Airlines seek antitrust exemption: KQ-CAK application pending

Kenya Airways (“KQ”) has applied to the Competition Authority of Kenya  (“the Competition Authority”) for an exemption from competition rules in relation to its joint venture agreement with Tanzania’s national carrier, Precision Air (“the Joint Venture”) until April 2022.  The exemption would allow KQ and Precision Air to discuss revenue sharing, price setting, route schedules, sales and marketing on the two airline’s joint venture routes in Kenya and Tanzania.  The routes in discussion are Nairobi, Mombasa, and Kisumu, Dar-es-salaam, Kilimanjaro and Zanzibar.

Most importantly, the exemption, if granted, would allow for the setting of prices between the two companies, which can be considered “price fixing” but without violating the Kenyan Competition Act, which defines restrictive trade practices as “any agreement, decision or concerted practice which directly or indirectly fixes purchase or selling prices or any other trading conditions”.

The two carriers already have a code-sharing agreement that allows airlines to sell seats on each other’s planes on the Nairobi-Dar es Salaam route.

According to the director-general of the Competition Authority the parties intend to align and coordinate network management activities with respect to the Joint Venture including terms of routes, schedules, capacity and designation and pricing of ticket fares on the joint venture routes.

The two airlines are also seeking exemption of competition rules in the management of any and all revenues attributable to the performance of the joint venture by any party, “…including without limit, setting up joint venues management systems and joint venue analysis systems; and joint marketing and sales activities with respect to joint venture”.

John Oxenham, a competition attorney with Primerio Ltd., notes that “[t]here is certainly a growing number of exemption applications filed before the Competition Authority of Kenya. This is attributed largely to an increase in awareness of competition enforcement in Kenya and also due to an increase in the number of ‘tie-ups’ between competitors or potential competitors entering into the Kenya market.”

His fellow Kenyan antitrust colleague, Ruth Mosoti, who previously worked as legal advisor to the CAK, confirms: “The CAK conducts a robust assessment in respect of any exemption application and does not grant these as a matter of course. The CAK has rejected a number of exemption applications in the past and therefore any such application should be supported with credible and quantifiable evidence in support of the exemption application. The most recent exemption applications which have been rejected by the CAK have invariably been brought by Trade Associations or Professional Bodies and the exemption would therefore apply across the entire industry as opposed to only specific firms within a given sector.”

“Exemptions may only be granted on the basis of certain narrow grounds as set out in the Act. In summary, exemptions may be granted on the basis that it will promote (or maintain) exports, benefit a declining industry or promote technical or economic progress in a particular industry.  Accordingly, an exemption which would generally lead to ‘pro-competitive’ effects must be based or fit into one of these grounds. An exemption may also be granted if the public interest benefit in granting the exemption outweighs any potential anticompetitive effect,” says Oxenham.

Ms. Mosoti notes that the Competition Authority has given the public 30 days to submit opinions on the proposal, as is common and required under the rules. The pro-competitive benefits to the public may ultimately outweigh the CAK’s concerns here: “It is not uncommon for Airlines to apply for exemptions particularly if the parties are considering or embarking on flight or code sharing arrangements. By increasing the passenger numbers, Airlines may be able to offer additional routes, decrease costs of tickets and/or offer a more convenient travel experience.”

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SA Airlink referred to Tribunal for Engaging in Alleged Excessive and Predatory Pricing Conduct

By Stephany Torres

The Competition Commission (Commission) has referred SA Airlink, a privately owned regional feeder airline, to the Competition Tribunal (Tribunal) for prosecution on charges of excessive and predatory pricing in relation to a specified domestic route in South Africa (Johannesburg-Mthatha).  The Commission was prompted to investigate the matter after receiving complaints lodged by Khwezi Tiya‚ Fly Blue Crane and the OR Tambo District Chamber of Business between 2015 and 2017.

The Commission found SA Airlink to be dominant in the market for the provision of flights on the Johannesburg-Mthatha route and further found that SA Airlink contravened the Competition Act by abusing this dominance from September 2012 to August 2016 by charging excessive prices on the route to the detriment of consumers in contravention of Section 8(a) of the Competition Act no 89 of 1998 (“the Competition Act”).  The Competition Act defines an “excessive price” as a price for a good or service “which bears no reasonable relation to the economic value of that good or service and is higher than the value referred to in 8(a)”.

SA country flag outlineAn additional requirement which the Commission will need to demonstrate in order to succeed with an excessive pricing complaint is that the “excessive pricing” was to the detriment of consumers.  In this regard the Commission found that consumers would have saved between R89 million and R108 million had SA Airlink not priced excessively on this route.  Furthermore, lower prices would also have resulted in more passengers traveling by air on the route‚ possibly contributing to the local economy of Mthatha.

The Commission also found SA Airlink to have engaged in predatory pricing to exclude a competitor from the market in contravention of section 8(c) and Section 8(d)(iv) of the Competition Act. In this regard, the Commission alleges that prior to Fly Blue Crane entering the market, SA Airlink had charged excessive prices. When Fly Blue Crane entered the route, SA Airlink allegedly reduced its prices below its average variable costs and average avoidable costs for some of its flights and then subsequently, after Fly Blue Crane stooped flying the relevant route, SA Airlink reverted to their alleged excessive prices.

The Commission went further to say that the effect of the predation is also likely to deter future competition on this route from other airlines which would also be to the detriment of consumers.

The Competition Act provides for an administrative penalty of up to 10% of SA Airlink’s annual turnover for contravention of Section 8. The Commission stated that “it will seek the maximum administrative penalty before the Tribunal”.

In addition‚ the Commission has asked the Tribunal “to determine other appropriate remedies in order to correct the conduct“.

Michael-James Currie, a competition lawyer, notes that “in addition to the potential administrative liability, should SA Airlink be found by the Tribunal to have abused its dominance, SA Airlink may also face civil damages claims similar to those which Nationwide and Commair successfully instituted against South African Airways (SAA) following the Tribunal’s decision that SAA had engaged in abuse of dominance conduct”.

John Oxenham, a director of Primerio and editor of the recently published book “Class Action Litigation in South Africa”, states that “this case may potentially also result in class action litigation if the Commission is correct in its quantification of the harm caused to consumers”.

The Competition Commission’s case against Airlink comes at an interesting juncture in light of the recently published Competition Amendment Bill. Andreas Stargard, also a director at Primerio notes that the underlying motivation for the proposed amendments to the abuse of dominance provisions is to assist the Commission in prosecuting dominant firms (by placing the onus on a dominant firm to demonstrate that its conduct is pro-competitive). The case against Airlink, however, will be decided in terms of the current regime as the Amendment Bill has not yet been brought into effect.

For further information and insight into excessive pricing and predatory pricing cases in South Africa, AAT has previously published papers on the Competition Appeal Court’s decision in Sasol (the seminal excessive pricing case in South Africa) and the Media 24 cases (the first successfully prosecuted case based on a predation theory of harm).

 

 

View from the Jump Seat: the SAA/Mango Merger

By Mitchell Brooks, AAT guest author

The recent proposal of a SAA/Mango/Express merger has sparked debate throughout the aviation industry. A good friend of mine has gained incredible experience in the private jet charter industry based in London, but more importantly, he also doubles as keen aviation blogger. And so, it only felt right to join the debate, as a team. What you are about to read is a merger between two SAFFAS with a passion for aviation. – A big thanks to Nick Combes (from The Aisle View)Flugsimulator_DASA_Dortmund

In late 2016 it was announced that SAA, SA Express and Mango airlines would undergo a merger. The merger is said to be overseen by an American 3rd party organisation, Bain & Co, a management consultant firm. The reported fee agreed for Bain’s oversee was in the region of R12 million.

From an operational aspect, Mango is already operating under SAA’s AOC (Air Operating Certificate) and its fleet is maintained by SAA’s technical department. This means that no real change would be felt across airline operations, however as discussed below, the legal structure of its fleet changes quite drastically.

When looking at the structures of these airline companies, one can become quite skeptical of the underlying rationale for the proposed merger between SAA and Mango. Mango is a 100% subsidiary of SAA, meaning that SAA holds the entirety of Mango’s shares. The financial integration should be straight forward. But it is the restructuring of the company that interests us.

With that said, SAA does not stand to reap profits greater than the existing dividends it already receives. I am no tax expert but, if anything, SAA may be attempting to avoid dividends tax of up to 20% by becoming one single entity.

But it is admittedly difficult to see why a state-owned entity would take on the cost of this merger, simply to avoid the same tax that it enjoys the benefit of!

For those even remotely aware of South African Airways’ financial history, you will remember that the state airline has already been rescued by various state bail outs (thanks, taxpayer). South African Airways still reported a 2015 loss of R5.6 billion or $485 million. Mango is currently the only profitable subsidiary of the 3 merging companies. (It has done well to remain so against the might of Comair’s low-cost subsidiary, Kulula.)

The merger proposes a streamlining of SAA as a parent company to maximise profitability. But if Mango is doing well shouldn’t they be left alone to continue just this? If the SAA board cannot return a flagship carrier to profitability, then taking on another two airlines is not going to make their jobs any easier. Adding two bad eggs with one good egg still makes a horrible pancake.

Mango’s relatively small yet successful operation is not going to be offering any lifelines for SAA parent. SAA is a sinking ship that ultimately threatens to pull Mango down with it.

So what really is the motive for this merger?

Let us back track to the restructuring of the boards of the entities and simplify things. As it stands, an unsuccessful SAA has a board of directors, with its highly criticised Dudu Myeni as its chair. On the other hand, a successful subsidiary, Mango, has its own independent board of directors. What should be noted is that, notwithstanding the MOI of the Companies, the Companies Act 71 of 2008 requires the shareholders of a company to elect a minimum of 50% of the board. This means that the SAA parent already has the power to appoint the majority of its subsidiary’s board.

Based on the endless corruption allegations and financial shortfalls of SAA, is it not plausible that the proposed merger serves the purpose to concentrate power towards one individual, whose purpose to date has clearly not been the success of a company, the chairperson – Dudu Myeni.

Another prominently possible reason for the merger would be to restructure the ownership of the fleet. One may then ask, why? Well SAA has found itself being investigated by the Competition Commission quite often, in fact, state entities are the most frequent transgressors of the Act which has caused quite a lot of speculation surrounding its possible amendment to relieve state entities altogether. Furthermore, our President did hint towards this amendment at SONA 2017, which indicates that there is certainly an intention for the state to relieve itself from this Act to some degree.

This may seem quite deceptive, as the merging of the entities may be for the purpose of avoiding the red tape surrounding the Competition Act. In June 2016 SAA conceded to sub-chartering aircraft to SAA at discounted rates. In fact, the SAFAIR CEO indicated that SAA would have been subsidising almost 40 percent of Mango’s costs through the arrangement.

Of course, such an arrangement drew attention from Mangos biggest rival Kulula, who laid a complaint to the competition commission on grounds of collusion. Unfortunately, the channel chosen by Kulula was slightly flawed and perhaps would have been better suited under a predatory pricing argument.

Firstly, the problem with pursuing the horizontal collusion argument is that the relationship between SAA and Mango is distinctively more vertical than horizontal because, as mentioned earlier, SAA amounts to a supplier of aircraft to its 100% wholly owned subsidiary. It would be quite difficult to argue that SAA competes with its sub in the domestic, low-cost airline market. Arguably, that is where the collusive approach falls flat. A more reasonable approach would be to argue that SAA was abusing its dominance in the domestic airline market, gained by means of historical state funding, by sub-chartering aircraft (a service) to its subsidiary at prices below their marginal or average variable cost. Furthermore, the only intention that can reasonably be inferred from this arrangement is that SAA, and by implication Mango, sought to remove Kulula from the market – hence the term predatory pricing. Think about it, why else would a bleeding parent company sublease aircraft, at a loss, to a succeeding sub?

The point is if Mango and SAA become one entity they no longer need to formally lease aircraft between each other, meaning that Mango benefits from the use of the aircraft at low costs which allows it to undercut Kulula and squeeze their margins, eventually squeezing them out of the low-cost market. The biggest effect of the restructuring is that without a leasing arrangement the Competition Act is circumvented. However, the merger will have to pass the muster of the Competition Tribunal in order to merge and I am quite hopeful that the merger will be rejected on the grounds that it would lead to extremely anti-competitive consequences in an already struggling market. One could say the merging parties have exceeded their maximum take-off weight (“MTOW”), and even if cleared would unlikely reach their VR speed “rotation speed.”

Ultimately, there are only two parties that may benefit from this merger, Dudu Myeni and allegedly a number of SAA pilots. An anonymous insider has suggested that currently, the policies within the two companies are different in regulating the years of experience required to jump over to the left seat, with the SAA policy requiring over a decade. The question arises as to whether SAA pilots may demand a threshold more akin to their orange comrades.

Cabin-crew, disarm doors and cross-check”

South African Airways (SAA) to pay $80 million in civil damages to competitor Comair for abuse of dominance

-by Michael-James Currie

currie2

A second civil damages award was recently imposed on South Africa’s national airline carrier, SAA, following on from the Competition Tribunal’s finding that SAA had engaged in an abuse of dominance.   The award in favour of Comair, comes after the first ever successful follow-on civil damages claim in South Africa (as a result of competition law violation) which related to Nationwide’s civil claim against SAA.  In the Nationwide matter, the High Court awarded , (in August 2016) damages to Nationwide in the amount of R325 million.   Comair claim for damages was based on the same cause of action as Nationwide’s claim. The High Court, however, awarded damages in favour of Comair of R554 million plus interest bring the total award to over a R1 billion (or about US$ 80 million).

Both damages cases entailed lengthy proceedings as Nationwide (and subsequently Comair) launched complaints, in respect of SAA’s abuse of dominance, to the South African Competition Commission as far back as 2003. Importantly, in terms of South Africa’s legislative framework, a complainant may only institute a civil damages claim based on a breach of the South African Competition Act if there has been an adverse finding either by the Competition Tribunal or the Competition Appeal Court.

The outcome of the High Court case is significant as the combined civil damages (both Nationwide’s and Comair’s) together with the administrative penalties imposed by the Competition Tribunal (in 2006) amounts total liability for SA is in excess of R1.5 billion.

Says John Oxenham, “Although the South African competition regime has been in place for more than 16 years and there have been a number of adverse findings against respondents by the competition authorities, have only been a limited number of civil follow-on damages cases.” This is largely due to the substantial difficulties (or perceived difficulties) a plaintiff faces in trying to quantify the damages, he believes. Follow-on damages claims for breaches of competition legislation are notoriously difficult to prove not only in South Africa but in most jurisdictions.

The recent Nationwide and Comair judgments, however, may pave the way and provide some important guidance to potential plaintiffs who are contemplating pursuing civil redress against firms which have engaged in anti-competitive conduct (including cartel conduct).

In this regard, the South African National Roads Agency (SANRAL) announced last year that it has also instituted a civil damages claim of approximately R700 million against a number of construction firms who had had been found by the Competition Authorities to have engaged in cartel conduct.  The SANRAL case will be the first damages claim, if successful, by a ‘customer’ against a respondent who has contravened the Competition Act in relation to cartel conduct (and not abuse of dominance as in the SAA case).

saaplaceThe only previous civil damages claim was in the form of a class action instituted by bread distributors and consumers in relation to cartel conduct involving plant bakeries. Although the class was ultimately successful in their certification application, the case provides no further guidance as to the quantification of damages as the respective parties have either settled their case or remain in settlement negotiations.

As the development of civil redress in South Africa develops in relation to cartel conduct, it will be particularly interesting to evaluate what the effect of civil damages may have on the Competition Commission’s Corporate Leniency Policy. The Commission’s leniency policy only offers immunity to a respondent who is “first through the door” from an administrative penalty. It does not extend immunity to a whistle-blower for civil damages or criminal liability. It is well understood that the Corporate Leniency Policy has been one of the Commission’s most effective mechanisms in identifying and successfully prosecuting firms which have engaged in cartel conduct.

In relation to the recent civil damages cases, John Oxenham, a Primerio director, notes that “Parties will have to strike a delicate balance whether to approach the Competition Commission for purposes of obtaining immunity from an administrative penalty, which is no doubt made all the more difficult following the R1.5 billion administrative penalty levied on ArcelorMittal in 2016 (the largest administrative penalty imposed in South Africa to date) will no doubt be of some import given that most of the conduct related to cartel conduct“.

Accordingly, in light of the introduction of criminal liability as of May 2016, the imposition of record administrative penalties, the risk substantial follow-on civil damages and the development of class action litigation, South Africa is now evermore a rather treacherous terrain for firms and their directors.