MPs Call for Inquiry into South African Flight Pricing

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JIMMY MOYAHA: The parliamentary Portfolio Committee on Trade, Industry and Competition has declared plans to request a market inquiry into the aviation industry via the Competition Commission. This decision comes at a crucial moment.

They have accused airlines of enforcing exorbitant ticket prices. Recently attempting to book a holiday may confirm this sentiment, unless an exceptional Black Friday deal was snagged. Still, they are urging the Competition Commission to examine this matter, hoping that their investigation will lead to tangible results.

I’m now on the line with Ahmore Burger-Smidt, head of competition law at Werksmans, to delve into this inquiry and its possible consequences. Good evening, Ahmore, thank you for joining us. What are the main objectives of such investigations?

AHMORE BURGER-SMIDT: Good evening, Jimmy, and good evening to your audience. This certainly marks a notable initiative from parliament.

These inquiries often yield significant findings, triggered by the commission’s identification of a specific industry—like aviation in this case—that is thought to display possible anti-competitive behaviors, especially given the high fares we’ve seen.

The commission must formally commence an inquiry if they aim to pursue this route, along with publishing defined terms of reference detailing their investigatory focus.

JIMMY MOYAHA: Ahmore, while this is a first for the portfolio committee to engage in this manner regarding the aviation sector lately, it’s not the first occurrence of intervention from the Department of Trade and Industry [and Competition].

Just last week, we witnessed their intervention in the Vodacom-Maziv deal, which was blocked by the Competition Commission. Do you think we are observing a more proactive stance from the Department of Trade and Industry currently?

AHMORE BURGER-SMIDT: Yes, it appears that more stakeholders are beginning to take decisive actions in accordance with competition laws. To date, we’ve seen 12 …

JIMMY MOYAHA: I believe we lost you for a moment there, Ahmore. Are you still with us? You were noting that there is increased engagement from stakeholders and the Department of Trade, Industry and Competition.

AHMORE BURGER-SMIDT: Absolutely. The Department of Trade and Industry, particularly the minister’s office, has been instrumental for many years. As you highlighted earlier, they took pivotal actions in the Vodacom matter, where significant public interest benefits were negotiated by Minister Parks Tau and other stakeholders.

When discussing market inquiries, the law permits such interventions aimed at alleviating market inefficiencies.

It’s hard to argue against the idea that current holiday ticket prices are exorbitantly high. However, if booked several months in advance, tickets were significantly cheaper.

This prompts the question: is this merely supply and demand in action, or are additional factors influencing the situation?

As I mentioned before the disconnect, the commission has already launched and nearly completed 12 market inquiries, which have resulted in compelling outcomes—occasionally leading to severe actions from the commission. These will certainly have an impact on the market.

JIMMY MOYAHA: Ahmore, you pointed out that multiple factors contribute to these circumstances. I’d like your thoughts on whether there is currently a lack of competition within the airline sector. Considering the recent departures of several players, do you believe the reduced competition could be part of the problem?

AHMORE BURGER-SMIDT: Reflecting on today’s media reports and the parliamentary committee’s comments about SAA’s [South African Airways] decline …

I would argue that SAA’s decline wasn’t caused solely by competitive forces.

Given Comair’s experiences, they suffered during Covid, like many global airlines struggling financially.

Moreover, if we evaluate Comair’s challenges against the backdrop of SAA’s substantial debts owed to them, it becomes evident that had those civil damages been resolved, Comair’s financial status would have been significantly more stable.

While we currently have a solid Safair airline, and observe Airlink and Lift expanding, there is a limit to how many airlines a market can support.

Consequently, economies of scale and scope are vital in airline management, along with numerous factors to contemplate. However, competition does exist in the market; it’s clear we want to avoid a monopoly.

JIMMY MOYAHA: In light of monopolistic conditions and their impact on consumers, let’s discuss the inquiry itself. You mentioned that such investigations can be effective when conducted appropriately. Can we expect different timelines? We’ve seen some inquiries taking years, while others wrap up in a matter of months.

What might a typical timeline look like, given the various elements involved? External parties, local airline operators, and so forth? Once the inquiry commences, if it progresses, can we anticipate when results may emerge?

AHMORE BURGER-SMIDT: It’s akin to the classic ‘How long is a piece of string?’ question that I frequently encounter [chuckle].

JIMMY MOYAHA: [Chuckle].

AHMORE BURGER-SMIDT: There’s a certain rhythm to this process; I liken it to a dance, requiring specific steps to be followed.

The first step involves crafting the terms of reference, followed by a designated window for feedback, which then gets finalized.

Afterwards, parties are called to answer certain questions and supply necessary information. Public hearings are also integral to this structured approach.

Only then will a draft report be circulated, leading to a final report. Therefore, there isn’t a set timeframe, as the legislation doesn’t prescribe one.

Various factors influence the pace of this process. A significant issue the commission encounters is the budget allocated for carrying out these market inquiries.

Also, the necessary resources are quite intensive, and simultaneously, the commission manages a hefty workload with notified mergers and acquisitions, in addition to other conduct and cartel investigations. As such, it’s a regulatory body tasked with a heavy caseload along with limited resources.

JIMMY MOYAHA: Thus, it might realistically take quite a while to achieve the desired results. However, a thorough process is preferable to hasty actions that could lead to suboptimal outcomes.

Before we finish, Ahmore, from a competition perspective regarding the airline sector, you mentioned that excessive competition isn’t beneficial either; finding that balance is crucial.

In a capital-heavy sector like aviation, do you suggest any alternative measures that could alleviate pricing, such as reducing operational costs or airfare rates? Have you observed best practices elsewhere that we might be able to apply here?

AHMORE BURGER-SMIDT: What we’ve seen on an international scale is the concept of price leader and price follower dynamics.

This brings us back to the number of airlines and aircraft required.

If I operate four planes while a competitor runs 20, and they set their fares at X, I have little reason to price my tickets at X minus 10, especially if I have adequate demand for my flights during peak time. In such cases, it would be prudent for me to align with market pricing.

This scenario is a reality seen worldwide.

If we ponder, ‘What can be done to lower ticket prices?’, we must acknowledge the substantial taxes included in airfare and scrutinize the entire value chain to identify areas where costs could potentially decrease and positively influence passenger fares.

This analysis covers the complete chain from Acsa [Airports Company South Africa] to the airline itself, and we must accept that it’s unrealistic to place the blame on a single player within this value chain.

This is emphatically a broader issue.

JIMMY MOYAHA: There may be more complex factors at play than initially indicated. We will uncover more as the inquiry unfolds. It’s a commendable initial step to launch this investigation.

We will conclude our discussion here, Ahmore; thank you for your time and invaluable insights.

Ahmore Burger-Smidt, head of competition law at Werksmans, has joined me to discuss the recent developments stemming from the parliamentary committee’s request to the Competition Commission concerning soaring airfares in South Africa.

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