Competition Law Update: The SAA Damages Double Whammy

By Jennifer Finnigan, Head of Competition Law

The fact that SAA’s successive travel agency incentive schemes abused its dominance and induced travel agents to sell SAA tickets in preference to those of its competitors is old news. But its sins came back to haunt SAA last week when the Gauteng High Court awarded R554.2 million in damages to Comair Limited.  Comair claimed that it had suffered damages because of SAA’s anticompetitive travel agency incentive schemes run between 1999 and 2005.  The court held that it was bound by the findings of the competition authorities “that SAA’s infringing schemes induced travel agents, that would otherwise have booked passengers on domestic Comair flights, to book such passengers on domestic SAA flats, causing Comair to suffer loss of profits in respect of tickets that would otherwise have been sold on domestic Comair flights to such passengers”.

Essentially, SAA argued that its anticompetitive conduct hadn’t affected Comair’s market share and that Comair had lost market share because of other changes in the markets such as the emergence of low-cost carriers such as Kulula and the fact that passengers were increasingly buying air tickets over the Internet. Based on this argument (that SAA’s anticompetitive conduct hadn’t made any difference to Comair’s market share) SAA’s expert economist argued that Comair had not suffered any damages at all. The court reviewed the decisions of the Competition Tribunal and the Competition Appeal Court which both found that SAA’s conduct foreclosed the markets to its competitors and had an anticompetitive effect. It concluded that the “zero damages” conclusion was inconsistent with the competition authorities’ findings that SAA’s conduct was anticompetitive and foreclose its competitors from the market. It pointed out the Competition Tribunal’s reminder that exclusionary conduct is not limited to anticompetitive conduct which causes the decline of competitors but includes anticompetitive conduct which retards or constrains competitors’ expansion opportunities within the market.

For the technically minded, the court found that damages suffered equals the revenue lost by competitors as a result of a firm’s anticompetitive conduct less costs which the competitors avoided because of the last sales (in this case reduced passenger numbers).

The court had to decide over which period damages should be calculated. SAA argued that its anticompetitive conduct stopped when its incentive schemes expired, namely on 31 March 2005. Comair disagreed. It argued firstly that the incentive schemes continued until the Competition Tribunal decided that SAA’s incentive schemes were actually anticompetitive at the end of July 2005.  Following European authority, it argued that anticompetitive conduct has a “lingering effect” which in this case, continued for an extra year until July 2006. The court agreed. It found that it was reasonable to assume that, it would continue to suffer damages because of SAA’s anticompetitive schemes even after those schemes ended because as a result of those schemes, SAA had acquired passengers it would not otherwise have obtained and those passengers were likely to exhibit some brand loyalty. In addition, loyalty scheme such as Voyager incentivized passengers to continue traveling with SAA. Corporate agreements may also have continued after the incentive schemes were condemned by the Tribunal.

When calculating, Comair’s revenue but for SAA’s anticompetitive conduct, the court cautioned that “target and aspirations are not a right estimate of growth because of subjective elements and changing market dynamics”. The court also discounted historical growth as a reliable indicator of expected future growth. Against this background, the court decided not to assume that Comair’s market share would have grown during the “damages” period.

The court then considered SAA’s arguments that factors other than the anticompetitive incentive agreements accounted for Comair’s decline in the market. It concluded that Kulula serviced a market different from that of Comair and was unlikely to have reduced Comair’s market share.  As more than 70% of Comair’s tickets were sold through travel agents, the emergence of the Internet bookings was unlikely to have affected Comair’s market share.  Corporate contracts were likely to have been steered SAA’s way by travel agents disparate to achieve the targets required to earn SAA’s anticompetitive incentives. Against this background, the court essentially agreed with Comair’s expert and calculated its damages taking account of its market shares at the beginning and end of the “damages” period less a deduction to take account of Comair’s assumption that its market share would have grown during that period.

While the court’s judgment is largely devoted to a comparison of the technical economic arguments, its conclusion is clear, engage in anticompetitive conduct at your peril. Administrative fines have now just become the 1st part of the price to be paid for contravening the Competition Act. Damages awards are increasingly likely too…

For more information contact

Jennifer Finnigan, Head of Competition Law

finnigan@wylie.co.za

+27 82 499 0522