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JIMMY MOYAHA: The Parliamentary Portfolio Committee on Trade, Industry, and Competition has expressed its intention to initiate a market inquiry into the aviation industry through the Competition Commission. This comes at a particularly significant moment.
They have criticized airlines for imposing excessively high ticket prices. Anyone attempting to book a trip in recent weeks would likely agree, unless they managed to secure an exceptional Black Friday deal. Regardless, they have urged the Competition Commission to probe this issue, hoping these inquiries will produce actionable results.
I am now joined by Ahmore Burger-Smidt, the head of competition law at Werksmans, to discuss this specific investigation and its potential consequences. Good evening, Ahmore, thank you for being here. What are the common objectives of such inquiries?
AHMORE BURGER-SMIDT: Good evening, Jimmy, and good evening to your listeners. This indeed marks a significant action from Parliament.
These inquiries usually yield valuable insights, stemming from the commission’s recognition of a certain industry—like the aviation industry now—believed to display potential anti-competitive behaviors, especially in light of the soaring prices we’ve noted.
This necessitates that the commission formally commence an inquiry if they choose to proceed down that route and publish terms of reference that detail the investigation’s scope.
JIMMY MOYAHA: Ahmore, although this is the first instance of the portfolio committee addressing this sector in recent times, it’s not the first occasion on which the Department of Trade and Industry [and Competition] has intervened.
Just last week, we witnessed their intervention in the Vodacom-Maziv deal, which was blocked by the Competition Commission. Do you believe we are seeing a more assertive Department of Trade and Industry at this juncture?
AHMORE BURGER-SMIDT: Absolutely, it seems that more stakeholders are now taking decisive actions in accordance with competition regulations. Up until now, we have documented 12 …
JIMMY MOYAHA: I think we may have momentarily lost you, Ahmore. Are you still with us? You were mentioning heightened interest from stakeholders and more involvement from entities like the Department of Trade, Industry, and Competition.
AHMORE BURGER-SMIDT: Yes, indeed. The Department of Trade and Industry, particularly the minister’s office, has been pivotal for many years. We’ve seen them taking significant actions, as you pointed out earlier, in the Vodacom case, where Minister Parks Tau and other stakeholders negotiated considerable public interest benefits.
However, regarding market inquiries, the legislation permits such actions to address market inefficiencies.
It’s difficult to contest the idea that holiday ticket prices are currently exceedingly high. However, those who booked months in advance found tickets to be notably more reasonable.
This raises the question: are we witnessing simple supply and demand, or are there additional factors at work?
I had mentioned previously before the disconnection that the commission has already initiated and nearly concluded 12 market inquiries, resulting in impactful outcomes—sometimes robust actions from the commission. These will undoubtedly affect the market.
JIMMY MOYAHA: Ahmore, you highlighted that various elements contribute to the current circumstances. I’d like your view on whether there’s a shortage of competition in the airline industry. Considering the recent withdrawal of several players, do you think the reduced competition might play a role in this issue?
AHMORE BURGER-SMIDT: Based on today’s media discussions and the statements from the parliamentary committee regarding SAA’s [South African Airways] challenges …
I would contend that the decline of SAA was not merely due to competitive forces.
Looking at Comair, they faced hardships during Covid, similar to many global airlines grappling with financial difficulties.
Moreover, if we consider Comair’s struggles against the backdrop of SAA’s significant debts owed to them, it becomes evident that, had those liabilities been settled, Comair’s financial situation would have been much healthier.
Currently, while we have a strong Safair airline, and we can observe Airlink and Lift expanding, there’s a cap on how many airlines a market can sustain.
Thus, economies of scale and scope are essential for airline management, along with various considerations. That said, competition does exist; it’s evident that we do not desire a monopoly.
JIMMY MOYAHA: In light of monopolistic conditions and their impact on consumers, let’s dive into the inquiry itself. You mentioned these inquiries are effective when managed correctly. Could we anticipate varying timelines? We’ve seen some investigations prolong for years while others wrap up in just months.
What would a typical timeline look like, given the numerous factors involved? External parties, local airline operators, and so forth? Once the inquiry begins, if it proceeds, do we have an estimate on when outcomes might surface?
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AHMORE BURGER-SMIDT: It’s somewhat akin to the classic ‘How long is a piece of string?’ question that I often get [chuckle].
JIMMY MOYAHA: [Chuckle].
AHMORE BURGER-SMIDT: There’s a specific rhythm to this process; I refer to it as a dance, where particular steps need to be followed.
The initial step involves establishing the terms of reference, followed by a designated period for input, which then gets finalized.
Subsequently, parties are called upon to respond to specific inquiries and supply essential information. Public hearings are also incorporated into this structured framework.
Only after this stage does a draft report circulate, followed by a final report. Therefore, there isn’t a fixed timeframe, and the legislation does not stipulate specific durations.
Multiple factors can influence the pace of the process. One major challenge for the commission is the budget allocated for conducting these market inquiries.
Additionally, the resources required are quite substantial, and at the same time, the commission manages a considerable workload related to notified mergers and acquisitions, along with other conduct and cartel investigations. As a result, it’s a regulatory body balancing a heavy caseload with limited resources.
JIMMY MOYAHA: Consequently, it may indeed take a significant amount of time to realize the desired outcomes. However, a meticulous process is more advantageous than hastily progressing and achieving inadequate results.
Before we conclude, Ahmore, from a competition standpoint concerning the airline sector, you noted that excessive competition isn’t beneficial either — striking that balance is crucial.
In a capital-heavy industry such as aviation, do you recommend any additional strategies to consider that might alleviate pricing, like reducing operational expenses or airfare costs? Have you observed successful practices elsewhere that we might leverage here?
AHMORE BURGER-SMIDT: What we’ve noted globally is the concept of price leader and price follower dynamics.
This brings us back to the question of how many airlines and aircraft are necessary.
If I operate four planes while a competitor has 20, and their ticket prices are set at X, there’s minimal incentive for me to price my tickets at X minus 10, particularly if I have ample demand for my flights during peak travel seasons. In that case, it is economically sound for me to align my pricing with the market.
This scenario is evident on a global scale.
If we inquire, ‘What can be done to lower ticket prices?’, we have to consider the considerable taxes incorporated into airfare and analyze the entire value chain to identify areas for cost reduction that would positively impact passenger fares.
This encompasses the full chain from Acsa [Airports Company South Africa] to the airline itself, and it’s critical to acknowledge that it is unrealistic to assign blame to a single entity within the value chain.
This is undeniably a broader challenge.
JIMMY MOYAHA: There are likely more factors involved than it first seems. We will learn more as the inquiry unfolds. Initiating this probe is a commendable first step.
We will conclude our conversation here, Ahmore; thank you for your time and valuable 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 regarding escalating airfares in South Africa.
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