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JIMMY MOYAHA: The parliamentary Portfolio Committee on Trade, Industry and Competition has expressed a desire to initiate a market inquiry into the aviation sector via the Competition Commission. This comes at a particularly pivotal moment.

They have accused airlines of imposing excessively high ticket prices. Anyone trying to book a holiday in recent weeks would likely agree with this sentiment, unless they were fortunate enough to secure a remarkable Black Friday deal. Regardless, they have urged the Competition Commission to examine this issue, hoping for tangible outcomes from the investigation.

I’m now joined by Ahmore Burger-Smidt, head of competition law at Werksmans, to discuss the specifics of this inquiry and its potential ramifications. Good evening, Ahmore, thank you for being with us. What are the typical objectives of such investigations?

AHMORE BURGER-SMIDT: Good evening, Jimmy, and to your listeners. This indeed signifies a noteworthy action from parliament.

Such inquiries generally lead to significant findings, arising from the commission’s recognition of a sector—like aviation—that is thought to harbor possible anti-competitive behavior, especially given the high prices we have identified.

This requires the commission to formally start an inquiry if they intend to pursue that avenue and publish a terms of reference that defines the investigation’s scope.

JIMMY MOYAHA: Ahmore, while this is the first time the portfolio committee has acted this way towards this industry recently, it’s not the first occurrence of the Department of Trade and Industry [and Competition] stepping in.

Last week, we observed their intervention in the Vodacom-Maziv transaction that was blocked by the Competition Commission. Do you believe we are witnessing a more proactive Department of Trade and Industry at this moment?

AHMORE BURGER-SMIDT: Yes, it seems that more stakeholders are taking decisive action in accordance with competition laws. So far, we have noted 12 …

JIMMY MOYAHA: It seems we just lost the connection for a moment there, Ahmore. Are you still with us? You were mentioning the increased interest from stakeholders and the heightened involvement of entities like the Department of Trade, Industry and Competition.

AHMORE BURGER-SMIDT: Yes, indeed. The Department of Trade and Industry, specifically the minister’s office, has been instrumental for many years. As you noted earlier, we saw significant steps taken in the Vodacom case, where important public interest benefits were negotiated by Minister Parks Tau and other involved parties.

When it comes to market inquiries, the legislation enables such actions aimed at correcting market inefficiencies.

It’s difficult to dispute that current ticket prices for holidays are exorbitantly high. However, if booked several months ahead, tickets could be significantly cheaper.

This raises the question: are we witnessing straightforward supply and demand dynamics, or are there additional factors at play?

As I mentioned earlier before the disconnect, the commission has already launched and almost completed 12 market inquiries, leading to strong outcomes—sometimes resulting in stringent actions from the commission. These developments will undoubtedly influence the market.

JIMMY MOYAHA: Ahmore, you indicated that various elements are contributing to the situation. I’d like your opinion on whether there is currently insufficient competition in the airline industry. With several players having left the market recently, do you think this reduced competition might be part of the problem?

AHMORE BURGER-SMIDT: From the media reports today and the remarks from the parliamentary committee regarding SAA’s [South African Airways] struggles …

I would argue that SAA’s decline wasn’t solely due to competitive forces.

Looking at Comair, they faced the Covid pandemic, along with many international airlines battling financial difficulties.

If we analyze Comair’s challenges against the backdrop of SAA’s significant debts to them, it’s apparent that had those debts been settled, Comair’s financial situation would have looked more favorable.

Currently, while we have a strong Safair airline, and we observe Airlink and Lift expanding, there’s a cap on how many airlines a market can sustain.

Thus, economies of scale and scope are vital for running an airline, alongside various other considerations. Nevertheless, competition exists within the market; it’s crucial to avoid a monopoly.

JIMMY MOYAHA: Given the potential monopolistic conditions and their ramifications for consumers, let’s focus on the inquiry itself. You mentioned that these investigations are effective when conducted properly. Can we expect varying timelines? We’ve seen some inquiries that have dragged on for years, while others wrap up in just months.

What might be a typical timeline, considering the multiple factors involved? External parties, local airline operators, and so on? Once the inquiry gets underway, if it proceeds, do we have an idea of when results may surface?

AHMORE BURGER-SMIDT: It’s reminiscent of the classic ‘How long is a piece of string?’ question that I often encounter [chuckles].

JIMMY MOYAHA: [Chuckle].

AHMORE BURGER-SMIDT: There’s a certain rhythm to this process; I compare it to a dance, involving specific steps that must be adhered to.

The first step is to establish the terms of reference, followed by a set time for feedback, which then gets finalized.

Afterward, relevant parties are called in to respond to targeted questions and provide necessary information. Public hearings also play a role in this structured approach.

Only after this does a draft report go out for circulation, followed by the final report. Thus, there isn’t a predetermined duration, as the legislation doesn’t set one.

Several factors influence the pace of the process. One significant concern for the commission is the budget allocated for these market inquiries.

Moreover, the requisite resources are quite extensive, and simultaneously, the commission manages a considerable workload concerning notified mergers and acquisitions, along with other conduct and cartel investigations. This results in regulators handling a heavy caseload with limited resources.

JIMMY MOYAHA: Therefore, it might take a while to achieve the desired results. However, a thorough process is more beneficial than rushing and obtaining subpar outcomes.

Before we wrap up, Ahmore, in terms of competition within the airline sector, you mentioned that excessive competition can be detrimental too—striking that balance is vital.

In a capital-intensive sector like aviation, are there any other measures you would recommend to potentially alleviate pricing, such as reducing operational expenses or airfare costs? Have you identified any best practices elsewhere that we might implement here?

AHMORE BURGER-SMIDT: What we’ve seen internationally is a dynamic where price leaders and price followers exist.

This leads us back to the issue of how many airlines and aircraft are necessary.

If I have four planes while a competitor has 20, and their fares are set at X, there’s little motivation for me to price my tickets at X minus 10, especially if I have sufficient demand for my flights during peak periods. In such a situation, it makes sense for me to conform to market pricing.

This is a reality observed globally.

If we question, ‘What can be done to lower ticket prices?’, we need to recognize the significant taxes that are part of airfare and examine the complete value chain to find areas where costs might be reduced, positively influencing passenger pricing.

This extends from Acsa [Airports Company South Africa] to the airline itself, and we must acknowledge that it’s unreasonable to blame a single player within the value chain.

This is undoubtedly a more extensive issue.

JIMMY MOYAHA: There may be more factors involved than it initially seems. We will learn more as the inquiry unfolds. Instigating this probe is a commendable initial measure.

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 been with me to discuss the latest updates from the parliamentary committee’s request to the Competition Commission regarding the escalating airfares in South Africa.

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