationwide compete, with a separate market for business
travel and another for leisure travel in each of these citypairs. 33
Secondly, the market for distribution of domestic airline tickets. 34 In
final argument, SAA adopted the stance of Viljoen and contended for
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. SAA also argued
that the channel to market whether by means of travel agents, internet
or direct booking is immaterial to the service being bought and the
relevant market. 35
52. We agree with the Commission that this approach to the relevant
market is flawed because it fails to properly account for the abuse
being advanced. In short, the relevant market is wrong because it is not
being advanced. In short, the relevant market is wrong because it is not
relevant to the theory of harm being advanced. Were the case one of
excessive pricing in respect of a category of airline tickets, then finding
submarkets in respect of particular classes of passengers on city to
city pairs at particular times, may be feasible. It is not however
pertinent at all to the market in which the abuse is being experienced
(the travel agent market) or the market where the exclusion finally
takes place, domestic air travel.
53. In our view the Commission has correctly defined the second relevant
market as being the market for scheduled domestic airline travel, as
this is the market where, if the behaviour is exclusionary, the final effect
will be experienced. It will not be experienced in any narrower sub
market, as the exclusionary effect, if it exists, is experienced across the
32 See Record page16
33 See Record page 371,374
34 See Record page 375
35 Respondent’s Heads at paragraph 141.5 page 61
14
range of citytocity pairings, passenger classes and flight times.
Although SAA’s rivals are not present on all domestic routes, and at all
times, they are potential competitors in respect of all scheduled flights
where they do not already have a presence. The evidence is that the
number, destination and time of flights is continually changing so that
we cannot view the market as a static model where rivals only contest
route times and schedules that they are on at a particular moment in
time.
54. The override scheme applies to all domestic tickets sold by SAA
uniformly, not to specific classes of tickets. If it has the effect the
Commission contends for, namely that it incentivises agents to sell
SAA tickets at the expense of its rivals, then this behaviour will be felt
in the related market of domestic airline travel as whole. It can affect
the sale of any of its rivals’ tickets on any route, at any time or on any
class. SAA’s distinction may be of relevance if the abuse was
perpetrated in respect of customers in the domestic airline travel
market, but on these facts, it is not. The abuse occurs in the related
market and its effects are experienced across the domestic airline
travel market as a whole.
55. This marketwide effect was conceded by Viljoen :
“ MR PRETORIUS “So in other words, do you agree with me
that the same effect that is in the whole market will be in any
single city pairing that we may speak about, if there is such
an effect?
MR VILJOEN: Yes, there is. In that case, yes.” 36
56. We find that the second relevant market is the market for
domestic scheduled airline travel.
Dominance
57. Perhaps the most contested terrain in this matter has been the
Commission’s figures and methodology in arriving at its conclusion that
SAA is dominant in this market.
SAA is dominant in this market.
58. Dominance in a market may be calculated using various determinants.
Most commonly the method is based on the relative sales revenues of
the firms in the particular market. Whilst sometimes other figures are
used, number of goods sold etc, this if often because sales revenue
figures are not available, rather than the fact that they are not
considered a reliable statistic for the purpose of determining market
36 Transcript page 540
15
share.
59. In this case, the Commission has sought to establish the fact that SAA
is presumptively dominant in the market for domestic airline travel by
making use of data on ticket sales revenue. This is not an
uncomplicated task as the discussion will show.
60. The first question before we examine the data is whether to attribute
the figures of SAX and SAL, two other regional airlines that operate in
the domestic market, to SAA. SAX refers to South African Express
Airways (Pty) (Ltd). At the relevant time, Transnet owned 76,01% of
SAX, with the balance held by Thebe Investment Corporation. SAL
refers to South African Airlink (Pty) (Ltd). At the relevant time, SAA had
a 10% interest in SAL with the balance held by private shareholders,
unconnected to SAA or the government. 37
61. The Commission argued that since SAX and SAL have some common
ownership links with SAA, share groundhandling facilities, code
sharing, common sales outlets and common branding, we should
conclude that they acted in concert with SAA. More importantly, the
evidence of Viljoen suggests that these airlines operated as satellite
services complementary to those of SAA and hence did not directly
compete with it. 38
62. The Commission further makes the point that, insofar as the market for
travel agency services is concerned, many of the override agreements
concluded during the relevant period, including those of the largest
agencies, included sales of SAX, SAL, or both, within the target figures.
This means, the Commission argues, that from the perspective of
these agents, the differences between these firms were irrelevant and
hence it is proper to count them as part of SAA’s share for the purpose
of the travel agency market.
63. In the market for domestic air travel, since we find that SAA is
63. In the market for domestic air travel, since we find that SAA is
dominant without including the market shares of either SAX or SAL, we
need not decide this particular issue, although we supply figures for
both in Tables 2 and 3 below. In relation to the travel agency market,
attributing their market shares to SAA seems correct, given that for the
purpose of achieving their compensation levels, travel agents could
include sales on SAX and SAL in their SAA totals.
64. The first source of data on ticket sales is the revenue generated by
travel agents on tickets that they sell. The method by which this is done
is called the BSP or bank settlement plan. When an agent sells a
37 See Record page 445.
38 See transcript page 494.
16
customer a ticket they take the first coupon in the ticket pack and send
it to the BSP, which computes an amount owing to the airline. This
amount, which reflects gross sales by travel agents, is referred to as
‘BSP revenue’. When the passenger crosses the gate at the airport and
boards the aircraft for the flight in question, the coupon that is in the
boarding pass is collected and is processed. That information is
captured in an information system and is referred to as ‘flown revenue’.
65. BSP revenue is always higher than flown revenue for the equivalent
number of sales. This is so for a number of reasons. In the first place,
flown revenue excludes revenues owing to travel agents for
commission. It also excludes cancellations and interline revenue,
where part of a particular flight booking makes use of the services of
another carrier. 39
66. Flown revenue is therefore a more reliable gauge of market share.
However although the Commission, cognizant of this distinction,
prepared its market share figures based on flown revenue as opposed
to BSP, its approach was still criticised by Viljoen. Indeed, so many
difficulties did he foresee that he seems to view the exercise as futile.
67. Here is a sample of what he said on this point:
“So the difficulty we have as an industry is there is no easy comparison
of market share… If we use capacity, which is what I used, that is the
maximum that it can be if you fill every seat providing you split it
between point of sale. If you use BSP it is highly flawed because it is
sold and not flown. There are cancellations. There are other airline
sectors in there. There are yield management effects. If you use ACSA,
again it is just feet crossing the threshold into an aircraft and it
does not take into account the point of sale. The only true
does not take into account the point of sale. The only true
measurement of market share is actual carried or flown
passengers of each airline, which statistics we do not have for
our competitors…(p 535)…So are no accurate figures. (p529).
You need to get the flown, carried passengers of each of the
airlines taking into account where the tickets were bought, if
you want an accurate measure of the true domestic market
shares. There is nothing else. And we don’t have it. So we
guess”.
68. Let us deal with these objections of Viljoen’s, and others not recorded
in this extract to see if they have any substance.
i)Tickets may have been sold in another country not South Africa.
39 See evidence of Mortimer transcript page 4041
17
69. Viljoen says a flight may have been reflected as flown revenue even
when the ticket was sold by an overseas travel agent. He stated that
depending on the time of the year, this figure could constitute as much
as 20–40% of the number of passengers. No documentary evidence
was offered to support this however. 40 Nevertheless the Commission
responded to this criticism and through us, requested further
documentation from SAA. 41 It requested SAA to provide figures of
flown revenue of SAA on domestic services sold in South Africa,
broken down into the following categories: Interline, online, direct
sales, travel agent sales, and finally, total sales including interline and
total sales excluding interline. 42 It therefore was able to compute
SAA’s market shares by excluding sales outside South Africa, thereby
representing only domestic sales of domestic tickets, and also to
exclude interline data.
70. Secondly, the Commission obtained data from each of the airlines and
combined this with data from ACSA to calculate the number of
domestic passengers passing through Johannesburg Airport who
purchased tickets in South Africa. 43
71. The revised figures submitted by the Commission at the resumption of
hearing in November 2004, which we find in the record in Figures
Bundle 2, cure the defects listed by Viljoen in that firstly, they excluded
domestic air tickets sold abroad. Secondly, they addressed the
concern that the figures didn’t account for cancellations since, being
flown revenue, these figures excluded refunds, cancelled tickets, lost
tickets, i.e. any ticket that are included in BSP that’s not contained in
flown revenue. Finally, the figures excluded interline sales. 44
72. When the hearing resumed three months later, the
Commission had had a chance to present these figures to
Commission had had a chance to present these figures to
Viljoen in cross-examination. The Commission showed, that in
fact, there was no substantial growth in the tickets sold
40 This aspect of his evidence did not feature at all in his answering affidavit. “So
at the time of doing my affidavit, I didn’t appreciate that from a competition
perspective it was necessary for me to clearly highlight the importance of a point
of sale. It is a commercial reality. It is something I deal with every day but when I
talk domestic I either talk all the passengers from all sources or on a direct
competitive basis, I split it out. So in my affidavit I failed to clarify that it is
important to address the point of sale. It is a fact that a large proportion of our
domestic passengers are fed from international flights onto those services.”
Transcript dated 20 August 2004 at page 498.
41 See Tribunal order dated 4 October 2004.
42 See transcript 8 November 2004 page 19.
43 They did this by obtaining SAA’s and other airline’s foreign sale figures only and deducting
these from the ACSA figures (which included domestic and foreign sales).
44 See figures bundle 2 page4 column 3
18
outside South Africa, but in fact, there was a decline. 45
Though denied by Viljoen, this was not seriously contested by
SAA.
73. Viljoen also appears to be have doubted that the SAA figures could be
cleansed of foreign sales as, according to him, it did not keep records
in this way. Counsel for the Commission explained that the order
requesting further information from SAA had required a breakdown that
made the distinction and that this information had then been supplied.
It is worth noting here that when Viljoen resumed his evidence he was
no longer an employee of SAA, having left a month earlier and had, it
appears, no part in the compilation of the document. Be that as it may,
this fails to explain the discrepancy between what he says SAA could
supply and what they did. SAA itself did nothing to attempt to fill this
lacuna.
74. We accept that the order was validly complied with and that the figures
supplied purport to be what they say they are and that the Commission
correctly relies on this information to calculate market shares.
ii) The figures do not take into account ticket swaps between airlines.
75. Viljoen testified that SAA and BA/Comair have an arrangement that
each will honour the other’s tickets. A passenger thus with a ticket
issued by BA/Comair and who then flies on an SAA flight, would be
reflected on flown revenue as an SAA sale. The Commission has not
been able to correct for this feature, but Viljoen is not able to explain
why it is statistically significant given that this is on his evidence a
reciprocal arrangement.
iii) SAA figures will always be higher because it has a better yield per ticket
sold.
76. Viljoen says that because SAA has a better yield management system
it gets a better yield per seat than do its rivals. 46 Accordingly its
revenues will always be higher than the other two even if they have
revenues will always be higher than the other two even if they have
sold the same number of seats. Flown revenue does not correct for
this. Again this criticism is made abstractly and no exercise has been
performed by SAA to show how statistically significant it is. BA/Comair
and Nationwide provided the Commission with their average ticket
yields from July 1999 to June 2001. 47 SAA was asked to provide the
same figures, but stated that it did not have them. This came as a
surprise to Viljoen, now testifying as an erstwhile chief executive, who
45 Transcript of 8 November 2004, at page 6. See also Figures Bundle 2, Table D1 page 6
46 According to Viljoen this is a computerised system.
47 Figures Bundle 2, page 13, Table F.
19
said that in his day the data was available and that perhaps the new
people did not know how to access it.
77. This is a most unsatisfactory response. Again, as with the flown
revenue figures, it does not redound to the credit of SAA that it cannot
have resolved anomalies in respect of documentation between the
erstwhile chief executive officer and those responsible for answering
the Commission’s requests.
78. Nevertheless the Commission still performed an exercise to show what
the figures were using passenger numbers only. The Commission
obtained from ACSA figures that showed the number of domestic
passengers passing through Johannesburg International Airport who
purchased tickets in South Africa. This data yielded the following set of
market sharesSAA 66,8% BA/Comair 22,4% and Nationwide 10,8%.
When the figures included SAL and SAX, then broken down they were
as follows: SAA 56,9%, SAL 5%, SAX 9,7%, BA Comair 19,1% and
Nationwide 9,2%. Viljoen still questioned whether these figures had the
foreign sales extracted and more generally whether the ACSA figures
were reliable. The Commission had called a witness from ACSA who
testified that these figures came from the airlines themselves.
79. T he Commission also argued that revenue, as a basis of calculating
market share is an accepted practice worldwide. Furthermore, revenue
is used by all airlines, SAA included, to calculated commission and
incentive payments.
80. We would agree. Even though the Commission has done its best to
correct for this alleged distortion by extracting passenger figures which
reveal much the same figures, it is not clear, as a matter of antitrust
economics, that Viljoen’s objections on this point have any substance.
The fact that a firm’s revenues are higher per unit than those of its
rivals, does not mean that sales revenue has to be adjusted to correct
rivals, does not mean that sales revenue has to be adjusted to correct
for this. It is precisely because it is able to attain these revenues, that is
of interest.
81. In our view the Commission has done a more than thorough task in
assembling and analysing the sales revenues and has correctly come
to the conclusions on market shares that SAA has. Let us now consider
the figures.
82. We set the various figures that the Commission has extracted in their
various permutations in Tables 2 and 3 below.
20
Table 2: Domestic market share of SAA using various data sources (%)
Airlines Flown revenue for
domestic travel
agency sales 1,2
Domestic passenger numbers via
Johannesburg that purchased
tickets in South Africa 3
SAA only 69 56.9
SAA and SAX n/a 66.7
SAA, SAX
and SAL
n/a 71.7
Notes: 1 Calculation excludes SAX and SAL.
Sources: 2 Table A.1, Figures Bundle 2, p1. 3 Figures bundle 2, Table C, p5.
Table 3: Market Shares of SAA based on revised estimates
Description of market Data Market Share
(%)
Market share of SAA for travel agency sales Flown
Revenue
69
Market share of SAA (by value) Flown
Revenue
65.7
Market share of SAA by passenger numbers
(with SAX and SAL included) (by volume)
Passenger
Numbers
SAA 56.9
SAL 5
SAX 9,7
Market share of SAA by passenger numbers
(with SAX and SAL figures excluded) (by
volume)
Passenger
Numbers
66.8
Source: Figures Bundle 2 pages 1, 5
83. What most of these figures suggest is a market share figure close to
66%. Even if one excludes the SAX and SAL and uses only passenger
numbers, the most favourable figure in the tables for SAA, the market
share is still 57%. Is it likely that there remains in this lowest possible
figure, methodological gremlins that the Commission has not ironed out
that affect SAA shares more disproportionately than its rivals that could
bring this figure below 45%? We are satisfied that there are not.
84. We are further comforted by the fact that other proxies for market
share (i.e. other than revised flown revenue and passenger figures)
exist, which tell a similar story. We have the figure offered by Ms
Harris, of Rennies Travel, SAA’s witness, that between them, SAA,
SAL and SAX manage on a daily basis, approximately 70% of the
domestic flights or departures in this country. 48
48 Transcript November 2004, page 59.
21
85. Then we have the consistency between these figures and internal
travel agency estimates. For instance one travel agent in
correspondence remarks in a letter to SAA that “the nearest other
airline barely achiev[es] one third of SAA sales. ” 49
86. Not only has SAA not come up with figures of its own, its objections to
the Commission’s figures have been speculative, trivial and ultimately,
unhelpful. Never did SAA say, “ you have got it wrong by making this
mistake this is what the figures are.” Rather it adopted the pose of a
caviller without offering a version of its own, a task which could not
have been difficult, given the small number of players in the market and
its own market intelligence, being the largest airline. The Commission
by contrast has done a thorough and diligent job in establishing the
figures and has during the course of the hearing met all of SAA’s
objections to the extent it has been possible to do so.
87. In our view the Commission has demonstrated that SAA’ s market
share is well over 45%. Because we find that SAA is presumptively
dominant we need not deal with a good deal of the evidence raised by
SAA’s expert witnesses to the effect that it does not in fact have market
power. This evidence is irrelevant, because once we find a firm’s
market share exceeds the 45% threshold it is presumed to be dominant
in terms of section 7(a) which states categorically that a firm is
presumed dominant if it has 45% of the market. This is to be contrasted
with section 7(b) where the presumption of market power is rebuttable.
SAA is not just dominant but overwhelmingly so.
88. We therefore conclude that in the second market for domestic airline
travel, SAA is dominant in terms of 7(a).
Conclusion on market shares in both markets
89. Although we have examined at some length whether SAA has market
89. Although we have examined at some length whether SAA has market
power in the domestic airline market it is not necessary for the
Commission to show that this is the case. The Commission’s case
depends on proving market power in the primary market where the
abuse occurs and that is in the first market for travel agency services.
Because the abuse occurs here, and its effects are only felt in the
secondary market of airline travel, it is only really necessary for the
Commission to establish that it has market power in this first market.
90. Nevertheless the Commission has, as we have discussed, done more
than this and shown SAA is presumptively dominant in both markets.
Given the relationship of the markets, it would be highly unlikely for
SAA to dominate the market for travel agents services if it was not
49 Amex letter to SAA dated, 25 Feb 2000, record page 645
22
dominant in the adjacent market for domestic airline travel.
91. But the Commission has gone even one step further than relying on
legal presumptions. It has shown that SAA enjoys market power in
relation to travel agents. Recall this is the market power that is relevant
in this case otherwise the abuse could not be perpetrated. The
evidence in this case of the negotiations with travel agents and how
SAA was able to impose a remuneration model on them against their
will, is an example of this. In the words of Viljoen, who was never afraid
of the blunt answer:
“MR VILJOEN: No, the fight was about the fact that I’m paying
them less, because even if they make the targets, they are
getting less, much less.
ADV PRETORIUS: But I’m saying they weren’t happy with what
you offered them.
MR VILJOEN: Not at all.
ADV PRETORIUS: Why did they accept it?
MR VILJOEN: Why did they accept it?
ADV PRETORIUS: Ja
MR VILJOEN: Because I said I’m not paying more. That’s it.” 50
92. Mortimer for his part stated that:
“ Our market power as travel agents is weak. We are not able to
dictate our revenue model in the South African market. In South Africa
suppliers determine the average level of commissions and we as
agents look to our profitability form our ability to be successful in
implementing the override agreements.” 51
93. SAA has not led any convincing evidence to rebut the notion that it has
market power in relation to the travel agency market. Its experts
queried if the market should not be analysed as a dual sided market.
That is a market where two or more distinct sets of customers have an
interdependent relationship with one another by virtue of a relationship
with a common intermediary. For antitrust purposes, such a
relationship, some recent literature suggests, may be important
relationship, some recent literature suggests, may be important
because the market power or alleged market power of the intermediary
50 Page 576 of the Record, 20 August 2004
51 See Transcript page 156.
23
may be affected by its relationship with not just one set of customers,
but perhaps two or more. 52 Thus a credit card company may need to
be looked at not only from its relationship to its cardholder customers,
but also the stores which accept its cards. The point about this theory,
as Holt has correctly noted, is that it relates to the market power of the
intermediary between two sets of customers. In this case the travel
agent is an intermediary between the supplier airlines and its
customers. But the travel agents market power is not at issue in this
case and therefore the theory, interesting as it maybe, has no
application.
94. Now recall that a firm that enjoys a market share between 35% and
45% is presumed dominant unless it can show otherwise. This means
that even if SAA’s market share in the travel agents market is below
45%, SAA has not rebutted the presumption of market power. If it was
below 35%, a figure no one, not even the most optimistic SAA witness
has seriously contended for, the Commission would have the onus of
proving market power and that, on the present evidence, it certainly
has done.
The Abuse
95. Having found that SAA is dominant in the two relevant markets we now
consider whether the Commission has established that SAA has
abused its dominant position.
Legal standard
96. The Commission, as noted, alleges SAA’s Explorer Scheme and the
incentive scheme amount to a contravention of section 8(d)(i) and in
the alternative, a contravention of section 8(c).
97. We set out below the whole of section 8 with the relevant sections
underlined because the structure of the section becomes relevant to
the interpretation of arguments to be considered.
Section 8
It is prohibited for a dominant firm to
(a) charge an excessive price to the detriment of consumers;
(b) refuse to give a competitor access to an essential facility when it
(b) refuse to give a competitor access to an essential facility when it
is economically feasible to do so;
(c) engage in an exclusionary act, other than an act listed in
paragraph (d), if the anticompetitive effect of that act outweighs
52 See for instance David Evans, ‘The Antitrust of Multisided platform markets’, Yale Journal
on Regulation, Volume 20, 2003 page 325.
24
its technological, efficiency or other procompetitive gain; or
(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 anticompetitive effects of
its act –
i.requiring or inducing a supplier or customer to not deal
with a competitor;
ii.refusing to supply scarce goods to a competitor when
supplying those goods is economically feasible;
iii.selling goods or services on condition that the buyer
purchases separate goods or services unrelated to the
object of a contract, or forcing a buyer to accept a
condition unrelated to the object of a contract;
iv.selling goods or services below their marginal cost or
average variable cost; or
v.buyingup a scarce supply of intermediate goods or
resources required by a competitor.
98. Both these subsections refer to ‘exclusionary acts ’ a term defined in
the Act as:
“..[an] act that impedes or prevents a firm from entering into, or
expanding within, a market;” 53
99. We have previously observed in York Timbers that 8(c) places a
considerably greater burden on a complainant than 8(d). The first
major difference between the two subsections is the treatment of the
evidential burden in respect of the efficiency justification. 54 In terms of
section 8(d), the onus of proof of the efficiency justification is on the
respondent, whereas in section 8(c), the onus to negate it is on the
complainant. Another difference is that in terms of 8(d) an
administrative fine is competent for a first contravention. It is thus
treated in the same way that the Act treats the other socalled per se
contraventions.55 In contrast, section 8(c) is treated in the same way
contraventions.55 In contrast, section 8(c) is treated in the same way
as other ‘rule of reason’ contraventions for which a fine is not
competent, unless the conduct is substantially a repeat by the same
firm of conduct previously found by the Tribunal to be a prohibited
practice.56
53 Section1(1)(x).
54 ‘ Efficiency justification’ is used as short hand for the reference to ” technological, efficiency
or other procompetitive gains”
55 See section 59(1)(a), which lists as well section 4(1)(b), section 5(2) and 8(a) and (b).
56 See section 59(1)(b) which lists as well sections 4(1)(a), 5(1) and 9(1).
25
100.There is a third difference. Paragraph (d) makes specific reference to
five exclusionary acts, whereas paragraph (c) refers generally to an
‘exclusionary act’. It would follow that any exclusionary act not captured
in the list in paragraph (d) would fall to be considered in terms of
paragraph (c).
101.It would seem from the manner in which the section is drafted, that
conduct in (d) is presumed to be exclusionary, whereas conduct not in
the list would still have to be established as exclusionary. It is
established under (c) only if it meets the definition of an exclusionary
act.
102.The reason for these differences in treatment is that the exclusionary
acts in 8(d) are listed, presumably evidencing the legislature’s view that
these are the more egregious of the exclusionary acts and so firms
who are dominant are on notice that they must behave with due
caution in relation to this conduct, whereas in 8(c) no acts are listed
and hence the complainant would have to prove that the conduct
sought to be impugned is indeed exclusionary. Here the dominant firm
has no advance notice that the conduct is deemed exclusionary in
nature, and hence may be in some danger zone. This explains the
policy choice to shift the onus in (c) to the complainant in respect of
negating efficiencies, and secondly, not exposing firms to a fine for first
time offences.
103. SAA asks us however to give a different reading to section 8(d). SAA
argues that it is not enough to prove that the respondent did one of the
acts listed in 8(d). The Commission must still prove that it is
exclusionary i.e. that it impedes or prevents a firm from entering into,
or expanding within, a market. Thus one would have to read into the
text of 8(d) the revised words, so that it would now read: “engage in
text of 8(d) the revised words, so that it would now read: “engage in
any of the following [exclusionary] acts, if they are exclusionary… ”.
SAA argues that the legislature did not intend to create a per se
offence in 8(d), it merely meant to signal that if exclusionary conduct of
the kind listed, is found to be the exclusionary conduct in question, the
consequences for the respondent are the reverse in onus and the
prospect of a first time fine. SAA argues that although its interpretation
requires reading in ‘ if they are exclusionary’ it does account for the
presence of the words ‘exclusionary acts’ in 8(d). If the listed conduct
were per se exclusionary, there would be no need for the legislature to
have referred to the words ‘exclusionary acts’, hence, on the SAA
interpretation, we avoid redundancy.
104. SAA’s approach is not supported by the language of the section,
which states, quite unambiguously, the “.. following exclusionary acts”.
In section 8(c) where the Act does require proof that the conduct is
26
exclusionary the language is different and refers to “ an exclusionary
act other than act listed in paragraph (d”). SAA’s approach is also
inconsistent with the way in which the per se sections are treated
elsewhere in the Act where the listing of specified conduct has created
the offence. The whole point of the legislature’s approach is to treat
certain conduct in this fashion so that its exclusionary nature does not
have to be established each time. The interpretation of SAA would
create some species of ‘middle ground’ contravention neither per se
nor rule of reason 57. The creation of this unique species to support this
reading seems wholly unwarranted. The legislature must be seen to be
taking a view that either the conduct is exclusionary in the sense
meant by the Act, or not. If not, why is 8(d) then worth the candle? If
the point of the specified list is to warn firms in advance what conduct
puts them into the danger zone, how is that purpose served if the
conduct is only susceptible to ‘consideration as’, (SAA’s reading) rather
than being ‘deemed’, exclusionary?
105. We find that as a matter of law if the Commission proves that SAA's
conduct “requires or induces a customer not to deal with a supplier”
then it has proved an exclusionary act. It is not necessary for the
Commission to go on to prove that the conduct “impedes or prevents a
firm from entering into, or expanding within, a market”. This is
consistent with our finding in Patensie where we held that section 8(d)
does not require the showing of an exclusionary effect:
“However, as already noted, in terms of Section 8(d) the complainant
does not have to establish that the act complained of has an
exclusionary effect, that is, that it prevents a firm from expanding in
exclusionary effect, that is, that it prevents a firm from expanding in
the market if it is established that one of the acts specified in the
various subclauses of Section 8(d) has been perpetrated and that
the perpetrator is dominant, then the exclusionary nature of the act is
presumed. We find that the Commission has discharged this onus.” 58
106.Perhaps a more fruitful area of debate is what consequences flow
from the fact that an act is ‘exclusionary’? The question is then whether
conduct deemed (8(d)) or found to be (8(c)) an exclusionary act , is, for
that reason, impugnable (subject of course to the conclusion on the
efficiency justification). That is not a simple answer. In York Timbers ,
an interim relief application, we stated that this was not sufficient:
57 Note when we use per se here we don’t use it in the traditional sense of excluding the
need to prove an anticompetitive effect . We mean per se in the sense that it excluded the
need to prove its exclusionary.
58 The Competition Commission and Patensie Sitrus Beherend Beperk 37/CR/Jun01, at
paragraph 95
27
“99. We conclude then that even if the facts had established a refusal
to supply by SAFCOL, it would not have been possible to impugn this
practice under the Competition Act. It is not enough to show that a
given practice is a product of market power. It must also be shown
that the act complained of actually extends that power or creates new
sites of power. This has not been established and, accordingly, the
application for interim relief in respect of the alleged violation of
Section 8(d)(2) is denied.” 59
107.One approach is to say that if the act is exclusionary, it is deemed to
have an anticompetitive effect. On this approach the only issue that
remains to be decided is the balancing of the efficiency justification
against this deemed anticompetitive effect.
108.The problem with this approach is that it can lead to the outlawing of
conduct that has no anticompetitive effect. The definition of an
exclusionary act is very broad indeed. Discussing not dissimilar
language, Areeda and Hovenkamp, in their treatise have this to say:
“In defining undesirable conduct, we are concerned mainly with
exclusionary behaviour, that which prevents actual or potential rivals
from competing or impairs their opportunities to do so effectively. But
this term and the root idea are also too broad, for they embrace all
competitive behaviour: All successful competitive moves tend to
exclude, particularly in oligopoly markets. 60
109.The same observation by the authors can be made in respect of our
Act’s definition of an exclusionary act. The term is not a useful filter for
determining whether conduct is competitive or anticompetitive; both
can sensibly be included in the definition. If, however, we do not regard
the notion of anticompetitive effect, referred to in both paragraphs (c)
and (d), as inferentially linked to an exclusionary act, this danger can
and (d), as inferentially linked to an exclusionary act, this danger can
sensibly be averted. It means that that the notion of what it anti
competitive is something different to an exclusionary act.
110. At a purely textual level they appear to be notionally different. If they
were congruent notions, then the legislature need not have troubled
itself with introducing the language anticompetitive effect into the
paragraphs, but would instead have referred to exclusionary effects.
We suggest that there is a difference between an exclusionary act as
defined and the inference that it has an anticompetitive effect. Without
some notion of what the anticompetitive effect is it would be
impossible to perform the weighing with the efficiency justification that
59 York Timbers Limited and South African Forestry Company Limited 15/IR/Feb01 at para
99
60 See Antitrust Law, Areeda and Hovenkamp Volume 3, paragraph 651b
28
both (c) and (d) require. In order to perform a weighing of the anti
competitive effect on the one side of the scale to the efficiency gain we
need to have some notion of its quantitative effect. But the definition of
an exclusionary act is descriptive of a conduct’s ‘type’, not its ‘gravity
or extent’. Thus by way of example the refusal to supply one customer
with a de minimus market share and the refusal to supply a substantial
number of customers, representing a large proportion of the rest of the
market are both exclusionary acts in terms of d(ii), but they have very
different competitive consequences.
111.For this reason the Act requires a finding both in terms of paragraphs
(c) and (d) that the complainant not only establishes that there has
been an exclusionary act, but also that it has an anticompetitive effect.
112.We have to answer two questions if we follow this approach. Firstly
what do we mean by anticompetitive effect? Secondly, if it means
something different to the notion of an exclusionary act, what purpose
does reference to the latter term serve in section 8? Why does
reference to an anticompetitive effect not suffice? If it is after all anti
competitive, does it matter if we call it exclusionary first?
113.To answer this we must appreciate the purpose of the abuse of
dominance prohibition in our Act.
114. Modern antitrust law identifies two species of abuse of dominance. 61
The one kind, termed exploitative, focuses on the effect of the abuse
on the consumer, who, in consequence of the output decisions of the
dominant firm, may be facing output constraining behaviour and hence
higher prices. Section 8(a), which prohibits a dominant firm from
charging an excessive price to consumers, is an example of this kind.
115. The other kind is an abuse that has an exclusionary effect, and this is
115. The other kind is an abuse that has an exclusionary effect, and this is
what concerns us in terms of sections 8(c) and (d). It is exclusionary in
the sense that it is conduct which excludes or impedes the growth of
rivals in the market. The theory of harm that explains why exclusionary
behaviour may be anticompetitive is usually explained in this way. An
act that is exclusionary of rivals can lead to the creation or
enhancement of a dominant firm’s ability to exercise market power. By
its exercise of market power it can adversely effect consumer welfare
by output limiting decisions. As we see this consists of a set of stages
of assumptions before we lead to a conclusion of welfare loss. Should
an abuse of dominance provision that seeks to proscribe exclusionary
61 Perhaps this is more typical of European Law than US law as the latter is more pre
occupied with exclusionary forms of abuse. For a discussion on the distinction between
exclusionary and exploitative abuse see Korah, EC Competition Law and Practice 7 th edition,
Hart Publishers page 79.
29
behaviour require there to be evidence of each part of a chain of
causation establishing the links from the act of exclusion to the loss of
consumer welfare? Areeda and Hovenkamp caution against such an
approach:
“However because monopoly will almost certainly be grounded in
part in factors other than a particular exclusionary act, no government
seriously concerned about the evil of monopoly would condition its
intervention solely on a clear and genuine chain of causation from
exclusionary act to the presence of monopoly” 62
116. It is comforting to note that even in United States law this is still a
matter of controversy. Two positions have emerged in the case law.
Sometimes this eclecticism manifests itself in the approach taken in
the same decision. Fox notes in her gloss on the Court of Appeals
decision in Microsoft that:
“ While it may be sui generis in many respects, it is typical in its
ambivalence regarding seriously exclusionary practices that
may
not have output effects.” 63
117.And later Fox asks rhetorically:
“What did the court mean by “anticompetitive” and did it use that word
consistently.” 64
118. The first approach in the case law favoured by some writers notably
those close to a Chicago School, requires a showing of harm to
consumer welfare in order to make conduct unlawful. Absent such a
showing these writers contend there is a danger that courts will
“mistake protecting competitor profits for consumer welfare”. 65 These
writers find authority for their position in decisions of the Supreme
Court such as Brooke Group a case dealing the standard of proof
required in predatory pricing claim. The Court noted:
“Mistaken inferences are especially costly, because they chill the
62 Areeda op cit paragraph 651 c.
62 Areeda op cit paragraph 651 c.
63 United States v Microsoft Corporation 253, F.3D 34 (D.C.Cir). See Fox: “What is harm to
competition? Exclusionary Practices and Anticompetitive Effect.” 70 Antitrust L.J. 371, See
page 6.
64 See Fox, op cit 386.
65 See Chang,Evans and Schmalensee, ‘ Has the Consumer harm standard lost its teeth?
High Stakes Antitrust The Last Hurrah? ” R.W. Hahn AEI –Brookings Joint Centre for
Regulatory Studies Washington DC.
30
very conduct the antitrust laws are designed to protect.” 66
119.Muris, who is representative of the views of this school of thought,
argues that:
“Both the history of the Supreme Court cases, as well as an
analysis
of the weak empirical foundation of much modern economic
theory,
suggest that socalled exclusionary conduct can be
condemned as
monopolistic only after a full analysis, including consideration
of
whether the practice in fact has an anticompetitive effect.” 67
120. For Muris anticompetitive effect is the ”ability to raise price and
restrict output.” 68
121. The second approach is to find liability if there is evidence that the
exclusionary behaviour will lead to substantial market foreclosure.
Writers who support this approach are concerned that if harm to
consumer welfare is the standard, antitrust law will be underdeterrent,
because evidence of harm to consumer welfare is very difficult to come
by. Support for this approach is found in earlier Supreme Court
decisions, such as Lorain Journal and Otter Tail Power Co. In Lorain
Journal the Court held that it is:
“not necessary to show that success rewarded appellants attempt
to
monopolise” 69
122.In other words what the court is saying is that proof of anticompetitive
effect, in the sense that Muris understands it, is not necessary.
123. The second approach is best articulated in Fishman v Wertz a
decision of the Seventh Circuit. The Court held that the antitrust laws
protect competition and the competition process, not results. It was no
defence that consumers were not hurt. Thus:
66 See Brooke Group v Brown and Williiamson Tobaccco Corp , 509 U.S. 209,222 (1993).
The writers referred to are Chang et al op cit at page 76 and Timothy J. Muris, “ The FTC and
The writers referred to are Chang et al op cit at page 76 and Timothy J. Muris, “ The FTC and
the Law of Monoplisation” , 67 Antitrust Law Journal 693 (2000) at page 699.
67 See Muris op cit page 695.
68 See Muris op cit at page 697.
69 See Lorain Journal Co v United States , 342 U.S. 143 (1951) at 153.
31
“[Defendants] assert that “ the antitrust laws do not apply where
there is no consumer interest to protect.” … The dissent
makes the
same argument about consumer effect. “ Antitrust law
condemns
results harmful to consumers….” “We agree that the
enhancement
of consumer welfare is an important policy – probably the
paramount
policy – informing the antitrust laws… Some Supreme Court
cases
indicate that effect on ultimate consumers is, in an appropriate
context, a significant consideration in analysing a business
practice to
see whether there has been an antitrust violation… The
antitrust laws
are concerned with the competitive process, and their
application does
not depend in each particular case upon the ultimate
demonstrable
consumer effect. A healthy and unimpaired competitive process
is
presumed to be in the consumer interest .”70 (Our underlining)
124.Areeda and Hovenkamp in their treatise have suggested a test that
has influenced later decisions. They suggest that:
“In sum, ‘exclusionary’ behaviour should be taken to mean conduct
other than competition on the merits or other than restraints
reasonably necessary to competition on the merits, that
reasonably
appear capable of making a significant contribution to
creating or
maintaining market power .”71 (Our underlining)
125. In Microsoft we hear echoes of this approach when the Court of
Appeals commenting on one aspect of Microsoft’s behaviour in
excluding rivals from the bootup sequence said:
“ Because this prohibition has a substantial effect on Microsoft’s
market power, and does so through a means other than
competition
70 See, Fox op cit at footnote 39.
competition
70 See, Fox op cit at footnote 39.
71 See Areeda op cit paragraph 651c.
32
on the merits, it is anticompetitive.” 72
126. In Europe, Fox argues, the approach to exclusion cases is “often
phrased as a dynamic one: the right of market actors to enjoy access
to the market on the merits.” 73 She goes on to argue that in
European Court of Justice cases it is clear that:
“harm to competition is a wider concept than the result –
oriented
output limitation. Use of dominant power to procure significant
advantages not on competitive merits, thereby preempting
competitors’ opportunities, is a harm to competition under
Article 82.” 74
127.What is happening in this debate in the case law and academic writing
takes us back to the chain of causation referred to by Areeda.
128.What are courts doing when they find behaviour to be anticompetitive
in the absence of evidence of harm to the consumer? Essentially they
are consciously, or sometimes unconsciously as Fox suggests, making
inferences of fact and law and sometimes, mixed fact and law, to arrive
at findings of competitive harm by way of proxy. Courts may find that,
as a matter of fact, a particular business practice is exclusionary. As a
matter of fact, a court may also find that the practice has the potential
to foreclose the market for competitors of the dominant firm. As a
matter of inference on the facts the court may find that this is likely to
foreclose competition. As a matter of inference the court may
determine that if competition is foreclosed, there will be an adverse
impact on competition. 75 This latter type of inference, as Fox has
pointed out, is not factual, but legal. It is based on an assumption that :
“.. markets are more likely to reward merit if they are not clogged
by substantial unjustified exclusions. Moreover, although we
may not know the direction in which ‘open’ competition will take
may not know the direction in which ‘open’ competition will take
us, we may prefer to let the chances of competition –rather than
the strategies of the dominant firm take us there.” 76
72 See Microsoft id, 6162
73 Fox op cit page 395.
74 Fox op cit page 405.
75 The approach to examining the analysis by way of a series of inferences is informed to
some extent by Fox, in her article cited, and Areeda and Hovenkamp in their treatise op cit. at
paragraph 651c footnote 20.
76 See Fox op cit page 391.
33
129.What this excursion into the case law and commentary suggests is
that there is respectable authority for the notion that exclusionary
practices should not require evidence of actual competitive harm for a
finding of abuse. A finding is still possible if there is evidence that the
exclusionary practice is substantial or significant, or expressed
differently, 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 does the latter
it will be assumed to have an anticompetitive effect.
130.It is however necessary not to limit that competitive harm to the notion
of consumer harm because of the danger, as the writers we have
quoted have suggested, that the Act would then have introduced an
elaborate scheme to regulate exclusionary abuses of dominance, with
deemed exclusionary conduct and reverse onuses, only to find that it is
underdeterrent. If on the other hand we inferred harm to competition
simply by the finding that conduct was exclusionary, that would risk the
danger of outlawing aggressively competitive, but nonpredatory
behaviour and so would be overly deterrent. 77
131.Authority for the fact that harm to structure suffices to show an
infringement of the Act, rather than requiring direct evidence of harm to
the consumer welfare, is evident in the approach of the Competition
Appeal Court. In the Patensie case where the court was dealing with
the implications of terms in a firm’s articles of association that
restrained its members from contracting for the services of its rivals,
Selikowitz JA held:
“There can be no doubt that the restraint provisions, with or
without the reinforcement by the penalty provisions in
Appellant’s Articles of Association enable Appellant to
Appellant’s Articles of Association enable Appellant to
prevent all its members from offering their produce to other
packing houses indefinitely and for so long as they are
members of the Respondent. Conversely, the members are
deprived of the opportunity to select a competitor to pack
and market their citrus fruit. Furthermore by tying more
than 70 per cent of the farmers to the exclusivity
agreement, other potential competitors who may wish to
compete in the relevant market are effectively excluded.
The effect of the offending Articles of Association is to hinder
the maintenance of the degree of competition which exists
and to hinder the growth of competition.
77 Areeda give as an example a firm that cuts prices aggressively but not in a predatory
manner. This conduct on our Act s’ definition if the price was below that of rivals marginal cost
could be said to impede them in the market but we would not surely want to proscribe it.
34
The Tribunal’s finding that Appellant’s “conduct that is complained of
is in clear violation of section 8(d)(i)” is, in my view unassailable. ” 78
132.In summary, we find that the Act sets out the following approach to
exclusionary practices. In the first place we examine whether the
conduct in question is exclusionary in nature. In terms of section 8(c)
that would be conduct that fits the definition in the Act for what
constitutes an exclusionary act . In terms of 8(d) it is conduct that meets
the definitions set out in the subparagraphs of that section. If the
conduct meets the requirements of the definition, we then enquire
whether the exclusionary act has an anticompetitive effect. This
question will be answered in the affirmative if there is (i) evidence of
actual harm to consumer welfare or (ii) if the exclusionary act is
substantial or significant in terms of its effect in foreclosing the market
to rivals. This latter conclusion is partly factual and partly based on
reasonable inferences drawn from proven facts. If the answer to that
question is yes, we conclude that the conduct will have an anti
competitive effect. Whichever species of anticompetitive effect we
have, consumer welfare or likely foreclosure, we have evidence of a
quantitative nature and hence we can return to the scales with a
concept capable of being measured against the alleged efficiency gain.
133.Thus far the onus of proof in terms of both sections is on the
complainant. Here the treatment of the onus in the two sections now
diverges.
134.In terms of 8(c) we then consider whether the anticompetitive effect
outweighs any efficiency justification for the conduct. If it does we can
find that there has been an abuse of dominance. Here again the onus
find that there has been an abuse of dominance. Here again the onus
is on the complainant.
135.In terms of section 8(d) the burden of proof now shifts to the
respondent who must prove that the efficiency justification outweighs
the anticompetitive effect. If the respondent does not, then the conduct
will be found to be an abuse.
136.It is now appropriate to answer our prior questions. An anti
competitive effect is something different to an exclusionary act. This
does not make the reference to an exclusionary act somehow
superfluous. It firstly signals that we are analysing an exclusionary as
opposed to an exploitative abuse. Because we know we are dealing
with an exclusionary as opposed to an exploitative abuse, it helps
guide our analysis of the alleged anticompetitive effects of the
conduct. More importantly, because some forms of exclusionary act
78 See Patensie Sitrus Beherend and The Competition Commission, Jakobus Johannes
Pietrus Bezuidenhout, Jan Daniel du Preez – 16/CAC/Apr02 at page 31.
35
are for the legislature more commonly associated with egregious
behaviour by dominant firms these are signalled out for special
mention, so that dominant firms are on their guard to be especially
careful when embarking on this form of market behaviour. Finally, we
would suggest that the use of the word has a “characterising “ function.
it signals the legislature’s intention to view competitive harm as
structural in nature as opposed to a test of abuse of dominance that is
based solely on consumer harm.
137.A cautionary word needs to be said about the use of terms such as
exclusionary and anticompetitive. These are labels which are not
always used uniformly by writers or, as Fox indicates, by courts.
Reliance on foreign authority should be premised on a clear
understanding of how the terms are being used. The danger of
uninformed borrowing of comparative jurisprudence that the
Competition Appeal Court has frequently warned against is no more
apparent than here. One person’s notion of what constitutes an
exclusionary act may be more extensive than what is meant by the
same term in our Act. (Unlike in our law the term is not defined in U.S.
law by statute but by judicial interpretation, which has led to
inconsistency.) One person’s anticompetitive harm can mean harm to
consumer welfare only, whilst another’s embraces harm to the
structure of markets as well. We as the Tribunal may likewise have
been guilty of not making ourselves clear on this point in the past. In
York Timbers we held that establishing the existence of an
exclusionary act was insufficient to prove liability, absent a showing
that it enhances monopoly power. That approach is followed in this
that it enhances monopoly power. That approach is followed in this
decision albeit with a more detailed analysis of why anticompetitive
harm includes harm to the structure of a market. In Sappi Fine Papers ,
however, we held that an exclusionary act was presumptively anti
competitive. This holding, made obiter, is not as the reader will see, the
position that we subscribe to now with our further experience of
working with the Act.
The abuse – factual issue .
Proof of an exclusionary act
138.We have now defined the legal test for section 8(c) and 8(d). The
Commission must prove an exclusionary act has taken place and
secondly that it has an anticompetitive effect. We must now examine
whether the Commission has met this standard. Since a showing under
8(d)(i) will not require us to examine the conduct in terms of 8(c), the
alternative count, we start by applying the test of proof of an
exclusionary act to the facts in terms of 8(d)(i).
36
Does the conduct require or induce suppliers [ travel agents] of the
dominant firm [SAA] not to deal with its competitors [Nationwide,
Comair]?
139.A crucial part of the SAA defence is that override agreements are not
unique to SAA nor are they of recent invention as they were around
long before the relevant period. Factually this is true. SAA has had
incentive schemes for travel agents for some years. No one is sure
when they started but they appear to have been in operation during the
1980’s i.e. well prior to the relevant period. 79 Nor were they the
brainchild of SAA. They had been in vogue overseas for some time. By
January 1999, SAA had override agreements with all the large travel
agents.80 Both Nationwide and Comair also had override
agreements.81 It is also true that from a legal perspective the SAA
override agreements in issue in this case are identical to their
predecessors in operation prior to the relevant period. 82 There is also
evidence that for the period of April 1998 up until July 2000 Nationwide
experienced a continuous increase in its passenger numbers. There is
also no evidence that Comair had any concerns about the effect of the
SAA override scheme prior to the relevant period.
140.SAA relied on this to assert that the scheme could not have affected
the behaviour of travel agents so as to induce them not to deal with
SAA’ s rivals. Thus, it argues that its rivals’ complaints of harm during
the relevant period cannot be related to any anticompetitive effect of
the scheme, but the procompetitive behaviour of SAA in the market
place.
141.What this ignores is that it is not the existence of the scheme that is in
issue but its nature, and its nature, on SAA’s own evidence, changed
significantly in late 1999. Thus while legally the scheme may have
significantly in late 1999. Thus while legally the scheme may have
looked similar to its predecessors, economically it was a different
creature. On SAA's own version it had become more ‘challenging’ for
travel agents. 83
142.Let us examine why this is so. We noted earlier that the override
agreements provide 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%; this appears to have been the
79 See Transcript page 478.
80 See Transcript page 479.
81 This point of course both legally and factually irrelevant. It is legally irrelevant because
neither is a dominant firm and hence section 8 is of no application. It is economically
irrelevant as schemes of this loyalty inducing nature can only work if the firm effecting it has a
large share of the market and its rivals have smaller one; without this its attempts would fail.
82 See Transcript page 576.
83 See transcript page 492.
37
industry standard for a very long time. Sometime in 1999 British
Airways changed its international commission from 9% to 7%. SAA, in
October 1999, followed suit. In terms of the new agreements the drop
in the basic commission was accompanied by an increase in the
commission payable in terms of the override and the increment, but
only if the agent reached a more demanding target. Its effect on agents
is described by one of the witnesses called by the Commission, Mr
Willem Puk, of SureTravel.
“ But then.. used the philosophy that we don’t actually want to save
the 2%, we actually want to give it back to you and in fact will give
you back more. We will give you the 8%, 9% and 10%, providing you
can move market share towards us and that was there [their]
philosophy. It is a scheme they adopted in the UK just prior to
introducing it in South Africa and I think from that step, things
snowballed very quickly in South Africa.” 84(Our underlining).
143.The snowballing that Mr Puk refers to presumably came about as a
result of SAA’s adoption of BA’s more aggressive approach to the
implementation of the override scheme. SAA did so in October 1999. 85
SAA is very explicit about its reasons for changing the nature of the
scheme. As the CEO at the relevant time, Andre Viljoen, testified:
“..we then went about redeveloping those override structures to.. not
reward or pay them for what we call generic growth in revenue,
because inflation pushes the price up anyhow and to make it
challenging for them to earn a reward for distributing our tickets.” 86
(Our emphasis)
144.SAA soon redesigned the agreements to reflect this change in policy.
In the agreement with Luxavia, one of the largest groups, the intention
of the scheme is expressed clearly in clause 2.1.3:
of the scheme is expressed clearly in clause 2.1.3:
“SAA wishes to incentivise and reward the agent by paying a cash
override incentive for achieving certain total SAA flown revenue
targets, all on the terms set out in this agreement. Accordingly this
override agreement is established to stimulate and encourage the
increase in total SAA flown revenue in return for the cash override
incentive payments.” 87
84 See transcript page 127.
85 See t ranscript page 591.
86 See t ranscript page 491
87 (Record page 58990). Note that although this agreement is dated July 2000 the
commencement date provided for is April 2000 notwithstanding the date of signature –
(Clause 1.2.8, Record page585)
38
145.The agreement goes on to record that the agent understands that the
standard (basic) commission is subject to reduction from time to time in
line with worldwide airline industry trends.
146.With the change in the compensation system shifting the emphasis
from basic commission, now lower, to the override and incremental
incentive commission, now higher, and with targets becoming more
‘challenging’, what is it that agents were being incentivised to do? The
answer is to direct more business to SAA if they were to retain their
profit margins, let alone improve upon them. But it does not necessarily
follow that if this was how the agreement incentivised them that its
effect was to induce agents to sell SAA tickets at the expense of those
of its rivals, which is the conduct required to make the act exclusionary.
147.In order for the agreement to have this effect the Commission has to
show
that agents have a financial incentive to move customers who
purchase tickets from them away from rivals and towards SAA;
and
that agents have the ability to do so.
148.The Commission argues that it has shown both. To prove the first
proposition the Commission’s experts, Oxera, devised an economic
model to show what travel agents’ incentives are in terms of the
override scheme.
149.The model itself has not been the subject of any serious criticism by
SAA and hence need not be examined in any detail. Rather SAA
contends that it is so theoretical, that it is of little value.
150.Oxera developed a model of the incentives facing travel agents based
on a selection of the override agreements. The model assumes a
similar agreement exists between a competitor of SAA that is one –
third of its size. We are told by Mr Holt, the expert from Oxera who
testified, that the model holds true even if the competitor is twothirds
testified, that the model holds true even if the competitor is twothirds
SAA’s size. Now the model assumes that travel agents have control
over which airline their customers wish to travel on. Oxera concedes
that this exaggerates the influence that travel agents have. (Note that
the Commission’s case is not that agents always influence consumer
choice, but they can often enough for it to be significant.) Nevertheless,
the importance of the model is to demonstrate what the incentives of
agents are, it is not meant as evidence that agents have this control.
The Commission argues that the incentives in practice are even more
stark for travel agents than the model shows, since in practice agents
39
are dealing with more than one rival to SAA and those rivals have
smaller market shares than the rival in the model. (The rival in the
model was assumed to have 25% of the market to SAA’s 75%). This
means that the additional commission generated by each individual
competitor will be lower. 88
151.The model demonstrates that travel agents maximize their
commission by allocating 100% of their customers to SAA and none to
a rival airline. Oxera then use the model to examine how the travel
agent could still maximise their commission if they shifted business to a
rival of SAA. Using the American Express agreement as an example,
Oxera shows that if they were to cut SAA’s market share by 5%, they
would need to need to receive an average commission rate of 14,4%
from a rival airline, which would so raise the rival’s costs as not to be
viable. Secondly, Oxera shows that reducing SAA’s growth by 5%
would mean a 32% growth by a competitor, which it argues, while not
implausible, is generally the kind of growth rate associated with cut
rate, no frills airlines who do not use agents for the distribution of their
tickets.89
152.The reason why the model shows these incentives is because of the
marginal incentives of agents. Oxera explains that if all tickets were
sold for a flat rate of 10% with no override scheme in place, the
marginal incentive rate to travel agents would be 10%. With the
override scheme, the incentive of the travel agent is greatly changed.
Assume an agent needs to sell 100 tickets to get to the base target.
Until the target is reached the agent gets only the basic commission.
However above the base target the override and incentive
commission’s change the compensation to the agent in two ways.
commission’s change the compensation to the agent in two ways.
Firstly, the commission increases above the basic incrementally for
further amounts of tickets sold. Secondly, and perhaps most
importantly, is that once the agent is above the base target the override
also kicks in, which means that the override rate is applied not just to
the extra ticket sold above the target, but to the whole value of tickets
sold including those sold to reach the target. This is called the ‘back to
rand one’ principle. According to Oxera:
“As a result, in some cases the marginal commission rates within the
contracts can be well above 30% of additional sales for SAA.” 90
153.Oxera prepared a table illustrating the change in these marginal
commission rates, which we have included in this decision for
illustrative purposes as appendix 1. Oxera argues that the table shows
88 See Commission Heads of Argument paragraph 5.1.4
89 See Record page 345.
90 See Record page 343.
40
that the function is often ‘discontinuous’ by which they mean that there
are sharp increases in the marginal commission rate paid. This
demonstrates incentives not only to achieve sales above the base
target, but also at later targets down the line. In appendix 1, we see
that in the case of American Express when it achieves sales in excess
of 15 % of its base target( what Oxera have termed “out performance”),
its marginal commission rate moves from 7,5% to 217,5% .
154.The best illustration of how dramatic this effect is comes not from
Oxera, but one of the agents whose correspondence with SAA the
Commission introduced into the record. The following extract is from an
email from Bradley Jay, then MD of Seekers Travel, to SAA CEO
Andre Viljoen:
“As you are aware our domestic percentage is linked to the
achievement of certain levels of international turnover, at this stage
we are forecasting to be between 1.9 million to 600 000 short. 1.9
million being very conservative, if we hit the target, this is by selling at
most R1.9 million worth of tickets, we stand to earn R2.7 million in
tickets, in incentive. It obviously means that in the worst case
scenario we can spend the 1.9 million including giving away free
tickets, if necessary, in order to achieve a net revenue to Seekers of
800 000”.91
155.In other words, even if they gave away at that point in time R1.9
million worth of tickets for nothing, they would still have made
R800 000 clear profit.
156.Thus at least one of the travel agents, without the benefit of Oxera’
model of marginal commission rates, has come to the same
conclusion. At a certain level of sales, the benefits of selling another
SAA ticket are overwhelming. Without achieving similar compensation
SAA ticket are overwhelming. Without achieving similar compensation
from a rival, the agent has little incentive to sell the rival’s ticket and a
compelling incentive to sell SAA’s.
157.That agents had a keen appreciation of this fact is borne out not only
by this letter but also one from Mr Puk to agents within his group in
which he berates them for not achieving sufficient sales through
SAA.92
158.Holt has also made certain other observations about the nature of the
scheme by reference to some of the economic literature which he says
tends to suggest its anticompetitive nature. Firstly, he suggests that the
override and incentive commissions cannot be regarded as targeted
91 See record page 669.
92 See record page 714. We quote this letter in more detail below.
41
discounts, the latter sometimes being treated as procompetitive in the
literature. He states in this case we have not a targeted ‘discount
scheme,’ which is a payment made to the consumer, but a targeted
‘premium scheme’ which is where the payment is made to an
intermediary, in this case, the travel agent. He says that a targeted
premium scheme (i.e. the override incentive scheme) tends to be more
anticompetitive than a targeted discount scheme because the benefits
are not passed on to the final consumer.
159.Next he identifies the fact that the pricing structure is nonlinear. He
explains it thus:
“Essentially what this means is that there is a break in the relationship
between the amount of the commission paid and the amount of sales
earned by the travel agent for that particular airline; that there is
effectively a jump or a bonus level, which is paid once you meet a
particular threshold. Now it is clear from the general economic literature
..that the greater the degree of nonlinearity in the scheme, the greater
the anticipated anticompetitive effects.” 93
160.Holt identifies the discontinuities or leaps in the marginal commission
rate that we referred to earlier as examples of the high degree to which
these agreements are nonlinear.
161.He also makes an observation in relation to the length of the reference
periods, by which he means the duration of the contracts. The longer
they are, the greater the base on which bonuses are paid, and the less
possible it is for competitors to sign up such agreements with travel
agents. He considered a period of one year, the typical duration of the
agreements in question, as being sufficiently long for them to have an
anticompetitive effect. 94
162.Another aspect of concern with the nature of the agreements is their
lack of transparency. Because, as we have seen, compensation is
lack of transparency. Because, as we have seen, compensation is
based on flown revenue, a lesser figure than BSP, the figure that travel
agents have in their books, travel agents do not know at any given time
between reporting back from SAA (typically every quarter) whether
they are making their targets or not. This says Holt will make them
more conservative in their approach. 95 He goes on to say that as a
result they:
“will tend to want to focus traffic even more on SAA in order to be
absolutely sure or as sure as possible of getting these bonuses by
93 Transcript 279.
94 Transcript 279 281
95 Transcript 252.
42
directing as much traffic as possible to SAA.” 96
163.This aspect of his evidence is supported by one of the travel agents
who testified, Mr Mortimer, who stated:
“Flown revenue… is exclusively held by the airline. So we don’t exactly
know where we are in relation to the flown revenue at any particular
point in time. We are benchmarking. We are getting quarterly sales and
performance reports and review meetings are taking place with the
preferred partner where the airline presents our performance results,
lets just say at the end of the quarter. We are looking at our invoices.
We are applying an adjustment factor to ballpark what we think the
flown revenue is and as we start getting towards the end of an
agreement and lets just look at the dates of this email. This email is
the 27 th February. We are approaching 31 March. .. It’s almost the end
of the financial year. We are going to just make it or just miss it. The
MD is concerned that he may have just missed it, and I can remember
it because there was the possibility for me of an around the world ticket
and I was disappointed.” 97
164.If the management of a travel agency operate under this cloud of
uncertainty for much of the time, all the more so the individual
consultants who interact with the consumer on a daily basis and who
know what pressures their agencies are under to meet target.
165.Although Holt was the subject of much criticism from SAA, in our view
unwarranted, this criticism apart from some carping technical complaint
from SAA’s expert, which Holt adequately answers, did not extend to
the way in which his model works.
166.Rather the criticism is that the model is purely theoretical and
dependent on assumptions that are not valid, such as the travel agents’
ability to move business to SAA. We deal with this issue below. He is
ability to move business to SAA. We deal with this issue below. He is
also criticised because he fails to take into account that the override
agreements were in effect since the 1980’s. On this point, the
Commission correctly counters when it points out that it is not the fact
of the agreements, but the way their nature changed in 1999, that is
crucial. He is also criticized for assuming that the other airlines did not
have override agreements at the time, which they did. Whilst Holt had
been incorrectly instructed on this point it does not affect his model. His
model assumes a “similar agreement” between the rival airline and
travel agents.98 Furthermore, as the rivals are not dominant firms,
96 Transcript page 287.
97 Transcript 1889.
98 See record page 344
43
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.
167.The other criticism of the model is that if it were true, then rivals would
stop making use of travel agents and find some other avenue to sell
tickets. This is best answered, not by Holt, but by Viljoen, who, in
explaining the centrality of travel agents, has pointed out the increased
cost of ticket distribution if an alternative was considered. If it is
unattractive for SAA, with its volumes, to forsake travel agents as the
optimal sellers of tickets, all the more so for its smaller rivals. 99
168.We now turn to consider the most contentious factual issue in the
case and that is whether travel agents can influence customers’ choice
of airline. If this is not the case, then SAA is correct and Holt’s model,
for which this is a key assumption, must fail, and hence an essential
pillar of the Commission's case on exclusion.
169.At first blush the SAA critique seems the more plausible. SAA argues
that if travel agents steer customers away from their preferred airline to
a more expensive one, then they risk being caught out and the
consequences of being exposed in this way could be irreparably
damaging to their businesses. SAA says that Holt’s model does not
take this into account. However the Commission has not based its case
on this aspect on Holt’s evidence. Holt does not attempt to say that this
is the case – he says if agents could, the model has the consequences
he outlines.
170.The Commission relies instead on other sources. Firstly, what agents
he outlines.
170.The Commission relies instead on other sources. Firstly, what agents
have said themselves about their ability to do so and secondly, on past
statements by SAA, where agents’ ability to move customers appears
to be assumed.
171.Mr Bricknell, the chief executive of Nationwide, testified that in mid
2000 he had noticed a drop in their sales and he asked his staff to
investigate the problem. The feedback he got was that travel agents:
“..were so highly incentivised by South African airways. They also
had this program called Explorer that the consultants were getting
incentivised as well, and that we just couldn’t compete. So we were
being sold off.” 100
99 See the earlier quotation from Viljoen’s evidence, footnote 25 where Viljoen suggests he
would have to treble his IT platforms.
100 See transcript page 106.
44
172.As a result of these reports he went to see Ms Lillian Boyle the chief
executive officer of Rennies, one of the major travel agency groups and
asked why they were not getting support. Boyle he said, replied that
she was glad to hear that her instruction had been adhered to:
“ because SAA was their preferred carrier and she had instructed her
entire group to only deal with South African Airways and not to sell
Nationwide.” 101
173.Bricknell was not contradicted on this point. Although SAA called Ms
Boyle’s colleague Ms Harris, she testified that she was not present at
the particular meeting. Boyle could have been called to testify by SAA
on what is an important meeting, but was not. The Commission
attempted to call Ms Boyle, but despite a subpoena she did not attend,
and we received a medical certificate from her doctor to indicate that
she was indisposed for that entire week – the week when the
Commission was calling its witnesses. Some months later, when SAA
led its case, she was still not called, even though one presumes from
the relatively minor illness indicated in the medical certificate, she
would have recovered. Bricknell’s evidence on this meeting is thus
uncontradicted.
174.The probabilities that Bricknell's evidence on this point is true, and can
be accepted, is bolstered by correspondence between Ms Harris of
Rennies and David James of SAA. In this letter dated 28 October 1999,
Harris expresses an undisguised outrage at the new incentive scheme,
which had obviously just been communicated to Rennies. 102 What it
clear from what Ms Harris writes is that she believes that Rennies can
influence the movement of customers.
“For a number of years we have supported SAA through preferred
supply policies – to the extent that we have actively either moved to or
retained business on your carrier.”
retained business on your carrier.”
175.And at the end of the same letter where she threatens:
“Given your onesided attitude to the relationship we will now move to
evaluate, in addition to our passenger volumes, our group cargo
volumes handled by your carrier, namely from Renfreight and Safcor.
Sadly, should your position not change and should we continue to find
ourselves compromised by your stance, we will be forced to move our
support to your competitors – perhaps South African Airways
101 See transcript page 106.
102 See pages 711712 of record .
45
management does not appreciate that we add real value to the
relationship. If that is the case then I fear will we need to demonstrate
this capability to you which will unfortunately be to the mutual
disadvantage of both of our organisations.”
176.Harris as noted, was called by SAA to testify. Crossexamined on the
contents of this letter her answers were not satisfactory. She does not
appear to deny the ability of the agent to move customers, but
suggests that they would only do so with the customer’s best interests
in mind. So on the credibility of the threat contained in the letter she
testified:
” I said if you don’t retract what you have put on the table, which is not
a viable model, then we will have no alternative but to move, obviously
on the predetermined (sic) that it is right for the customer, away to
another competitor.” 103
177.Given that the letter was written in 1999, prior to the contemplation of
these proceedings, we place greater reliance on it than the subsequent
oral testimony of Ms Harris, given at a time when Rennies had an
incentive not to be seen capable of influencing customer choice.
Rennies also seems the one agency well disposed to assisting the
SAA case.
178.But Harris is not the only travel agent whose correspondence indicates
a belief that they have the ability to move sales from one airline to
another. In a letter to SAA dated 25 February 2000, on the subject of
deliberations over the new override agreement, Nigel Adams, the
managing director of American Express Travel writes:
“Clearly Amex could offset its risk by drastically reducing its flown
revenue with SAA, and directing a large portion of this R 170 000
00000 worth of flown revenue to other Airline carriers where its current
00000 worth of flown revenue to other Airline carriers where its current
base of business is low, and attractive override deals are presently on
offer.”104
179.Note that prior to this, on 9 November, Adams, who wrote the above
letter, wrote to his superior, Craig Bond at Tourvest, where he notes
that SAA has told him commission is going to be cut from 9% to 7% on
1 November 1999.
180.He then goes on to state:
“I understand that Tourvest and ourselves are committed partners
103 See Transcript dated 8 November 2004 page 105.
104 See record page 646.
46
of the National Carrier, but at the end of this financial year, as an
owner and a manager, I am on line for the profitability of this
business. I have agreements with both British Airways and Comair
where I can earn 10% and 5% back to Rand One respectively and
to be honest the temptation of my line management is to really start
pushing these partners even harder .” 105 ( Our emphasis)
181.When Viljoen was examined on this letter, and on others from agents
evidencing their ability to move passengers, his response was that:
“those letters are nothing more than posturing.” 106
182.Whilst all commercial bargaining may have an element of what Viljoen
refers to as “posturing”, it is unlikely that travel agents would make a
threat that had no credibility whatsoever. Even if Ms Harris was
exaggerating Rennies’ ability to move passengers, the fact that they
have some influence in this respect is unlikely to be mere posturing. If
travel agents had no significant influence in customer choice, SAA
would be well aware of it and the bluff would be easily called. What
SAA perhaps did not know was the extent of a particular agent’s
influence and, in that respect, Viljoen may have considered this an
exaggerated claim of influence.
183.Furthermore, if this is just posturing by travel agents in their
bargaining with SAA, this does not explain why Adams, in an internal
letter to the CEO of his parent company (the one quoted above), would
refer to his agency’s ability to push other airlines if both he and Bond
did not believe that they had some capacity to do so. This is not
posturing for the benefit of SAA, as it is not a letter they would have
seen.
184.But we also know that SAA itself considered that agents had this
ability. This emerges from an exchange of letters between American
ability. This emerges from an exchange of letters between American
Express and SAA in which the terms of a proposed override agreement
are being negotiated. In a letter dated 5 November 2001, Nigel Adams
of American Express writes:
“American Express will commit to a 25% year on year growth for the
period November to March for both domestic and international.”
185.And later on in the same letter Adams adds:
“American Express will be forced to disregard other airline agreements
105 Record page 641
106 Transcript page 483.
47
entered into to achieve 25% growth in these difficult times.” 107
186.Fay Mhlanga from South African Airways writes a letter to Adams
responding to the suggestion of achieving a 25% growth:
“Achieving 20% domestic growth and 25% international growth for the
full year will be difficult without actively shifting business to South
African Airways ” 108 (Our emphasis)
187.Thus Mhlanga, like Adams, recognises the ability of travel agents to
influence and to shift business between carriers. 109
188.The Commission also relies on both the correspondence and oral
testimony of other travel agents. The first travel agent called to testify
was Mr Willem Puk, the Managing Director of the Sure Travel Group.
Sure operates as a franchise of independently owned agencies.
189.Prior to this complaint, Puk, like Harris, was less reticent about
expressing his views on travel agents’ potential to move passengers in
correspondence, than he was in his testimony before the Tribunal. A
monthly email bulletin from Puk to Sure travel agency members dated
11 December 2001 is most instructive. Some select quotes, evidencing
the Group’s attitude to SAA and Nationwide are 110:
“saa’s (sic) second quarter’s results are in and our support looks
good our domestic group market share support for the six
months (aprjun) is up from 62% last year to 68% this year.
While international support average for the group is now 31%
compared with 27% a year ago. please compare this to your
own figures when you receive them later this week.”
190.And
“3) a reminder regarding your allocation of free tickets with saa
(a) Included in our contract as per last year is the ability for each
suretravel agency to claim free and promotional tickets for their
use.each agency is entitled to receive …the first two tickets are
upgradable to business class if your saa market share support
upgradable to business class if your saa market share support
exceeds 35% for international & 50% for domestic..”
107 Record page 698.
108 Record page 699.
109 Note that Mr Mortimer, whose testimony we deal with below, confirms this construction of
the intention of the letter which although not addressed to him personally is directed to his
agency.(See Transcript page 48)
110 See record page 714715.
48
191.And
“4) we are still giving too much of our domestic business to
nationwide, R40 million last year alone. we cannot hope to keep
both saa and ba comair satisfied if we can give a nonpreferred so
much business. SOME MEMBERS have even signed deals and
receive overrides from nationwide. ..this is completely unacceptable
and where this is discovered, both the domestic saa and ba/comair
deals will have to be pulled. Members who are also receiving an
override from nationwide are an embarrassment and liability to our
group. .. we are well aware of the very competitive pricing policy of
nationwide and you will shortly see a preponderance of tactical
specials from both saa/ and ba (in fact please view matchmaker
today) for the first of SAA’s specials to counter this.”
192.And emphasising this message again:
“however if there is one thing that will make us stand out head and
shoulders above any other group it is our individual commitment to
our preferreds.. please reinforce this commitment on a daily basis
with your staff and challenge ALL sales on nonpreferreds”
193.In his testimony Puk however, contrary to the message he sends to
his members as quoted, adopted the stance that to “mislead “
customers would not only be unethical but bad business practice and
contrary to the ASATA charter to which all agents subscribe. 111
194.When reexamined by the Commission this high moral tone slips
slightly:
“ADV PRETORIUS: I ask you again Mr Puk, what do you mean by
channel it to your preferred partner? What does that mean in practice?
MR PUK: It means, where you have a discretion, where in the case
of our fare is identical , giving the first shot to a preferred partner is
directing the business, where possible to a preferred partner.” 112
195.Puk’s position becomes more pragmatic later when he concedes:
“ADV PRETORIUS:.. So I am asking you again, which one is really
“ADV PRETORIUS:.. So I am asking you again, which one is really
paramount to the Managing Director of a firm, the consumer or the
incentive , reaching the incentive threshold? Mr Puk from your point
of view, what is most important?
MR PUK: From my personal point of view, if you are asking for the
paramount, I am employed to make sure that the group achieves its preferred
111 Transcript page 715.
112 Transcript [age 139
49
agreements.”
196.Puk was not a witness sympathetic to the Commission’s case. Sure
Travel did not disclose the email referred to above to the Commission
despite a subpoena, and the Commission appears to have obtained it
from another source. 113 Indeed, during the course of the investigation
Sure Travel had assisted SAA by writing a letter to SAA, to be
forwarded to the Commission, in which Sure Travel denies that agents
can move passengers. 114 The concession by Puk, that for him group
interests are paramount over consumer interests, is all the more
significant because of this.
197.The one travel agent who was consistent with what his firm had
written in correspondence prior to the hearing and in his testimony at
the hearing was Mr Conrad Mortimer, the commercial director of
Tourvest Holdings (Pty) Ltd.
198.Again, we start with the correspondence. The Commission’s counsel
led Mortimer on several letters from Tourvest companies to SAA
indicating their continued commitment to supporting SAA, in one case
expressing it as “despite lucrative British airways and Comair override
agreements”. 115
199.Mortimer also refers to various incentives to consultants on his
agency’s staff to increase revenue from SAA sales. Mortimer confirms
a circular to staff regarding a competition to win a car. According to the
circular:
(a) ” Remember all you have to do to be in line for the car is SELL
SAA!!! Not difficult, so with one month to go, let’s give it all we’ve
got.” 116
200.Mortimer confirms that the incentive worked and that Tourvest
achieved R10 million above its flown revenue target. 117
201.But perhaps the most important aspect of Mortimer’s evidence is his
completely frank, albeit measured, opinion on agents’ ability to move
customers:
“…this is not simply a matter of an agent being able to turn on or turn
customers:
“…this is not simply a matter of an agent being able to turn on or turn
113 See Transcript page 34. Puk denies that the failure to produce the letter was intentional.
114 This letter is at page 156 of the record.
115 Record page 637.Letter from Craig Bond to David James dated 10 October 1999.
116 Record page 665.
117 Transcript page44 lines 1923 and page 46 lines 37
50
off a tap. The tail doesn’t exactly wag the dog. The end customer does
and the market does have its own dynamic. But within that market
dynamic the agent is able to, from time to time, exert a greater or
lesser influence.” 118
202.Crossexamined on this point he stuck to his position:
“We may. We may and it certainly would be in our commercial interest
to promote our preferred. It’s very simple. We are not going to make
any profit out of selling a nonpreferred’s ticket. We’re going to
basically break even on trading. If we’re going to make profit, we’re
going to make profit because we sold a preferred carrier.” 119
203.Mortimer indicated that where agents have this opportunity they
promote their preferred supplier:
“..wherever we have the opportunity we promote our preferred supplier
and that can and has been at times highly lucrative and it is on that
basis that we are able to achieve our volume incentives and generate
profitability in our business.” 120
204.There is no motive for Mortimer to exaggerate this evidence – if
anything, a travel agent would be inclined to claim the moral high
ground and assert its independence and professionalism despite
commercial pressures to the contrary. Nor does Mortimer show any
inclination to please the Commission. The Commission indicated that
although there had been a consultation with Mortimer, he had declined
to make a statement. Some of the extracts from the evidence that we
have quoted was elicited from cross –examination by SAA’s counsel.
For these reasons we believe that we can place great reliance on his
testimony.
205.SAA’s rival, BA/Comair, seems to be in no doubt on travel agents
ability to influence as this exchange between SAA’ s counsel and Mr
Venter illustrates:
ADV SERRURIER: Just explain to me would you? Is it your thesis
Venter illustrates:
ADV SERRURIER: Just explain to me would you? Is it your thesis
that a travel agent is in a position to influence the customer, the
passenger the flyer?
MR VENTER: Yes very much so.
206.We are satisfied that there is sufficient evidence of travel agents’
ability to influence customer preferences. Whilst the evidence is at the
118 Transcript page 161162
119 Transcript page 179
120 Transcript page 157.
51
level of their potential to do so, and we do not have data of actual
customer movements, which would be extremely difficult to obtain, the
evidence of the potential is so widely perceived, not only by the
different travel agents as emerges from the correspondence and the
testimony, but also the airlines, including, as we have shown, SAA. 121
This widespread faith in the ability of agents to influence suggests that
they in fact do so. This is not to say that customers are putty in the
hands of agents who bend them to their will. Mortimer is careful to give
a very nuanced view of this ability. What does emerge, is that all
players consider that agents can exercise a significant influence on
choice and that this has commercial implications for airlines. If not, as
we shall point out in the conclusion, there would be no logic to the
incentive schemes in their current form and in particular, the override
and incremental aspect of those schemes. The logic of the override
and incremental incentive is premised on the ability of agents to direct
a nontrivial amount of revenue to their preferred. The same of course
can be said of the Explorer Scheme. Why should it exist at all if travel
agents cannot move customers?
207.Of course an important part of SAA’s defence, through all its
witnesses, has been to assert that even if agents had an incentive and
inclination to move passengers to SAA, they would fail as consumers
are not that easily duped. A customer who had paid more for a ticket as
a result of the travel agent’s machinations would soon find out and the
agent would suffer a reputational loss that may exceed the short term
gain of the marginal commission earned.
208.The problem for SAA is that information on ticket prices is
asymmetrical because of their volatility and complexity. Viljoen in his
asymmetrical because of their volatility and complexity. Viljoen in his
evidence gives a prime example of this complexity. He says that there
are ten levels of discount between business class and economy. 122 If
this is so, it must inhibit the ability of consumers to monitor prices that
agents quote them. It is also clear, that at least during the reference
period, the level of internet usage for ticket bookings was still in its
infancy, and hence the best tool for making the market more
transparent to consumers was not yet fully functional. Consumers are
also aware that ticket prices are a function of demand over time. Since
consumers have no access to cycles in demand from time to time,
informational asymmetries are easily maintained. Consumers need not
121 There was evidence that British Airways had conducted a ghost call survey to test if
agents were directing customers to SAA. The ghost call survey does not indicate this and if
anything may support the version of SAA. Nevertheless the survey as the Commission points
out is statistically insignificant. The Commission did not lead this evidence itself and does not
rely on it. The evidence of the survey emerged during SAA’s crossexamination of the BA
Comair witness who mentioned the survey and was then asked to produce the survey results,
which he duly did.
122 See Transcript 497.
52
suspect they are being duped simply because they hear different ticket
quotes for a similar service at different times. They may assume the
difference is simply a function of demand movements over time.
209.Furthermore, ticket availability is also never a constant. Were agents
to suggest that a rival airline had no tickets available, particularly if they
are SAA’s rivals who are known to have less capacity, consumers may
have no reason to suspect that this may not be so and given that
occupancy, like price, is so transient a notion, it would also not alert
suspicions if the consumer later became aware that seats were
available. In essence, the consumer’s ability to police opportunist
behaviour by agents, is seriously constrained in this type of market,
because of the informational asymmetries that exist.
The Explorer Scheme
210.Although much the bridesmaid during the course of this hearing, in
terms of attention afforded to it, there is still evidence of the
exclusionary nature of this scheme. Perhaps it got little attention
because SAA’ own experts were sceptical about its procompetitive
value.
211.Professor Du Plessis testified that the scheme’s impact at the
individual travel agent consultant level reinforced that of the more
general incentives created by the override schemes signed at a group
level for the travel agents. In fact, in his view , explorer incentive
scheme would in all likelihood have had a far greater anticompetitive
effect, since a pointsbased system for rewarding loyalty to the
consumer at least has some positive impact in terms of benefits to that
consumer. However since the Explorer scheme was applied at the
travel agent level or the consultant level, there were no welfare
travel agent level or the consultant level, there were no welfare
enhancing benefits for the consumer. 123
212.This theme is echoed in the testimony of the Commission’s expert.
Holt testified that the Explorer Scheme was more likely to have an anti
competitive effect, as the reward is not granted to the consumer but to
the intermediary in the form of the travel agent and its employee the
consultant. He thus distinguished it from a frequent flyer program,
which at least rewards the consumer.
213.The language contained in the scheme document is instructive as to
its intentions. In explaining the bonus pool arrangement, an additional
feature of the Explorer scheme, SAA states:
In order to further reward travel agents who proactively support South
123 This was confirmed by SAA’s witness, see Transcript page 197 .
53
African Airways, in addition to rewarding individual consultants, travel
agents can earn a special bonus pool of South African Airways
Explorer points bases on South African Airways share support of
individual agent location in the monthly BSP reports.” 124 (Our
emphasis)
214.When the interesting use of the word ‘proactive’ was put to Viljoen in
crossexamination, he suggested that proactive means:
(a) “Just doing it a bit smarter”. 125
215.Viljoen’s answer seems to run contrary to the ordinary definition of the
word, which according to the Concise Oxford Dictionary means:
“creating or controlling a situation rather than just responding to it.”
216.This we would suggest is precisely what the scheme was all about.
Travel agents, and in particular consultants, who were after all the
workers at the coalface who might not always have the same
incentives as the shareholders who own the agencies, some of which
are large corporations, were being given the incentive to be ‘proactive’
about how consumers decided between airlines. It was a useful
complement to the override incentive scheme and filled the gaps left in
that scheme to resolve the principal agent problem in SAA’s favour.
217.We find then that the Commission has established that the override
incentive scheme provides 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 are able to influence
customer preferences so as to give effect to these incentives. The
Explorer scheme serves to enhance these exclusionary effects.
218.The Commission has thus, on a balance of probabilities,
established that the practical effect of the schemes is that they
induce suppliers not to deal with competitors of SAA and hence
induce suppliers not to deal with competitors of SAA and hence
constitute an exclusionary act in terms of section 8(d)(i). Having
made this finding it is not necessary for us to consider whether
the Commission has made its case in terms of section 8(c).
Does the exclusionary act have an anticompetitive effect?
219.Recall that we said an anticompetitive effect could be manifested in
two forms. Either there is direct evidence of an adverse effect on
consumer welfare or evidence that the exclusionary act is substantial
124 See record page 624.
125 See transcript 580.
54
or significant in terms of its effect in foreclosing the market to rivals.
220.Our present enquiry will be limited to examining whether the
Commission has established evidence of the latter proposition. We say
this as it appears to be common cause that the Commission has not
established an adverse effect on consumer welfare except by way of
inference. Expressed less technically we have no direct evidence that
consumers are paying more for their domestic airline tickets or have
experienced less choice in flights or inferior service. That does not
mean that there have not been these effects. The Commission asks us
to infer them rather than putting them to the burden of proving what the
market may have been but for the exclusionary nature of the override
scheme.
221.We therefore examine the other test for anticompetitive effect we
identified earlier in the legal section as to whether the exclusionary act
is substantial or significant in terms of its effect in foreclosing the
market to rivals.
222.The Commission’s evidence here is of the following nature. Firstly,
direct evidence of the extent to which SAA had imposed its override
scheme in its post 1999 form on the travel agents market. Secondly,
evidence of a decline in the performance of Nationwide and BA/Comair
during this period – this constitutes circumstantial evidence of the effect
of the alleged foreclosure. This must be coupled with some evidence
from the travel agents of their increased business with SAA. Thirdly,
the economic theory, derived in part from the number of the agents
partaking in the scheme and the extent of SAA’s dominance that
suggests, by way of theoretical inference, that significant foreclosure
would be inevitable and that the cost to rivals of compensating agents
to meet the exclusionary effect of the scheme would be prohibitive.
to meet the exclusionary effect of the scheme would be prohibitive.
223.Travel agents. The evidence is that travel agents accounted for
approximately 75% of sales of domestic airline tickets during the period
April 2000 till March 2001. 126 SAA had 19 override agreements by the
end of March 2001. All four major groups, were covered by agreements
as well as smaller agencies. This represents, if one disaggregates the
groups into their individual agencies, 683 agencies. 127 Holt testified
that the “agreements appear to cover a very large percentage of the
industry.” Although we do not have an exact figure for this, his
conclusion was not challenged so we can accept it. Thus agents
subject to the scheme represented a significant number of agents who
126 Holt’s evidence, Transcript page 209. He bases this figure (which actually is 76.8%) on
the totals reflected in table 1.1 (Figures bundle 1) compiled by the Commission on the basis
of material obtained during their investigation. The figure for the period July 2000 to June
2001 is 81% based on the Commission’s revised figures in Table A1 in figures bundle 2.
127 Holt at Transcript 208 and Record page 173.
55
in turn constituted a significant vehicle for ticket distribution. We know
that 85% of SAA’s ticket sales were through travel agents. 128 Although
rivals of SAA had a lower proportion of their sales through travel
agents, the figures remain high BA /Comair 74% and Nationwide
70,2%.129
224.We can thus conclude that a significant portion of the travel agents
market, itself a significant channel for ticket sales, was subject to
override agreements.
225.The Commission led the evidence of executives of both Nationwide
and BA/Comair in support of its case that these firms had suffered
adverse effects on their businesses pursuant to the implementation of
the scheme.
226.The evidence of Mr Bricknell, the chief executive of Nationwide, was
that his airline commenced business in 1995 and for its initial three
years growth was considerable. In about 2000 the airline noticed a
decline in growth. Since he had expectations that Nationwide should
still be growing he asked his financial director to investigate the cause.
The feedback that he received from his staff was the travel agents
were telling him that they were so highly incentivised to support SAA
that Nationwide could not compete. As he termed it “they were being
offsold.” Pressed in crossexamination he said he attributed this trend
to the SAA override incentive scheme and Explorer Scheme. 130
227.The Commission has produced a table of the number of passenger
flown by Nationwide during the period December 1995 until October
2004.131 The table shows that from November 2000 Nationwide
started to experience decline in passenger numbers when compared
with numbers for the equivalent month in the previous year. This
decline persisted until August 2001, declines again in January 2002
and is thereafter positive. Prior to this period, one already observes a
and is thereafter positive. Prior to this period, one already observes a
decline in the rate of growth as early as August 2000 when one sees a
growth of only 2,9% after three previous months where growth was
61%, 59% and 35% respectively. For the period November 2000 until
January 2002, the monthly moving average (i.e. the sales recorded in
the immediate proceeding 12 months) is in continual decline. The
figure at the beginning of the period was 526 888 passengers and
declines to 458,549 passengers in January 2002.
128 See Figures Bundle 2, Table A.1
129 See Figures Bundle 2, Tables A.2 and A.3.
130 Transcript page 110.
131 See Figures Bundle 2, Table G, at page 14. Despite referring to ‘Revenue Pax’ in the
column heading, this is a reference to passenger numbers and is extracted from the
document furnished by Nationwide. See Record page 746 –8.
56
228.This is the way Holt interprets this data:
“ MR HOLT : Well the first point to note is that the overall market growth
was less than the 10% that we had for the purposes of our model
assumed. So therefore, our growth rate in that model was, if anything,
higher than one would have required to reflect these particular years.
I think the second point, and perhaps even more important point to
note here, is that if you look at the overall market growth and compare
the BA Comair and Nationwide performance to those market levels of
growth, what you typically find is that before the period of the override
incentive agreements, BA and Nationwide were experiencing above
market growth and for the period later on, once the override
agreements were in effect and during the period in question, their
above market growth turned into below market growth or even
decline.132
229.SAA does not deny that the figures show a period of decline in
Nationwide’s figures that coincides with the relevant period. However it
denies any causality between the override scheme and the decline in
performance. SAA says, in the first place, since Nationwide had grown
from a nil base it could hardly expect its rate of growth to be maintained
once its market share matured. Secondly, SAA argues that the override
scheme was in operation at the time that Nationwide experienced its
rapid growth. It points out that Nationwide’s performance improves later
at a time when overrides are still in place. If this is the case there must
be some factor other than the overrides that accounts for the decline
and rise in fortunes of Nationwide.
230.Through the evidence of Viljoen and the cross examination of
Bricknell, SAA suggests an alternative theory.
231.Bricknell under crossexamination conceded that in June/July 2000
231.Bricknell under crossexamination conceded that in June/July 2000
Nationwide had increased the price of its tickets, erroneously
anticipating that the rest of the market would do as well. 133 As a result
of this, Nationwide lost market share although he expressed the view
that the loss attributed to the price hike was temporary, as they re
adjusted prices to the competitive level soon thereafter. (Note that his
financial manager Mr Griffiths testified later that the hike had lasted
only two days). 134 It was also suggested in cross examination to the
Nationwide witnesses that their firm was believed to be close to
bankruptcy at the time and this might have had an effect on public
132 See Transcript page 251.
133 Transcript page 111 .
134 Transcript November 2004 page 302.
57
confidence in the airline. 135
232.Viljoen testified that in late 1999, SAA embarked on an aggressive
strategy to improve its performance as they had lost market share in
previous years. This included better pricing, more reliable take off times
and better overall service. In this he was supported to some extent by
the evidence of Harris. This explains the improvement in SAA’s
performance at the expense of its rivals.
233.SAA also relies on board minutes of BA/Comair dated 28 December
2001. The board was discussing the reasons for BA/Comair’s poor
performance on the Johannesburg /Durban route in the months
preceding the meeting. The board identified four possible causes (1)
the increased frequency of SAA flights (2) lack of economic
development in the Durban area (3) the SAA override scheme and the
incentive bonuses paid to travel agents (4) the power of the SAA
Voyager program. The board discusses the lodging of a complaint with
the Commission in respect of the override scheme. The minutes also
record the Chairman as noting that regardless of whether BA/ Comair
lodges a complaint it would still have to find new ways of competing
with SAA as it could not compete with it on frequency. 136
234.Mr Venter, BA/Comair’s financial director, testified that while there is a
relationship between the size of an airline and the market share that it
can realistically gain, they were seeing a decline in their market share
to which he attributed the influence of travel agents:
“ But the fact that we started to see a decline in market share ..there
we believed there was strong influence from the travel agents.” 137
235.The figures produced by the Commission show a decline in Comair’s
rate of growth in respect of ticket sales through Johannesburg airport
from 11,97% for 9697, and 14,5% for 9798, to 4.05% for 9899 and
for 2000 to 2001, 0,2%. 138
for 2000 to 2001, 0,2%. 138
236.What do we make of this conflicting evidence? It appears, and SAA
does not seriously challenge this, that both Comair and Nationwide
suffered a decline in performance during the relevant period. We have
contemporaneous evidence from BA/Comair through its board minutes
that the company was concerned with this at this time. We also know
that Nationwide was too, which led to the interim relief case and the
135 Transcript November 2004 page 312.
136 See Exhibit F a file of documents discovered by BA/Comair.
137 Transcript page 73
138 See Table 4.4 of Figures Bundle one.
58
complaint that gave rise to this matter. What SAA disputes is whether
its rivals misfortune can be attributed to the effects of the scheme. It
argues that in the case of Nationwide, it had grown rapidly during
19958, when the evidence is that override agreements were in place
and that it also showed renewed growth after the relevant period, again
at the time that override agreements were in effect. This proves, SAA
argues, that the scheme could not have been the cause of
Nationwide’s downfall. SAA’ s theory of a combination of its own
renewed competitiveness in the form of better service is the
explanation, coupled with some poor business decisions made by
rivals. Its rivals therefore suffered as a result of its competitive
response, not the override scheme.
237.The Commission argues, convincingly in our view, that the
performance of Nationwide in the period before and after the relevant
period misses the whole point of the case. It was not that override
schemes themselves are a problem, but the nature of the override
scheme, as SAA changed it in late 1999 by lowering the standard
commission and increasing the override commission and hence
materially altering the incentives of travel agents. The decline is
therefore causally consistent with the advent of the new override
scheme. Because the figures for the later periods fall outside of the
relevant period there may be other explanations for Nationwide and
Comair’s recovery in their respective fortunes, but as we have
insufficient data for this period, we must postpone making conclusions.
For instance we don’t know whether bookings through travel agents
For instance we don’t know whether bookings through travel agents
were not as central to the later period as during the relevant period nor
if they were, how much of the market was subject to override
agreements and whether they were in the same form. Mortimer’s
evidence suggests that post March 2001, American Express did not
continue with their override agreement. 139
238.We also have to accept the evidence that SAA had improved its
performance during the relevant period. Whilst the evidence is not
inconsistent with the Commission’s case, we simply cannot be sure
which was the more preponderant cause of the decline competition
on the merits or the override scheme. But this difficulty is not unique to
this case. All cases of exclusionary anticompetitive conduct create the
dilemma that the counterfactual, namely what the market would have
looked like absent the alleged prohibited practice, is impossible to
construct. An exclusionary act is not confined to causing the decline of
rivals, it is equally exclusionary if their opportunity to expand in the
market is retarded or constrained. As the Court of Appeals in Microsoft
observed:
139 Transcript page 40
59
“ To require that section 2 [of the Sherman Act] liability turn on a
plaintiffs ability or inability to reconstruct the hypothetical market
place absent a defendant’s anticompetitive conduct would only
encourage monopolists to take more and earlier anticompetitive
action. We may infer causation when exclusionary conduct is aimed
at producers of nascent competitive technologies as well as when it
is aimed at a producer of established substitutes. Admittedly, in the
former case there is added uncertainty, inasmuch as nascent
threats are merely potential substitutes. But the underlying proof
problem is the same – neither plaintiffs nor the court can confidently
reconstruct a product’s hypothetical technological development in a
world absent the defendant’s exclusionary conduct. To some
degree, “the defendant is made to suffer the uncertain
consequences of its own undesirable conduct .”
239.The fact that SAA made use of an anticompetitive scheme at the
same time as it behaved more procompetitively does not immunise it
from any consequences for its misdeeds in terms of the Act, rather it
means that it must suffer the ‘undesirable consequences’ of the former
coexisting with the latter.
240.We find that anticompetitive effects are likely for the following
reasons:
1. At a theoretical level, Holt has demonstrated convincingly the
anticompetitive nature of the agreements in question. Whatever
their effect was in isolation, the Explorer scheme grafted on top of
them puts their nature beyond doubt;
2. The evidence is that Nationwide and BA/Comair experienced a
period of decline after strong periods of growth that coincided with
the periods in which the override agreements became more
challenging;
3. The evidence of BA/Comair and Nationwide not only during this
challenging;
3. The evidence of BA/Comair and Nationwide not only during this
hearing but more importantly their thinking at the time and before
litigation had commenced. Recall the board minutes of BA/Comair
and the visit by Bricknell to Boyle at Rennies.
241.We find further that the effect of the anticompetitive conduct on the
structure of the market was to inhibit rivals from expanding in the
market whilst at the same time reinforcing the dominant position of
SAA. Therefore the exclusionary act is substantial or significant in
terms of its effect in foreclosing the market to rivals.
242.Although, because of this finding, we do not need to make a finding
that there was actual harm to consumers, despite the lack of direct
60
evidence on this point, it is highly likely that this foreclosure has had
adverse effects on consumers. As Holt has put it the conduct would
lead to allocative inefficiency. This means that consumers are likely to
have made wrong choices of airlines, chosen the wrong prices and
essentially, it has led to the wrong set of outputs. 140
Efficiency justification
243.Having found that the Commission has established that the override
scheme, in conjunction with the Explorer scheme, is an exclusionary
act as contemplated by section 8(d)(i), and that it has an
anticompetitive effect, we must now evaluate the efficiency justification
raised by SAA. If we find an efficiency justification exists, we then
evaluate whether it outweighs the anticompetitive effect. On both
issues the burden of proof shifts to SAA.
244.SAA relies for its efficiency defence on evidence led by Viljoen, Harris
and its economist, Professor Du Plessis.
245.Viljoen was, according to his testimony, central to SAA’s decision to
change the nature of the remuneration provided by the override
scheme. If anyone can testify to the efficiency gains of the scheme it
would be him. Yet his evidence on this matter fails to establish the
connection between the nature of the scheme and the benefits he
sought from the travel agents thereto. Viljoen explains that the
relationship between the airline and the travel agent is subject to the
contradiction that the airline wants to minimise costs whilst the agent
want to maximise commission. SAA was busy exploring alternatives
with agents. He mentions that SAA gave 15 million rand to ASATA to
look at alternatives and that working groups had formed on these
issues but that after 18 months they had not yet reached
issues but that after 18 months they had not yet reached
agreement.141 Viljoen testified that SAA wanted travel agents to be
incentivised to undergo training to learn about the SAA product. What
this meant in practice was never very clear in his evidence, but the
clearest articulation emerged when he was being pressed on the
incentive behind the Explorer Scheme:
“Yes so how do you sell. You must know what you are talking
about. You must know the product. You must know the service.
You must know the network. You must know the aircraft. You
must know the seating, know the food. You must know all that
stuff.” 142
140 See transcript page 253.
141 Transcript 4889,503.
142 Transcript page 580.
61
246.Yet when pressed to explain the relationship between these goals,
laudable as they may be, and the manner in which the schemes
functioned, he was a lot less clear. During crossexamination he was
asked how he expected American Express to achieve incremental
growth of 35% he says:
“ Well, in the negotiations they put on the table to us that they
were training their staff. They were expanding the infrastructure
countrywide, that they believed that they would achieve those
sorts of growth figures, but not by not selling on [off] other
airlines but by stimulating the market, by having more
offices.”143
247.The evidence of Harris is no more helpful in establishing this link.
Harris testifies to the benefits of the relationship describing being given
direct access to key people in the event of problems so that they could
be ironed out. Yet her evidence also does not explain why this type of
service from SAA is necessarily linked to the override scheme.
248.On this shaky factual premise Professor Du Plessis has had to
construct a theoretical basis that links the scheme to the claimed
efficiency. He, following his witnesses, makes as the first claim that the
scheme incentivises agents to improve their knowledge of the airline’s
products and that as a result there is a better match between airline
and customer. He describes these as trade creating, rather than trade
diverting gains. It is by no means clear why this is so.
249.There is nothing about the mechanism of the schemes to show how
they would be attractive to the consumer and hence trade creating in
the sense that these would be attracting clients to SAA and thus
growing the market.
250.The second benefit mentioned is that the agent has an interest in
250.The second benefit mentioned is that the agent has an interest in
improving the airline’s service by regularly informing the airline of
improvements needed, and complaints by customers. To some extent
this benefit has a greater relationship to the override scheme than the
previous one. It may well be true that if agents’ fortunes are tied to the
fate of SAA, they have an interest in advising SAA on how to improve
shortcomings so that they can meet their targets. The scheme could
therefore encourage efficient information exchange between agent and
principal, which the agent, absent such an incentive, may be unwilling
or uninterested in communicating. However this is not the only method
of achieving this type of benefit, nor is it so overwhelming as to
outweigh anticompetitive effects. Nor is it likely that SAA, which sells
tickets directly to customers and must also presumably get its share of
143 Transcript page 5189.
62
customer feedback, needs the override scheme to achieve this end.
251.There is of course a fatal paradox in the manner in which SAA
advances the efficiency argument. If agents cannot influence customer
choices, as is SAA’s central contention, why embark on an
arrangement to influence their behaviour when they are passive
recipients of consumer’s predetermined choices? It can only be a
rational incentive if one acknowledges that agents do influence choice
to some extent. Du Plessis ‘ answer is to suggest that they help grow
the market. But it is not clear how they do this without influencing
consumer choice. There is no evidence of how, armed with their
superior knowledge of SAA product, they put more people on to
planes. The most obvious method by which they might do this is to
provide lower prices on SAA tickets so as to promote air travel – but
the evidence suggests that they cannot do so and indeed are
discouraged from intra brand competition between agents as,
according to Mortimer, SAA does not want to lose control over its
pricing. 144
252.If they grow the market by marketing promotion for instance by
announcing specials that are available, granted this may bring in new
passengers who might otherwise not have chosen to travel or to fly, but
this kind of promotion does not require an incentive scheme. SAA can
find numerous other ways of rewarding agents from this type of
promotion of its products without the exclusionary nature of the current
scheme.
253.The disjuncture between the efficiency benefits claimed and the
mechanism of the scheme was well articulated in our view by the
Commission in its heads of argument. The Commission points out that,
Commission in its heads of argument. The Commission points out that,
because of the target set in the schemes as the basis for reward, a
travel agent that undergoes all the training but fails to meet its target
receives no reward, whilst another who does not, but makes its target,
will.145
254.The Commission also relies on several European cases where similar
target based incentive schemes were examined. 146 The cases indicate
that the nature of these schemes is not to promote efficiency because
they are not volume driven, but rather to promote loyalty. As the
European Community observed in the BA/Virgin case:
“ A travel agent that sells an inefficiently small number of tickets
144 Transcript page 197
145 See Commission’s replying heads of argument 5.1.
146 See Virgin/British Airways OJ [2000] L30/1, [2000] CMLR 999, SAS case, Swedish
Competition Authority DNR: 902/1998 Alitalia case Measure No. 9693 (A291) ASSOVIAGGI/
ALITALIA
63
can earn the maximum commission provided its small sales
represent a 25% increase over its sales in the previous year.
Equally, a high volume travel agent will not get extra
commission in return for the economies of scale it realises for
BA unless its sales increase over the previous year. .. Travel
agents are encouraged to remain loyal to BA rather than to sell
their services to competitors of BA by being given incentives to
maintain or increase their sales of BA tickets which do not
depend on the absolute size of those sales.” 147
255.In the SAS case the Swedish authority points out that one of the
objectionable features of the scheme it was considering was that the
bonus scales were subjective:
“The bonus scale is thus not constructed on objective grounds
but is wholly and completely adapted to the individual
customer’s previous purchases.” 148
256.The objectionable features identified in these cases are present in the
SAA override scheme. There is thus in our view no logical nexus
between the efficiency gains that SAA claims the scheme seeks to
achieve and its mechanism. If as Holt has pointed out it wanted to
achieve these objectives, the scheme would have been constructed
differently. The far more plausible explanation of the scheme is the one
advanced by the Commission that it is the mechanism for inducing
loyalty to the dominant carrier to the exclusion of its rivals.
257.We are not satisfied that SAA has proved that the override scheme or
the Explorer scheme, provides any technological, efficiency or other
procompetitive gains that outweigh their anticompetitive effect.
258.Accordingly we find that SAA has contravened section 8(d)(i) of the
Competition Act by the implementation of the override scheme. We find
Competition Act by the implementation of the override scheme. We find
further that use of the Explorer scheme has contributed to the anti
competitive effects of the scheme. We find that, although the override
incentive scheme on its own would constitute a prohibited practice in
terms of the Act, the same cannot be said with the same certainty of
the Explorer scheme. This is because we do not have sufficient
evidence to know if the latter scheme, taken in isolation, would have
constituted a prohibited practice. We do know however that it served to
complement and to enhance the anticompetitive effects of the override
incentive scheme.
APPENDIX 1
147 See BA / Virgin , paragraph 102
148 See SAS paragraph 123
64
65
66
PART II REMEDY
259.We must now consider what remedy is appropriate given our finding
that the respondent has contravened section 8(d)(i).
260.The Commission initially sought four remedies; a behavioural remedy,
a declaration that the conduct constituted a prohibited practice, an
order declaring that the relevant provisions of the Explorer and override
schemes be declared void, and an administrative penalty.
261.At the hearing on 7 December 2004 the Commission abandoned its
proposal for a behavioural remedy and we need not consider this issue
any further. We deal with the remaining forms of relief.
Declaration and Voiding
262.The Commission seeks an order that the provisions of the Explorer
scheme and the override scheme are declared prohibited practices.
The Commission further seeks an order that the relevant provisions of
the override agreements and the Explorer scheme be declared void.
The Commission does not detail which agreements these are and
which provisions should be voided. The Commission states specifically
that it does not propose alternative formulations for the voided clauses.
149
263.SAA’s approach to the declaratory relief is twofold. It firstly opposes
the relief on the grounds that it has not contravened the Act. That part
of its defence is now academic given our finding that it has. It then
specifically opposes any voiding of the clauses in the agreements, as
that would create practical problems for it until it had a viable
alternative.
264.Apart from arguing that we should not find against them SAA does not
make any specific comment on the merits of a remedy declaring the
Explorer Scheme and override scheme restrictive practices. We
presume that this is because SAA accepts the logic that if we find
against them such a declaration would automatically follow. It is
against them such a declaration would automatically follow. It is
accordingly only necessary for us to consider the terms of the
declaration. The Commission says no more than that we should
declare the practices to be prohibited. We find however that the
declaration needs more flesh put on it. Given that on the evidence, the
mere existence of an override scheme may not on its own constitute a
prohibited practice, but that it is the nature of the scheme that counts
(that is after all the Commission’s case on the merits) we narrow our
149 See affidavit of Menzi Simelane paragraph 2.
67
finding to the period in which the override scheme was found, in its
present form, to be an abuse of dominance.
265.We noted at the beginning of this decision that the evidence before us related to
different time periods. Thus although in many instances data from the airlines has
covered longer periods, evidence of the content of the agreements has covered a
shorter period. The Commission states that the ‘challenging’ override agreements
commenced in April 1999, but according to Viljoen’s evidence the date is October
1999. Then to add to the confusion, June 2001 is the end date for much of the data
presented in the Commission’s most recent set of figures. Despite this the
Commission in its affidavit on remedies states that the investigation and evidence led
“ focussed on the period June 2000 to May 2001. 150
266.We have thus confined the declaration to a period where evidence of
both for the most part coincided and we felt confident of making a
finding for that period. We have taken a conservative view of whether
these findings could be extended beyond these periods, even though
we have had some evidence that extends beyond this period. The
period of October to May 2001 is thus a cautious determination of
conduct one suspects continued for much longer, on either side of
these dates.
267.In relation to the Explorer Scheme we have no evidence when it
commenced, it appears at the very least to have been in operation by
October 1999. We know however from SAA that the scheme stopped
in June 2002. We could have declared that the Explorer scheme was a
prohibited practice for this period. However, given our finding, that on
its own, there is insufficient evidence that the Explorer scheme
constituted a prohibited practice, we confine our declaration to the
constituted a prohibited practice, we confine our declaration to the
period when we know that it coincided with the period in which the
override scheme was in operation in an unlawful form.
268.For this reason we have confined both declarations to the period from
October 1999 until May 31 2001 .
269.We do not consider it appropriate to void the specific clauses in the
agreements. In the first place as we noted, the Commission has failed
to give any particulars. We don’t know for instance if any of the
agreements are still currently in force, it is, after all, four years or more
since the relevant period. Secondly, we do not know whom they are
with and thirdly, which are the relevant clauses that should be voided in
each of the agreements. We are also concerned about the issue of
joinder. We have previously found that we cannot void an agreement
unless both parties have been joined. 151 In the present case, the
Commission would have us void agreements with travel agents where
150 See affidavit of Menzi Simelane on remedies paragraph 11.
151 The Competition Commission and South African Forestry Company Limited and Others
at paragraph 15
68
none of the agents have been joined to these proceedings. Without
hearing them, we cannot void the agreements. For all these reasons
we deny this aspect of the relief.
Administrative penalty
270.As we have found that SAA has contravened section 8(d)(i), it is
competent although not mandatory, for us to impose an administrative
penalty. In terms of section 59(2) of the Act an administrative penalty
may not exceed 10% of the firms annual turnover in the Republic
during the firm’s preceding financial year.
271.As we noted in Federal Mogul it is not clear from the Act what the
preceding financial year or ‘base year’ refers to, as there are several
possibilities.152 In that case we did not need to decide the point as the
parties had agreed what the base year should be. 153 In this case the
Commission has suggested that the base year should be June 2000 to
May 2001 . SAA’s position on this issue is far from clear. In his affidavit
in respect of the remedies, Mr Chavarika, SAA’s executive legal
counsel, criticises the Commission for its arbitrary selection of the base
year and then in the same breath, accuses the Commission of arbitrary
selection in respect of the investigation period of its case. 154 Yet later
on, in the affidavit when asking in the alternative for a lesser fine than
that sought by the Commission, Chavarika makes use of the same
base year. Nor has SAA, in its heads of argument on remedies, put in
issue the choice of base year. We have decided to follow the
Commission’s proposal for the base year as despite SAA’s criticism of
arbitrariness, it has neither questioned the legal basis for the
Commission’s choice of base year nor offered its own alternative.
272.It is common cause that SAA’s total annual turnover for that year was
R10 396 096 000. 155 However, this is not the figure that the
R10 396 096 000. 155 However, this is not the figure that the
Commission relied on to constitute the base revenue for the purpose of
calculating the fine. Rather the Commission has relied on a lower figure
that it says represents SAA’s turnover in the ‘affected market’
described as SAA’s flown revenue through travel agents in the
domestic market. This figure says the Commission is R2 022 124 775.
It is this figure that the Commission argues should serve as the base
revenue.156
152 The Competition Commission and Federal Mogul Aftermarket Southern Africa (Pty) Ltd
[2003] 2 CPLR 464 (CT).
153 The Competition Commission and Federal Mogul Aftermarket Southern Africa (Pty) Ltd
[2003] 2 CPLR 464 (CT) paragraph 169.
154 See Chavarika affidavit paragraph 41.4.
155 See Chavarika affidavit paragraph 59.6.
156 See Figures Bundle 2, table B, column 3, page 4.
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273.Sometimes a restrictive practice may have no relationship to a firm’s
total annual turnover, as the relationship between the contravention
and the total business to which that turnover may be attributed may be
remote. In Federal Mogul we held that we would exercise our discretion
to set the threshold for the calculation of a fine at a level lower than
total annual turnover, where, in the appropriate circumstances, it might
be more correct to select as the base, the turnover in the line of
business where the infringement took place.
274.In this case the Commission has done just that. It has argued that as
the abuse took place in the market for the sale of domestic airline
tickets through travel agents, that should be the appropriate affected
turnover for the purpose of reaching a threshold for the penalty. This
means the figure of R 2 billion as opposed the R 10 billion. SAA does
not dispute that this figure represents the domestic turnover of flown
revenue sold through domestic travel agents. However, SAA argues
that not all the tickets were sold through travel agents who were party
to the impugned agreements and hence the R 2 billion figure is too
high. (As has been its approach to other evidence in this case, SAA
has queried a figure, but not given one of its own when it was in the
best position to do so.) In our view this complaint does not raise a
material issue. The affected turnover as represented by this figure is
lower than the one that the Commission could legitimately have relied
on, namely the total domestic turnover, given that the abuse on our
findings had effects ultimately in this market. 157The Commission’s
choice to confine its base figure to the turnover in the smaller market is
in SAA’s favour.
275.Even if we are wrong on this, the evidence suggests that the amount
in SAA’s favour.
275.Even if we are wrong on this, the evidence suggests that the amount
of turnover not covered by override agreements of some sort was
insignificant.
276.For the purpose of this decision we will confine ourselves to the figure
that the Commission has selected.
277.We will regard the figure of R 2 billion as an appropriate base figure
on which to calculate the penalty.
278.We regard the circumstances of this case as one where an
administrative penalty is the most appropriate form of remedy,
particularly given the absence of a behavioural remedy and the legal
difficulties with voiding provisions of the agreements.
157 See figures bundle 2 page 1, where the figure is stated to be R2.4 billion as opposed to
the base figure that the Commission has used of R2 billion.
70
279.Following our approach in Federal Mogul we now examine the factors
that affect the level of the penalty as they are set out in section 59(3).
Nature, duration, gravity and extent of the contravention
280.The evidence is that SAA has had override agreements with travel
agents since 1980. 158 But given that we have found that it was not the
existence of override agreements, but the material change in their
nature that constitute the abuse of dominance the period of the
contravention is much shorter. The Commission in argument suggests
that the challenging override agreements came into effect in April 1999.
On the evidence of Mr Viljoen and the figures supplied by the
Commission it would appear that the abuse commenced in October
1999. In any event we cannot go back any earlier than 1 September
1999, as that is the date on which the Act came into effect.
281.The evidence of how long the abuse persisted is more difficult to
analyse. The Commission alleges that the abuse has continued for
more than five years and was still continuing at the time we heard
argument in March 2005. SAA does not deny this, but goes to great
lengths to explain why it could not simply terminate the scheme until
alternatives had been found. Indeed it suggests that rather than being
admonished it should be commended for the reasonable steps it has
taken to find a workable solution. As this relates more to the conduct of
SAA than to the nature of the scheme, we consider this line of defence
more fully below when we come to consideration of that factor.
282.However, 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 mid2001. We do not know for
instance if the nature of the contracts changed in any respect after the
instance if the nature of the contracts 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.
For this reason we give SAA the benefit of finding that the abuse in this
case is only shown to have lasted a period of approximately 20
months.159 We examine later, when we view the behaviour of the
respondent, the significance of the fact that the schemes are still in
place.
283.As far as the Explorer Scheme is concerned Chavarika, in his affidavit
on remedies, alleges that the Explorer scheme was terminated on 1
158 Chavarika affidavit paragraph 41.1.2
159 During his opening address counsel for the Commission referred to the fact that the
‘reference period’ for the agreements, by which we think he meant their duration, varied
between one and five years. Nevertheless this information has not been placed before us in
evidence.
71
June 2002. 160 The Commission has not led any evidence to the
contrary so we accept this fact.
284.In our view the nature of the override scheme during the relevant
period was of such a nature that the real intention must have been to
make use of it in an anticompetitive, exclusionary manner, rather than
to introduce efficiencies into the ticket distribution system, evidence,
which we have already found to be wholly unconvincing. Its use in
conjunction with the Explorer scheme at the same time aggravates its
effect. The combined conduct whilst brief in duration, in terms of the
evidence, was nevertheless of a seriously anticompetitive nature.
Loss or damage suffered as a result of the contravention
285.Two types of loss are possible here: loss to competitors and loss to
the ultimate consumers by way of higher prices or less choice and
inferior service.
286.The Commission argues that it has established that, at least during
the investigation period, the fortunes of Nationwide and BA/Comair
declined whilst those of SAA soared. Given that this change in fortune
coincided with the more robust implementation of the override scheme,
post October 1999, the Commission seeks to draw the inference that it
was the unlawful conduct that caused the loss. SAA seeks to refute
this. It relies partly on testimony of Mr Viljoen, who testified that at the
same time as the override scheme was changed, SAA had introduced
a number of other wideranging changes that made it much more
competitive and that these changes explain the improvement in its
performance. SAA also refers to evidence that Nationwide had, at one
stage during the period, increased its fares in the erroneous
anticipation that others would follow. When they did not, Nationwide
experienced a decline in sales. Whilst Nationwide have acknowledged
experienced a decline in sales. Whilst Nationwide have acknowledged
the setback attributable to the increase, its financial manager, Peter
Griffiths alleges that this did not account for any substantial decline as
his firm corrected its pricing soon after the market response. 161
287.The BA/Comair board minutes are the best evidence of the response
of that firm at the relevant time. But this evidence, as we have noted is
equivocal. It notes the improved performance of SAA, but also shows
concern about the effect on its fortunes of what it regarded as anti
competitive activities by SAA, inter alia, the override and Explorer
schemes.
288.This leaves us with an uncertain picture of cause and effect. SAA
160 See Chavaruka Affidavit on remedies paragraph 35.3
161 See Transcript dated 9 November 2004 at page 304
72
argues that because of this we should not assume that the decline in
Nationwide and Comair’s performance during the investigative period is
attributable to the override scheme and Explorer.
289.To some extent, SAA is correct. We have a situation where more
aggressive competition on the merits coincided with conduct we have
found to be anti competitive. We also know from the figures that the
Commission has produced, and which we analysed in our decision on
the merits, that both Nationwide and Comair showed a marked decline
in performance during the investigative period. Does this mean that
SAA must be given the benefit of the doubt and that in the absence of
evidence of harm, uncontaminated by harm from competition on the
merits, make no conclusion at all? To do so would be as dangerous as
to conclude that mere harm to competitors means by inference the
presence of anticompetitive conduct. Seldom will one find a situation
where a respondent firm’s behaviour in the market place is either all
good or all bad. To abstain from attempting to make a finding because
we find the presence of both simultaneously too hard to call, would be
to do a disservice to the enforcement of the Act.
290.What we must do is to test whether on a balance of probabilities the
harm proven may to some or more extent also be attributable to the
contravening conduct.
291.In this case the evidence, if not the cause, of harm is common cause.
So is its coincidence with the more aggressive implementation of the
override scheme. We also have the evidence of Mr Holt that the
override scheme was likely to affect the behaviour of travel agents and
this would impact on rival firms’ sales. We further have two items of
contemporaneous evidence by the rival firms. In the case of
Nationwide we have the evidence of Mr Bricknell that on observing a
Nationwide we have the evidence of Mr Bricknell that on observing a
decline in his firm’s sales he ordered his financial manager to conduct
an investigation as to the cause. 162 At first, this evidence sounds
strange – why order an investigation in this formal way, surely the firm
knew what was going on in its own market? That might be more
plausible if the reasons were solely the procompetitive conduct of
SAA. The fact that he suspected something more below the surface, a
suspicion that turned out to have some foundation, is an indication that
the override scheme, not obvious in its effect to outsiders, was playing
some role in Nationwide’s recent decline.
292.But his suspicion that something more than vigorous competition on
the merits was lurking, is more than the mere whim of a single
disappointed competitor. We know from the Comair minutes that its
board was also of the view that the improved performance of SAA,
162 See Transcript 16 August 2004 at page 105
73
which they acknowledge, was not the sole cause of the losses Comair
was experiencing at the time and their suspicion was that certain
practices of SAA, the override scheme among them, were prime
suspects as well.
293.By examining this evidence cumulatively, we are satisfied we can find
that the override scheme and Explorer were the most probable
explanation for some of the decline of SAA’ s rivals during the relevant
period. Granted we cannot be certain how much, but in our view it was
not a trivial cause of this loss.
294.The problem of assessing the loss as we noted in Federal Mogul is
that the counter–factual, namely what the market would look like
without the prohibited practice having taken place is always unknown.
For it is not merely a case of how much worse off competitors are
shown to be, the issue we have examined thus far, but also how much
better off they might have been absent the abuse. Nationwide, we
know, showed a spectacular rate of growth in its early entry into the
market, which ended during the reference period. Granted, as SAA
would have it, the rate of growth would decline as their market share
increased after entry, but the conduct may well have arrested the
fortunes of a very effective entrant. We also know from the internal
correspondence of some of the travel agencies, which we quoted
earlier, the strong pressures that the override scheme was imposing on
the industry and it is highly probable that this must have injured
Nationwide and BA/Comair. 163
295.In our view, the evidence shows some loss to the competitors of a not
insignificant nature although more precise quantification is impossible.
To some extent, this gives SAA the benefit of the doubt.
296.On the other hand, it needs to be noted that the effect of loss on the
296.On the other hand, it needs to be noted that the effect of loss on the
present evidence was for a limited period and that none of the
competitors was forced out of the market.
297.As SAA are quick to point out, there is no evidence of loss to
consumers. The Commission concedes that while there is no direct
evidence on this point the loss to consumers may be inferred from the
loss to competitors. By increasing the dominance of SAA, the scheme
has contributed to making the market less responsive to rivalry and
hence to the detriment of consumers.
298.We find again that it is highly likely that the scheme did have an
impact on consumers because of its effect on the performance of
163 Recall the newsletter of Puk and the pressures that Mortimer describes this his agency
was under.
74
SAA’s rivals. However we do not know what the extent of this is
because the counter factual is unknown. We find that although loss to
consumers is highly probable, the extent of that loss is uncertain.
Behaviour of the respondent
299.SAA argues that not only is the override scheme a practice known
world wide in the industry, but it has been used in the domestic market
by the complainant Nationwide and BA/Comair. The Commission
argues in contrast that it was well known, or should have been to SAA,
that override schemes had fallen foul of competition law elsewhere, but
that SAA nevertheless continued to implement them. The Commission
is referring to the cases in the European Union and some member
states.164 SAA however point to a case in the United States where the
scheme was not found to contravene section 2 of the Sherman Act. 165
SAA also argues that the fact that a scheme may fall foul of one
jurisdiction’s competition regime does not mean that the similar
conduct is necessarily unlawful in our own.
300.Whilst evidence of unlawfulness in some jurisdictions does not give
rise to any certain conclusion that a similar practice will be impugned
here, a firm of SAA’s sophistication, which of its own admission has
followed international practice in implementing the scheme, should
have been more alert to the fact that from international developments
its conduct was at least in the twilight zone of legality. Far from leading
the firm to becoming more cautious in this regard it chose, coinciding
with the introduction of the present Act, a fact alone that should have
induced greater circumspection, to advance further toward the
darkness of illegality by its introduction of the more ‘challenging’
scheme in October 1999.
301.Thus we have a firm uncertain as to whether its conduct is lawful
301.Thus we have a firm uncertain as to whether its conduct is lawful
choosing to exacerbate it instead, as it could have done, going to the
Commission for an advisory opinion. Nor did SAA do anything to make
this enquiry when its conduct was challenged by Nationwide in its
interim relief application in 2000. Whilst the Tribunal found against
Nationwide on this point, this was because the factual issues had not
been sufficiently canvassed not that the theory advanced in the Virgin
case was wrong in law. Indeed we expressed the view that we should
not be surprised if SAA was a dominant purchaser in the market for
travel agent for travel agent services. 166 This observation too had no
salutary effect on SAA’ s conduct.
164 BA/Virgin, SAS, Alitalia referred to earlier in this decision.
165 Virgin Atlantic Airways Limited and British Airways Plc 257 F.3d 256, 20012 Trade Cases P
73,351
166 See the extract quoted from this decision in footnote 3 above.
75
302.The European Court of Justice has held that a dominant firm is
considered to have:
“a special responsibility not to allow its conduct to impair genuine
undistorted competition in the Common Market.” 167
303.Whilst SAA may argue that it did not know it was a dominant firm, and
hence lacked an appreciation of its ‘special responsibility’ it ought, at
the very least, have been alert to the dangers inherent in a scheme that
was, to put it euphemistically, controversial with other competition
regulators. Nor could it have been ignorant of the size of its market
shares whatever its quibbles may have been over the Commission’s
methodology even on its own construction, it was in a high
temperature zone. Yet despite this, it not only showed no special
responsibility, it behaved irresponsibly.
304.SAA, as we noted earlier, argued that it could not simply abandon the
override scheme, as this would have been irresponsible. This appears
to be based on the assumption that without the override scheme in its
post October form, there would be no other means of compensating
travel agents short of developing a new form of compensation requiring
complex negotiations with the industry. That, according to the evidence
of Ms Harris, they were in the process of doing. Notwithstanding these
negotiations, by the conclusion of these hearings no new model had
been arrived at.
305.Had an attempt to reinvent agents’ compensation been a response to
allegations that the current practice was possibly a contravention of the
Act, this would have been laudable and influenced the quantum of the
fine favourably. But this is not the evidence.
306.Neither Mr Viljoen nor Ms Harris suggested that the reason for the
negotiations arose from these concerns. Harris testified that two years
ago ASATA and SAA had formed a remuneration team to look at
alternative remuneration for travel agents because:
alternative remuneration for travel agents because:
“..from a global perspective travel agency commission was being
done away with and the entire remuneration model was being
altered.”168
307.Thus the negotiations appear to be commercially, not compliance,
driven and therefore cannot avail SAA as mitigation. The length of time
this has taken would seem to bear this out. By way of contrast the
167 See Michelin V Commission , 1983 E.C.R. 3461 Case No. 322/81, Case T65/89 BPB Industries
Plc v Commission [1993] ECRII389 [1993] 5 CMLR 32, para 67.
168 See transcript November 2004, page 878.
76
evidence shows that SAA, in a matter of months, implemented the new
“challenging” override schemes and as the record of the
correspondence shows, against the wishes of the travel agents.
308.Further had SAA engaged the Commission at the time and asked for
its input on this matter this evidence would have been more credible.
Nor indeed is it particularly impressive that SAA has taken more than
five years since the lodging of the complaint to arrive at a new
compensation scheme for travel agents.
309.It appears that SAA was not prepared to abandon the override
scheme at any time soon despite serious questions over its legality nor
did it show any caution in this regard.
310.We therefore find that the behaviour of SAA in the market place since
the complaint does not warrant any mitigation of the fine but on the
contrary aggravation.
The market circumstances in which the contravention took place.
311.We know from the evidence of Viljoen that the October changes to the
override scheme were introduced at a time when SAA was losing
market share to rivals and had embarked on a number of strategies to
rectify that situation, amongst which was the more aggressive nature of
the override scheme. Other changes introduced at the time were
certainly procompetitive and even if they hurt rivals that would be part
of competition on the merits, which the Act seeks to encourage not
suppress.
312.What is regrettable is that in response to a loss of market share, SAA
did not confine itself to procompetitive responses, but included
conduct that was to have an anticompetitive exclusionary effect on
rivals. That anticompetitive conduct particularly impacted upon the
business of the newest and fastest growing entrant at the time,
Nationwide.
Nationwide.
313.We find that the prohibited practice was introduced at a time when the
dominant firm was losing market share, that a new entrant was
showing promising growth and hence served not only to attempt to
regain market share by competition other than on the merits, but also
to stifle the entry of a new rival and contain an existing one. Recall,
Holt’s evidence was that prior to the relevant period, Nationwide and
BA/Comair had grown more rapidly than the market as a whole and
that afterwards they had declined and their growth was less than that of
the market.
77
314.We must also bear in mind that the domestic airline market is central
to the lifeblood of our economy. Were SAA’s abuse of dominance
successful and one or more of its domestic airlines exited, we would
have faced the prospect of a duopoly or even a monopoly on the major
domestic routes. This is a market littered with the corpses of failed
entrants. Had more firms failed as a result of the override scheme, the
prospects for other new entrants would have been even bleaker.
315.The market circumstances therefore aggravate the conduct of SAA.
Level of profit derived from the contravention
316.The Commission concede that this is impossible to establish and we
agree with them. We can make no finding in this respect.
317.The degree to which the respondent has cooperated with the
Competition Commission and the Tribunal
318.We now deal with whether SAA has cooperated with the
Commission. The Commission accuses SAA of adopting tactics
throughout the course of this litigation that were designed to delay or
obstruct the hearing of the matter to its finality. The Commission cites a
number of instances.
319.It states that SAA first embarked on a High Court review of the
complaint referral, a review that was later abandoned, but delayed
further prosecution of the matter by one year. It then complains of an
incident where it alleges compliance with one of the Tribunal’s orders
for discovery of documents was deliberately frustrated by Mr
Chavarika, who had, wrongly, it is now common cause, alleged that
certain documentation was not in existence. The documents were
subsequently discovered by SAA after the Tribunal had ordered that an
affidavit be produced , confirming this be produced from Viljoen. On the
contrary, what was produced was an affidavit, this time from Mr Viljoen
contrary, what was produced was an affidavit, this time from Mr Viljoen
to state that they did exist and the documents were then discovered.
320.Then the Commission cites an instance in April 2004, when the matter
was due to commence, when SAA applied for a postponement on the
basis that it wished to consolidate the present matter with a matter that
at that stage the Commission were investigating, also related to the
override scheme. This Tribunal refused the postponement and SAA
unsuccessfully took the decision on appeal to the Competition Appeal
Court which dismissed the application imposing a costs order.
321.The Commission has also relied on the fact that Mr Viljoen, whose
crossexamination could not be concluded during the first period for
78
which the matter had been set down, had failed to appear at a later
date arranged for his convenience and thus the matter had to be
postponed again.
322.The Commission also catalogues various other instances, but we will
not burden this decision further by mentioning each one. SAA for its
part alleges that it has a valid explanation for each instance of apparent
delay. Thus in explaining the review, SAA says that the law on this
point was uncertain and it was entitled to pursue this action until the
Supreme Court of Appeal Court had decided otherwise, at which point
it abandoned the review. On the application for postponement SAA
alleges that it has been vindicated by time as that case has now been
referred to the Tribunal i.e. subsequent to the CAC determination. 169
323.SAA explains Chavarika’s apparent difficulty in obtaining the
documents that Viljoen was later to procure, as a bona fide
error.170SAA also goes on the attack and points out, correctly, that
some delays have been at the instance of the Commission. 171
324.Each of these incidents of delay at the instance of SAA, taken in
isolation, has been accompanied by a reasonable explanation. What
remains for us to decide is whether taken cumulatively, we can come to
the conclusion that SAA has deliberately embarked on a strategy of
delay. In the absence of this point being put to an SAA witness in
crossexamination, we must be careful of coming to such a conclusion
interesting as it might have been to hear them in reply.
325.What we can conclude is that SAA has certainly done nothing to
indicate it wanted to help the Commission in its investigation nor to
expedite the matter nor to reduce the issues in question.
326.What SAA did do was to litigate this matter to the last. No point was
326.What SAA did do was to litigate this matter to the last. No point was
conceded or not taken. Even on issues in respect of which it was
plainly unable to come up with a credible alternative version, it
resolutely refused to concede an inch. Recall Viljoen’s long war of
attrition with the Commission over market share figures that we
detailed earlier. That, of course, it is fully entitled to do for to draw an
adverse inference from such conduct may risk chilling litigants fully
exploring their rights. However such an approach means the litigant
cannot rely on subsection 59(3)(f) as a means of mitigating a fine.
While we do not regard the conduct as having aggravated the fine, as
we give SAA the benefit of the doubt, there can be no benefit to them
169 See Competition Commission and Comair 83/CR/Oct04
170 See Chavarika affidavit paragaph 50.
171 See for instance one of our earlier decisions during the course of this litigation where we
took the Commission to task for just such a delay. Competition Commission and SAA (Pty)
Ltd – 18/CR/ Mar01 (“amendment decision”)
79
either.
327.Whether the respondent has previously been found in
contravention of the Act
328.The respondent has not previously been found in contravention of the
Act.
Conclusion
329.The Commission has sought a fine of R 100 million. This constitutes
5% of the base figure of R 2 billion that we referred to earlier. SAA’s
response is that this figure, if a fine is deemed appropriate, is
exceedingly high. It states that in an internal memorandum to its
executive committee the Commission’s enforcement and exemptions
department had recommended that the fine be set at 0,5% of turnover.
This, says SAA, is one tenth the fine sought now and was
recommended at a time when the Commission had completed its
investigation and had a complete conspectus of the whole case.
330.We do not have this document in our record, but assuming that we
can accept that such a document exists its relevance escapes us.
What the Commission may have at one time discussed internally has
no bearing on what we have to consider today, namely, what is an
appropriate level of penalty on the evidence before us. It is that issue at
the end of the case that the Commission has addressed in its
recommendation, what one of its departments may have said once
upon a time long before this case ended, is irrelevant.
331.SAA has also raised as an additional mitigating factor its financial
plight at the time argument was heard. We do not need to decide
whether such circumstances justify the mitigation of an administrative
penalty. The evidence has been that in the past when it was in financial
straits, the State, its shareholder, has come to its aid. We have had no
regard therefore to SAA’s financial circumstances.
regard therefore to SAA’s financial circumstances.
332.SAA also belatedly raised a constitutional point that we were not
entitled to impose an administrative fine on a respondent where the
standards of proof of a criminal trial are not observed. 172 SAA states
this violates its rights to just administrative action in terms of section 33
of the Constitution.
333.Section 33(1) states:
“Everyone has the right to administrative action that is lawful, reasonable
172 See SAA Heads of Argument on remedies paragraph 20.4
80
and administratively fair.”
334.The Competition Appeal Court in the Federal Mogul case, where a
similar constitutional point was taken by the appellant, has decided that
the administrative fine contemplated by section 59 is civil in nature as
its purpose is not to punish criminals rather its context is corrective and
noncriminal in nature. 173
335.SAA attempts to escape this difficulty by asserting that the CAC
reasoning was flawed. Since we are bound by CAC decisions this
argument does not assist SAA in this forum. Secondly, they argue that
the CAC was not dealing with a challenge to section 59 in terms of
section 33 of the Constitution and hence this point is not yet decided.
Besides this bald assertion the argument is taken no further and hence
it is difficult to predict what form it might take that makes the issues
novel. Whilst is correct that the CAC decided the matter on the basis of
section 35 of the Constitution and not section 33 it is difficult to believe
that the CAC would come to any other conclusion since they stated
expressly that the procedure must be fair, yet upheld the imposition of
a penalty in that case where the standard of proof was civil and not
criminal.174 We accordingly find the constitutional argument devoid of
merit.
336.The remaining part of the constitutional argument was raised in oral
argument and not in the heads of argument. SAA argued that the
Tribunal could not impose an administrative penalty on a respondent
where evidence led in relation to the penalty was by way of affidavit not
viva voce testimony. SAA argues this way because we allowed the
Commission and SAA to give evidence by way of affidavit and not oral
testimony. The Commission furnished the initial affidavit to which SAA
was able to answer. SAA argues that it would be unfair to impose an
administrative fine on a respondent relying on untested evidence.
administrative fine on a respondent relying on untested evidence.
337.Whether this point is good is not something we have to decide. As our
approach to the consideration of the factors indicates, we have not
merely relied on the affidavits on remedies to come to our conclusion
and indeed we have considered the viva voce evidence as well. Where
the affidavits have raised disputes of fact we have either accepted
SAA’s version or, as is the case with the dispute over whether SAA co
operated with the Commission, given SAA the benefit of the doubt.
Accordingly the constitutional argument, whilst interesting, is of no
application in the present case.
173 See Federal Mogul Aftermarket Southern Africa (Pty) Ltd v Competition Commission and
the Minister of Trade and Industry . Case number 33/CAC/Sep03 (unreported) at page 39.
174 See Federal Mogul (CAC decision) page 40. Section 35 of the Constitution provides for
the rights for arrested, detained and accused persons.
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338.Our discussion of the various factors above has indicated that we
have found that the conduct was, on these facts, of short duration,
albeit of a serious kind. In a market with high barriers to entry and a
long history of failed entry, conduct of an exclusionary nature by the
dominant incumbent must be viewed seriously indeed. The behaviour
of SAA in seeking not to minimise the effect of its conduct in
circumstances when it knew or ought to have known it was operating at
the cusp of legality is an aggravating factor. Nor can we ignore either
the centrality of a competitive domestic airline industry to our economy
and the fact that if the exclusionary conduct was successful it could
have led to a monopoly or duopoly on certain domestic airline routes.
Nevertheless, we have found that no competitors were forced out of
the market although we consider them to have been adversely affected
albeit to an extent unknown. The effect on ultimate consumers would
have been adverse, but again we cannot determine the extent. We can
make no conclusions on the level of profit made by SAA as a result of
the prohibited practice. We cannot find any evidence in aggravation of
the respondents’ cooperation with the Commission and Tribunal but it
has not established any mitigating evidence either. We regard the
market circumstances in which the abuse occurred as an aggravating
factor.
339.All these factors point to us considering the Commission’s
recommendation as being too high, but SAA’s 0,5% suggestion as too
low. Our view is that an appropriate level would be 2,25 %, which
amounts, on a base figure of R 2 billion, to a penalty of R 45 million.
340.We indicate below how we have come to our finding on the basis of
our factual and legal conclusions.
Method used to set the level of the penalty
our factual and legal conclusions.
Method used to set the level of the penalty
341.We first took the factors we have to consider in terms of section 59
and gave them a weighting in terms of one another so that they add up
to 10%, the maximum permissible level for a fine in terms of section
59(2). We explain what we took into account in performing the
weighting in Table 4 below. Then, having established these
weightings, in Table 5, we applied them to our findings in the case and
gave them a score relative to the total weightings in Table 4. This has
served as the basis for the administrative penalty that we have
imposed.
342.Note that the weightings are not just a matter of adding up strikes
against a respondent. Where we find mitigation, we would credit the
respondent with a score, again weighted by reference to Table 4. Thus
we score cooperation with the authorities at 1,5%. A firm that failed to
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cooperate could find its fine increased by this percentage or part
thereof. Conversely a firm that cooperated could find that its fine is
discounted by this amount or part thereof.
343.Before we consider the tables, a few cautionary words are necessary.
The approach that we have adopted in calculating the size of the
administrative penalty attempts to lend rationality to an important
decision. While the Act specifies a nonexhaustive list of factors that
are to be taken into account, it does not weight these in any way. In
general, and in contrast with many other jurisdictions, our legal system
does not have clearly developed or widely used sentencing guidelines.
It is our view that the size of the administrative penalty be argued and
determined with as much attention to evidence and rational argument
as the merits of the case itself and, to this extent, at least the approach
adopted here is intended to act as a guideline for the future. However,
further experience with the Act may indicate that either the weightings
are inappropriate or that we have not exhaustively considered all the
factors that may exist. In this decision we have set out our thinking in
some detail in order to assist readers to understand how we approach
the difficult task of allocating to legal and factual conclusions a rating
that can inform the size of the penalty.
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TABLE 4 RELATIVE WEIGHTINGS
Factor Percentage
a) nature, duration and extent of contravention 3 %
This factor is given the highest weighting. Firstly, because it deals with three separate
issues, nature, duration and extent and thus as a matter of quantity it is the most wide
ranging of the factors. Secondly, it needs to be weighted heavily enough to provide for a
meaningful distinction between various types of contravention.
Duration, for instance could refer to the act being perpetrated over a period of months or
years. It is also important to differentiate sufficiently between types of prohibited practice.
For instance, a section 4(1)(b) prohibition, the socalled hardcore cartel, would be
considered the most egregious form of conduct and so would receive a higher allocation
than a less serious form of prohibited conduct e.g. resale price maintenance.
b) loss or damage as a result of contravention 1,0 %
Here we would look at loss or damage to competitors and/or consumers as a result of the
prohibited practice. This receives a lower weighting as the competitors/consumers can
recoup this loss through a claim for civil damages.
c) behaviour of respondent 1,0 %
This deals with the behaviour of a respondent firm in relation to the market i.e. consumers
and competitors as opposed to how it responds to the regulators which falls under sub
paragraph (f). This factor must be weighted sufficiently high to serve as both an aggravating
factor for respondents whose behaviour in the market justifies, but on the other hand, is
there to provide mitigation to those who attempt to redress the adverse effects of their
conduct.
d) market circumstances 1,0 %
Here we deal with what the nature and dynamics of the market are at the time of the
contravention. We examine here the type of market, its structure and history. We look at how
contravention. We examine here the type of market, its structure and history. We look at how
materially the conduct impacted or could have impacted on the market structure.
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e) level of profit derived 0,5 %
Here what we are dealing with is made quite specific. Nevertheless evidence of the level of
profit derived as a result of the contravention is difficult to prove in practice and for this
reason the factor, while not unimportant, is not given a high weighting.
f) degree of cooperation with CC and CT 1,5 %
This factor is given a high weighting because of the importance we attach to cooperation
with the regulators. Those who cooperate should be able to score well in mitigation of the
penalty whilst those who have not, should be penalised.
g) found in previous contravention 2 %
This factor needs a high weighting as a repeat offence is very serious and needs to be
adequately deterred.
Total 10%
344.In Table 5 we apply the above weightings to the facts of the case and
come up with an appropriate level for the penalty. Note that in respect
of some factors, where the evidence is not established, SAA is not
penalised and received a nil allocation. However since we have found
no mitigating evidence, it has not received any deduction.
TABLE 5 – APPLICATION TO SAA CASE
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Factor Percentage SAA
allocation
a) nature, duration and extent of contravention 3 % (0,75%)
Here we first take into account that an exclusionary abuse is not as serious a form of
conduct as a hard core cartel. The worst exclusionary abuse might therefore qualify for a
weighting of 1,5% depending on the extent and duration which we then look at. Here the
duration was found to be for a limited period. Bearing in mind the extent, a score of 0,75 out
of a maximum revised total of 1,5% is appropriate.
b) loss or damage as a result of contravention 1 % (0,25)
Here we could make no finding on direct loss to consumers and we found some damage
likely, but not quantifiable to competitors, but found that competitors had not been forced out
of the market.
c) behaviour of respondent 1,0 % (0,5)
The respondent’s failure to ascertain whether its behaviour was unlawful in circumstances it
should have, or to correct it over a period of almost five years, is a factor in aggravation.
Found no mitigation in relation to negotiations for a new compensation scheme.
d) market circumstances 1,0 % (0,75)
Found that this was a strategic market with history of high barriers to entry and early exit.
Found that if abuses had succeeded in excluding competitors it would have had very serious
impact on the structure of the market.
e) level of profit derived 0,5 % (0)
No evidence on this hence 0%
f) degree of cooperation with CC and CT 1,5 % (0)
No finding in aggravation or mitigation, hence 0%
g) found in previous contravention 2 % (0)
No evidence on this hence 0%
Total 10% (2,25)
ORDER
(a) SAA is ordered to pay an administrative penalty in the amount of
R 45 million (forty five million rands) to the Commission within
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20 business days of this decision.
(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.
Costs
There is no order as to costs.
________________ 28 July 2005
N. Manoim Date
Concurring: U. Bhoola, D. Lewis
For the Commission : W. Pretorius, instructed by Roestoff, Venter, Kruse
Attorneys
For the respondent : Adv. A. Subel S.C. and R Bhana, instructed by
Knowles Hussain Lindsay Inc on behalf of Edward Nathan and Friedland
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