Brief Summary

Competition Law — Anti-competitive practices — SAA's incentive schemes with travel agents — Complainants, Comair and Nationwide, challenged SAA's 2001 incentive schemes as exclusionary practices under section 8(d)(i) of the Competition Act — SAA's schemes incentivized travel agents to prioritize SAA over competitors, leading to substantial foreclosure of rivals in the domestic airline market — Tribunal found SAA's conduct to be anti-competitive, affirming its dominance in the relevant markets and concluding that the schemes reduced overall competition in the domestic airline sector.

Comprehensive Summary

Summary of Judgment

1. Introduction

The proceedings were heard by the Competition Tribunal of South Africa in an abuse of dominance matter concerning South African Airways (Proprietary) Limited (SAA) and its use of incentive arrangements with travel agents for the sale of domestic airline tickets. The case required the Tribunal to determine whether SAA’s post-2001 incentive scheme amounted to an exclusionary abuse of dominance, principally under section 8(d)(i) of the Competition Act 89 of 1998 (with section 8(c) pleaded in the alternative).

The parties were Nationwide Airlines (Proprietary) Limited as complainant, Comair Limited as intervening complainant (and applicant on notice of motion), and SAA as respondent. The dispute centred on the competitive effects of SAA’s so-called third generation override agreements and trust payments/agreements with travel agents, implemented after earlier incentive arrangements had already been condemned in prior Tribunal proceedings.

The procedural history was complex. Earlier, in Competition Commission v South African Airways (Pty) Ltd (Case No. 18/CR/Mar01) (referred to in this judgment as the Nationwide decision), SAA’s earlier incentive scheme (including “second generation agreements” and the “Explorer” scheme) had been found to contravene section 8(d)(i) for the period September/October 1999 to 31 May 2001, and an administrative penalty of R45 million was imposed. In the present matter, Comair’s complaint (lodged with the Commission in October 2003 and referred in October 2004) and Nationwide’s later self-referred complaint (following the Commission’s refusal to refer) were eventually consolidated. A separate development was that the Commission and SAA concluded a settlement, which the Tribunal confirmed as a consent order under section 49D(1), resulting in the Commission ceasing to play a prosecutorial role in relation to Comair’s referral; Comair thereafter proceeded via an application for declaratory relief under section 49D(4)(a).

The general subject-matter of the dispute was whether SAA’s travel-agent incentives operating between 1 June 2001 and 31 March 2005 induced travel agents to prefer SAA over rivals in a manner that foreclosed competition in the market for scheduled domestic air travel, thereby reducing competition and constituting an exclusionary abuse of dominance. A central practical purpose of the declaratory relief sought was to satisfy the statutory prerequisite for a subsequent damages action in the High Court in terms of section 65(6)(b).

2. Material Facts

SAA had used travel-agent incentive schemes since the 1990s. Prior to 1999, travel agents were paid a standard commission per ticket sold. In late 1999, SAA introduced a more complex incentive structure (described in the judgment as “second generation agreements”) together with the “Explorer” scheme; these arrangements were subsequently condemned in the earlier Tribunal decision for inducing travel agents not to deal with SAA’s rivals.

From around 2001 SAA introduced a revised incentive structure. The scheme under scrutiny in this case consisted of third generation override agreements and additional trust agreements/payments (collectively referred to as the 2001 incentive schemes). These arrangements were in place until 31 March 2005, and the Tribunal identified the relevant period for the present case as 1 June 2001 to 31 March 2005. While the Tribunal acknowledged practical overlaps in individual contract dates (given individually negotiated agreements with varying commencements, durations, and signature dates), it treated these as limited and not materially affecting the competition analysis for the defined period.

The Tribunal treated as material the following features of the post-2001 arrangements. First, SAA’s override agreements continued to reward travel agents for meeting individually negotiated performance targets (typically based on prior-year sales), and override payments remained calculated on a “back to rand one” basis for achieving base/target performance. Secondly, the scheme shifted measurement and verification from BSP figures (Booking and Settlement Plan sales) to flown revenue (and later flown passengers), which meant that airlines—rather than agents—held the decisive information for determining target achievement and entitlement. Thirdly, SAA introduced (and repeatedly adjusted) exclusions affecting how growth and base were computed (for example, excluding from “growth” certain acquisitions, new outlets, or corporate accounts), and introduced differentiated incentives by ticket class. Fourthly, SAA introduced trust payments, described as lump sum payments linked to achieving specified domestic and international revenue and market-share related objectives, and associated “support” for SAA.

The Tribunal relied on evidence that during the relevant period, despite growth in internet and other direct sales channels and the entry/expansion of low-cost carriers, travel agents remained the primary and optimal distribution channel for domestic airlines. The judgment recorded that by the relevant period’s end, travel agents still accounted for a substantial majority of domestic ticket sales for SAA, Comair (excluding Kulula), and Nationwide, and that direct channels—although increasing—were limited in uptake and functionality during the period (including the absence of later-developed comparison/search tools, and the inability to hold bookings online).

The Tribunal also relied on evidence that travel agents had the ability to influence customers’ purchasing decisions (directional selling), and that such influence persisted notwithstanding reputational concerns and market developments. The Tribunal treated admissions and testimony from SAA’s witnesses as supporting that agents had such influence, and noted contemporaneous communications indicating that at least some travel agents regarded themselves as capable of shifting discretionary business between airlines.

On market structure and power, the Tribunal relied on evidence that SAA (including its alliance with South African Express and South African Airlink) held high market shares in (a) the market for travel agent services to airlines and (b) the market for scheduled domestic air travel. It accepted that SAA’s alliance arrangements with SAX and SAL were coordinated and presented as a single branded offering to consumers, and that SAA’s incentives incorporated SAX and SAL sales.

The facts were disputed in relation to the interpretation of post-base incentive mechanics in certain override contracts, particularly whether post-base steps operated as overrides or as flattened/flat payments. The Tribunal treated the contractual text, witnesses’ uncertainty about how some terms operated in practice, and the existence and design of trust payments as relevant context, but ultimately regarded the continued back-to-rand-one design for achieving base, combined with trust payments, as sufficient to establish inducement.

3. Legal Issues

The Tribunal was required to determine, first, a preliminary procedural issue: whether section 67(2) of the Competition Act barred the complaints on the basis that SAA had already been a respondent in completed proceedings “relating substantially to the same conduct” (the “double jeopardy” objection in limine), given the earlier Tribunal prosecution and decision concerning SAA’s travel-agent incentives.

If the matter was not barred, the central merits issues were whether SAA’s conduct during 1 June 2001 to 31 March 2005 constituted an abuse of dominance by inducing travel agents not to deal with rivals and foreclosing rivals in the market, in contravention of section 8(d)(i) (or alternatively section 8(c)). This required determination of relevant markets; whether SAA was dominant in those markets in terms of section 7; whether the incentive arrangements amounted to an exclusionary act of the kind specified in section 8(d)(i); and whether the conduct had anti-competitive effects, particularly through foreclosure (impeding rivals’ expansion), as opposed to requiring proof of quantified consumer harm.

The dispute predominantly concerned the application of legal standards to economic and factual material (market definition, dominance, inducement, foreclosure, and competitive effects). It also involved evaluative judgments about market developments (low-cost carriers and alternative distribution channels), the significance of travel agents, and the inference of foreclosure where direct consumer harm evidence was difficult to obtain.

4. Court’s Reasoning

On the point in limine, the Tribunal interpreted section 67(2) as a protection against double jeopardy in relation to substantially the same conduct in the same defined time period. Drawing on authority from the Competition Appeal Court and prior Tribunal decisions, it rejected SAA’s “a-temporal” interpretation that would prevent prosecution of substantially similar conduct occurring in a different period. The Tribunal reasoned that SAA’s approach would lead to absurd outcomes (including immunising repeated future contraventions once a firm had been prosecuted once). It further rejected as baseless the suggestion that the earlier Nationwide decision extended to 2005, noting that the prior order expressly confined the prohibited conduct to the period ending 31 May 2001. Because the present matter concerned conduct after that date (defined as 1 June 2001 to 31 March 2005), the objection in limine failed and was dismissed.

On market definition, the Tribunal reaffirmed a two-market framework used in the earlier Nationwide decision: the market for the purchase of travel agent services for the sale of domestic airline tickets, and the market for scheduled domestic airline travel. It rejected SAA’s expert’s conceptualisation that treated travel agents as retailers selling to consumers in a standard wholesale-retail chain, emphasising that travel agents did not take ownership of tickets, could not set prices, and were primarily compensated by airlines rather than consumers during the relevant period. The Tribunal treated travel agents as an input channel for airlines, and assessed the competitive significance of that input channel.

In applying the facts to the market inquiry, the Tribunal placed weight on evidence that internet sales and direct channels were still limited during the relevant period both quantitatively and qualitatively, and that travel agents provided services airlines would find prohibitively expensive to replicate. It concluded travel agents remained the most significant distribution route and that alternative channels were, during the relevant period, sub-optimal substitutes from airlines’ perspective.

For the domestic scheduled airline travel market, the Tribunal rejected a route-by-route geographic segmentation, reasoning that SAA’s incentive arrangements applied across domestic tickets generally and were not limited to particular routes, including potential competition on routes where rivals were not yet present. It also emphasised that the incentives included sales for SAX and SAL, whose alliance arrangements were coordinated with SAA and perceived by consumers as a unified brand.

The Tribunal considered whether the market should be segmented into time-sensitive and non-time-sensitive passenger segments (as argued by Comair by reference to European merger decisions). It declined to adopt formal segmentation, citing limited reliable data to delineate segments and evidence of an evolving market. Nonetheless, it accepted that the anti-competitive effects, if established, would be most acute in the portion of the market distributed through travel agents (described for convenience as the travel agent segment (TAS)), which tended to include higher margin fares and excluded tickets sold exclusively through direct channels.

On dominance, the Tribunal applied section 7 of the Act, treating dominance as established by market share thresholds without requiring a separate inquiry into market power where market share exceeded 45%. It included SAX and SAL in SAA’s market share computation due to the strategic alliance, coordinated route planning, shared branding and benefits, and because SAA’s incentive agreements rewarded sales across SAA, SAX and SAL. It thus found SAA presumptively dominant in both relevant markets.

On whether the incentive scheme constituted prohibited exclusionary conduct, the Tribunal applied the analytical approach it had earlier articulated in Nationwide regarding section 8(c) and section 8(d)(i). It proceeded by assessing (a) whether the conduct fell within the statutory characterisation of an exclusionary act (here, inducing travel agents not to deal with rivals), and (b) whether the conduct had anti-competitive effects, particularly by foreclosing rivals or impeding their expansion. It emphasised that section 8(d)(i) does not require proof of complete foreclosure, and that substantial foreclosure can be inferred from proven facts and reasonable inferences.

The Tribunal first assessed whether travel agents had the ability to divert customers. It rejected the notion that reputational constraints and market developments made directional selling unsustainable, relying on the continued informational asymmetry between agents and consumers, limitations of internet tools at the time, and admissions or concessions by witnesses (including SAA’s witnesses) that agents could influence customers’ choices. It also treated documentary evidence (including communications from travel agents) as supporting that agents perceived themselves as able to shift discretionary business.

Turning to financial inducement, the Tribunal examined the structure of the third generation agreements. It held that key elements of the override structure persisted, particularly the back-to-rand-one feature for achieving base targets. It considered disputes over whether post-base provisions operated as overrides or flattened payments, noting witness uncertainty and contractual drafting that still contained milestones. However, it reasoned that even on SAA’s version (flattened post-base incentives), trust payments were introduced expressly to “compensate” agents for lost post-base incentives, which indicated that overall inducement remained. It further reasoned that the shift to flown revenue measurement and SAA’s control of crucial performance information increased agents’ dependence on SAA’s reporting and heightened incentives to focus on SAA sales until targets were confirmed.

The Tribunal treated trust payments as themselves a form of performance-linked incentive, paid upon achieving targets (with partial achievements also rewarded), substantial in magnitude and sometimes critical to agents’ profitability. It considered that SAA’s discretion in computing trust payments further reinforced agents’ incentives to maintain SAA support. In this context, the Tribunal found that the override agreements and trust payments, separately and collectively, induced travel agents to deal with SAA at the expense of rivals and thus contravened section 8(d)(i). Having made that finding, it held it unnecessary to decide the alternative section 8(c) case.

On anti-competitive effects, the Tribunal reiterated that such effects can be proved by evidence of consumer harm or by showing substantial foreclosure. It emphasised that direct consumer harm evidence was difficult to obtain in this industry due to information asymmetries and dynamic fare management. It therefore focused on foreclosure, reasoning that the relevant harm lay in impeding rivals’ expansion in the segment of domestic sales distributed through travel agents—a large portion of the market by value.

The Tribunal rejected SAA’s reliance on post-2005 “counterfactual” comparisons tendered late in the proceedings, attaching little probative value due to the manner and timing of their production and because meaningful counterfactual analysis would require controlling for other market drivers, including LCC-driven growth, new entry, and “lock-in” effects. It found the nature and scale of SAA’s agreements—covering a large proportion of travel-agent distributed sales—supported the inference that foreclosure was likely substantial, and that rivals could not match SAA’s incentives in rand value given SAA’s scale. It accepted that effects might differ between rivals and between product segments, but held that it was sufficient to find that both Comair and Nationwide were impeded in expanding in the relevant segment of the market.

Finally, on remedy, the Tribunal considered the scope of its powers where a complainant proceeds under section 49D(4) following a consent order. It held that the Tribunal’s powers in such proceedings were limited to declaratory relief for purposes of section 65 and/or declaring agreements void, and did not extend to imposing an administrative penalty in that procedural posture. It also accepted that relief declaring agreements void had become moot because the relevant agreements had already been terminated.

5. Outcome and Relief

The Tribunal dismissed SAA’s point in limine under section 67(2), holding that the earlier completed proceedings did not bar prosecution of substantially similar conduct occurring in a later, distinct period (and further holding that the impugned post-2001 scheme was in any event not the same scheme adjudicated previously).

On the merits, the Tribunal declared that SAA’s third generation override incentive agreements with various travel agents from 1 June 2001 to 31 March 2005, and SAA’s trust agreements/payments with various travel agents over the same period, constituted prohibited practices in contravention of section 8(d)(i) of the Competition Act.

The Tribunal granted an order of costs, including the costs of two counsel, in favour of Nationwide and Comair. It did not impose an administrative penalty in these proceedings, and the relief seeking a declaration of voidness of agreements was treated as moot given termination of the agreements.

Cases Cited

Competition Commission v South African Airways (Pty) Ltd (Competition Tribunal Case No. 18/CR/Mar01).

Sappi Fine Paper (Pty) Ltd v The Competition Commission (Competition Appeal Court Case No. 23/CAC/Sep02).

Barnes Fencing Industries (Pty) Limited and Another v Iscor Limited (Mittal SA) and Others [2008] 1 CPLR 17 (CT).

Barnes Fencing Industries (Pty) Limited and Another v Iscor Limited (Mittal SA) and Others (Competition Tribunal Case No. 08/CR/Jan 07) (as referenced in the judgment).

Omnia Fertilizer and Another v Competition Commission and Others (Competition Appeal Court Case No. 52/CAC/Jun05).

Competition Commission and JT International SA (Pty) Ltd v British American Tobacco South Africa (Pty) Ltd (Competition Tribunal Case No. 05/CR/Feb05).

Competition Commission v Senwes Ltd (Competition Tribunal Case No. 110/CR/Dec06).

Virgin/British Airways (European Commission Decision), Official Journal [2000] [30/1] [2000] (as referenced in the judgment).

European Commission (2004) Case No. COMP/M.3280, Air France/KLM, ECMR 4064/89.

European Commission (2005) Case No. COMP/M.3770, Lufthansa/Swiss, ECMR 139/2004.

Natal Wholesale Chemists (Pty) Ltd v Astra Pharmaceuticals & Others [98/IR/Dec10] (as referenced in the judgment).

Legislation Cited

Competition Act 89 of 1998, including sections 7, 8(c), 8(d)(i), 49D(1), 49D(4), 51(1), 58(1)(a)(v), 58(1)(a)(vi), 65(6)(b), and 67(2).

Rules of Court Cited

No rules of court were expressly cited in the judgment.

Held

The Tribunal held that section 67(2) did not bar the proceedings because the prior completed proceedings concerned conduct in an earlier, defined period, and substantially similar conduct in a later period constitutes new conduct for purposes of that section. The objection in limine was dismissed.

The Tribunal held that the relevant markets were the market for the purchase of travel agent services for the sale of domestic airline tickets and the market for scheduled domestic airline travel in South Africa. It held that, notwithstanding growth in low-cost carriers and alternative distribution channels, travel agents remained the most significant distribution route during the relevant period.

The Tribunal held that SAA was dominant in both relevant markets, including by reason of market shares, and that the sales of South African Express and South African Airlink were properly included in SAA’s market share assessment due to the strategic alliance and integrated consumer-facing offering.

The Tribunal held that SAA’s third generation override agreements and trust payments induced travel agents to deal with SAA at the expense of rivals, thereby constituting exclusionary conduct within section 8(d)(i), and that the conduct had anti-competitive effects by foreclosing or impeding rivals’ expansion, particularly in the travel-agent distributed segment of domestic air travel.

LEGAL PRINCIPLES

Section 67(2) is directed at preventing double jeopardy and does not provide a blanket, time-unbounded bar against prosecution for substantially similar conduct occurring in a different time period. For purposes of section 67(2), material differences in time (and manner) may remove a later complaint from the bar, and an a-temporal reading would produce outcomes inconsistent with enforcement against repeated contraventions.

In an abuse of dominance inquiry under section 8(d)(i), the Tribunal applied a structured approach requiring identification of (a) whether the conduct is an exclusionary act of the type contemplated in section 8(d), and (b) whether the conduct has an anti-competitive effect, which may be established by evidence of consumer harm or by showing that the conduct is substantial or significant in terms of foreclosing rivals. For foreclosure, it is sufficient that conduct prevents or impedes a firm from expanding in the market; complete exclusion is not required.

Market definition is treated as an analytical tool guided by the competitive effects of the conduct. In evaluating exclusionary conduct involving distribution arrangements, the Tribunal accepted that a relevant input market may be defined as the market for the purchase of distribution services (here, travel-agent services) where the alleged harm arises from input foreclosure affecting rivals’ access to customers.

Under section 7 of the Competition Act, a firm with a market share of 45% or more is dominant by statutory threshold, without requiring a separate inquiry into market power. Where alliances function as a coordinated economic offering and are treated as such in market behaviour and incentives, their shares may be included in dominance analysis.

Where evidence of direct consumer harm is difficult to obtain due to information asymmetry and dynamic pricing, anti-competitive effects may appropriately be assessed through the lens of likely substantial foreclosure supported by market structure, scale of the incentive scheme, the strategic importance of the distribution channel, and the inability of rivals to match the inducement in effective economic terms.

Nationwide Airlines (Pty) Ltd and Another v South African Airways (Pty) Ltd (80/CR/Sept06) [2010] ZACT 13; [2009] 2 CPLR 509 (CT) (17 February 2010)