22 October 2011

Aviation industry competition law exemption applications - what about consumer welfare?

By now, industries that are characterised by a need for constant competitor co-operation know it is better to seek permission rather than forgiveness for contravening the Competition Act, 1998 (the Act).

Competitor firms that need to co-operate in ways that may result in collusive outcomes, even for compelling business reasons, cannot simply do so without advance permission from the Competition Commission (Commission) because the Act prohibits price fixing, bid rigging and market sharing outright. The outright nature of the prohibition means there can be no justification of conduct, however well intended, where competitor firms have engaged in conduct that results in price fixing or market allocation (through sharing customers or territories, for example). This is simply prohibited outright under the Act and is likely to lead to immediate and substantial financial penalties being imposed.

The Act contains an exemption procedure which allows firms that contravene any of its provisions, including the anti-collusion provisions that deal with price fixing and market allocation, to petition the Commission for permission to do so before engaging in the relevant conduct. If the relevant criteria are satisfied, an exemption might be granted for the period the exemption is shown to be necessary.

The airline industry is one in South Africa that has so far made most use of the exemption procedure. Airlines have been granted exemption, usually in the context of code sharing arrangements. These are typically where airline A wants to enter into a code sharing arrangement with airline B that will allow each airline to service different city pairing routes and possibly, block sell seat inventory on one another's flights. International airlines in many countries, including South Africa, commonly use this model.

Airline industry insiders will know that code sharing agreements and co-ordination of routes is also common between international carriers and domestic service providers wanting to provide a seamless convenient service for passengers, or attract new customers to routes which may be undersubscribed. Of course, not every co-operation and code sharing relationship leads to price fixing or market allocation between competitors and there are many complex considerations that go into making such an assessment. But, any arrangement in which airlines agree to operate on, or not operate on, particular routes or sell their inventory by code share, may be collusive (however inadvertently so) and so, would need exemption before being implemented.

The South African Competition Act provides only very narrow grounds on which an exemption application may be based. No provision in the Act allows for general efficiencies, convenience, consumer benefits or other benign objectives to justify exemption application. Instead, the applicant must show that the otherwise unlawful conduct is a necessary measure being taken by the parties concerned in order to meet one or more of a set number of objectives listed in the Act.

The objectives most commonly relied on in the aviation industry in a South Africa context include:

(i) "maintenance or promotion of exports" and

(ii) "a change in productive capacity necessary to stop decline in an industry".

In other words, if the South African Commission were approached for an exemption to be granted in respect of an aviation code sharing arrangement, the airlines concerned would have to show that the code sharing arrangement is necessary to contribute to the maintenance or promotion of exports from South Africa. This may be difficult in certain markets where the payload of the aircraft is purely passengers and it carries little or no cargo, or where there are already effective trade routes between the relevant countries. This would also be impossible to show in circumstances where one party to the code sharing arrangement is a domestic operator while the other is an international carrier that simply does not have domestic operating rights in the relevant country.

As far as changes in the productive capacity of an industry which are necessary to stop decline are concerned, this can be a very high hurdle to overcome. The applicant would have to show upfront that the arrangement is necessary for the stability of an industry as a whole and not simply to enhance the longevity of the economic life of one or both of the carriers concerned.

While the grounds for an exemption application are limited in South Africa, when considering applications, the Commission should (but is constrained by the legislation not to do so) take into account other benign benefits that code sharing agreements generally would yield. US aviation industry experts have noted considerable consumer benefits arising from airline competition exemptions granted over the years in respect of code sharing and co-ordination arrangements1.

The US Department of Transport observed that "no airline, however strong, is able to efficiently provide service with its own aircraft and crew to every destination its customers require". It also said "multinational alliances have fuelled enormous increases in connecting traffic".

Further observations are that exempted international airline alliances tend to eliminate airline operators' incentives to impose successive mark-ups on fares for connecting tickets, and this has led to lower fares overall. Studies have shown that global airline alliances which obtain competition regulatory immunity, have yielded a more convenient and integrated service. They also show that effective international airline co-operation agreements often yield greater flight frequencies, which are spread further throughout the day rather than being clustered, as they might without an alliance agreement. This gives travellers more convenient schedule options and better connections on both ends of the route.

Airlines operate on a notoriously marginal basis. They are important to holiday and business travellers, for transporting cargo and mail, and they benefit other aspects of the global economy. Given all this, it would seem that competition legislation should not unnecessarily hinder the formation and promotion of these alliances, where they can be justified.

Justification is an extremely important element of the exemption application procedure around the world. However, in certain jurisdictions, such as the US, much broader scope of justification is provided, with a greater variety of benefits that can be put before the Competition Regulator for consideration. When it comes to exemption applications, the hands of the South African Commission are tied. As a statutory body, the Commission cannot go beyond the wording of the Act and the Act simply does not allow consumer benefits as a ground of justification for an exemption. Many more airline alliances would succeed, and probably ultimately benefit consumers, if wider grounds of justification were permitted in the South African legislative context.

To this end, South African aviation industry bodies should consider lobbying for an amendment of the Act to permit the seeking of exemption applications in deserving circumstances, on good grounds other than those currently provided for in the legislation. South Africa has recently entered into a new era of vigorous consumer protection under the Consumer Protection Act, 2008. In an aviation industry context, the Competition Act, which ultimately also aims to protect consumers, might instead be depriving consumers of benefits that may arise from certain airline co-operation agreements. Where these agreements are legitimate, necessary and efficiency-producing, and designed not to exploit consumers or deprive them of choice, they may well contribute to lowering the often prohibitive costs of airline travel and create greater consumer choice.

Nick Altini

1. The author specifically wishes to acknowledge the paper of Daniel M Kasper and Darin Lee entitled "Why Airline Anti-Trust Immunity Benefits Consumers" as the primary source of information related to the perceived benefits in the US airline industry of a more liberal anti-trust immunity system. GCP: The Anti-Trust Chronicle September 2009 (1)

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