Come down hard on those who tilt the scales

Thando Vilakazi and Anthea Paelo

26 June 2016

Recent revelations and back-tracking by SAA about subsidising Mango underscores the findings in a study just completed by the Centre for Competition, Regulation and Economic Development (CCRED) at the University of Johannesburg. Anti-competitive behaviour, particularly of ‘national champions’ or State-Owned Enterprises such as the national airline fails consumers by maintaining unnecessarily high costs for goods and services, but also disadvantages rival entrants into the economy.

A series of papers scheduled to be released in July, funded by the National Treasury, to examine barriers to entry included a study of low-cost carriers. The research revealed that the entry and growth of low cost airlines has reduced prices by as much as 38% on some routes, increased passenger volumes, and extended services to smaller cities and towns.  The knock-on effect benefits local communities where airports are located, the tourism sector, and small-, medium-, and large-sized firms both domestically and regionally. 

For example, passenger fares on the George – Cape Town and George – Johannesburg route pairs decreased by around 30% between 2014 and 2015 following the entry of FlyGoAir. Passenger volumes on these routes also increased significantly as they did on other routes where there has been entry, with significant benefits to local economies. 

While there are barriers to entry relating to the regulatory requirements, capital investment and industry experience, the number of entrants into the sector over the past two decades illustrates that these barriers are not necessarily high. At the time of liberalisation of the market in the mid-1990s, SAA held 95% of the market share. By 2015, competitors had eroded this to 38%; its subsidiary Mango held 18%. The key challenges have rather been the ability to sustain the businesses through the volatility associated with fluctuations in fuel prices and demand shocks. 

The support for the national carrier and the conduct of SAA and its subsidiaries and associated companies appears to have undermined many of these rivals. This conduct includes repeat violations of competition laws – from price fixing to predatory and cartel behavior – which raises questions about the deterrence and penalties for repeat offenders.  

To the extent that the ability of airlines to become and remain effective rivals is undermined by unfair or anticompetitive distortions in the competitive environment either by cartels, abuse of dominance or even regulatory manipulation, these need to be assessed as potential barriers to entry and expansion.

CCRED would recommend that the conduct of firms – and their management - in which government is a shareholder violating the Competition Act and harming consumers is penalised harshly.

Further, if some efficiencies result from the state-support of particular carriers then a requirement should be that they are passed through to consumers, which does not appear to have been the case in respect of SAA.

Air travel in Africa has grown strongly and much faster than the rest of the world.  Government must decide whether it is in favour of a market in which it has control over competition outcomes amongst a handful of established incumbents, versus one in which there is dynamic market rivalry between multiple operators leading to pro-competitive gains.

This article was published in the Sunday Times on 26 June 2016.