CHAPTER 6 PROBLEMS IDENTIFIED IN THE SOUTH AFRICAN DOMESTIC AIR TRANSPORT MARKET 6. 1 INTRODUCTION The purpose of this chapter is to identify the problems in the South African domestic air transport market from a competition perspective. Specific objectives that will be established in this chapter are: • The market dominance of SAA and its domestic alliance partners. • Industry structure (ownership) of state-owned airlines. • State financial assistance to SAA. • The occurrence of anti-competitive conduct, abuse of a dominant position or predatory conduct by dominant airlines. • Measures to ensure access and to level the playing field for new entrants. • Price discrimination. Smith E stated that a remarkable difference resulted from the deregulation of the domestic air transport market in South Africa in comparison with the results of such deregulation in the USA with regard to: • The structure of airline ownership (that of state control in South Africa), and • The increased market share of SAA that demonstrated dominance following deregulation. 1) It would appear that limited measures were intended to be introduced to “level the playing field” and reduce barriers to entry at the outset of deregulation of the domestic air transport market in South Africa. The major deviation from the objectives set in 1988 pertaining to deregulation relates to the issue of a lack of effective competition, especially by smaller concerns. Smith E stated that the concept of a level playing field identified in 1990 was not adhered to, as can be seen from the recommendations made in terms of SAA’s position in the domestic market. 2) In addition, the 1990 policy did provide for an active role for the then Chapter 6 Page 615 existing Competition Board that did not have the statutory authority to perform such duties. 3) The competition policy, competition institutions and associated legislation were substantially amended following the deregulation of air services. The adequacy of these needs should be considered in the light of experience of competition bodies in dealing with air transport matters in South Africa and elsewhere. The original deregulation policy relating to the domestic air transport market in South Africa envisaged some restructuring of the activities of SAA and an active institutional role for the then Competition Board. As will become evident, the restructuring of the activities of SAA did not materialise and a new competition policy and legislation were introduced during the period 1997 to 1998. As demonstrated in 4.2.3 of chapter 4, the commercial practices of airlines have also changed as a result of deregulation, mostly in the area of economies of scope from a demand point of view. Some of these practices do present advantages from the perspective of a small segment of consumers but, from an overall consumer welfare point of view, they may also be used in an anti-competitive manner and even in a way that would indicate unacceptable behaviour in the form of an abuse of a dominant position or predatory conduct by dominant airlines that has longer term consequences. It should be noted that the objectives contained in the 1996 White Paper on National Transport Policy of the South African Government also included: • The setting of level playing fields. • Promotion of competition. 4) The purpose of this chapter is to identify a number of structural difficulties with regard to competition in the domestic air transport market in South Africa, including the findings and conclusions of Smith E. Specific objectives that will be established in this chapter relate to the dominance of the SOE, SAA, and its effect on the level of competition, specifically with regard to the following dimensions: • Market dominance of SAA and its domestic alliance partners. • The vertical integration of SAA. Chapter 6 Page 616 • Industry structure (ownership) of state-owned airlines. • Conduct of SAA in the domestic market. • Anti-competitive conduct, abuse of a dominant position or predatory conduct by dominant airlines. • Measures to ensure access and to level the playing field for new entrants. 6.2 THE ECONOMIC REGULATION OF THE SOUTH AFRICAN AIR TRANSPORT INDUSTRY 6.2.1 INTRODUCTION A short perspective is necessary with regard to the historical development of air transport policy prior to the deregulation of air services in South Africa, in order to demonstrate that scheduled transportation did not originate as a state enterprise in South Africa, but in the private sector. Economic regulation, in the form of minimum air tariffs, was only introduced in South Africa when a private scheduled air service (Union Airways) started to compete on an inter-modal basis with the railway services of the SAR&H. This effectively led to the establishment of a state owned airline SAA as part of the SAR&H. 6.2.2 MEANS OF ECONOMIC CONTROL OVER AIR TRANSPORT SERVICES IN SOUTH AFRICA The rationale for the introduction of economic or commercial control in the South African air transport industry was researched in an earlier study Economic Control over Domestic Air Transportation in South Africa (1996). 5) Successive South African governments established economic control over domestic air transport services by means of a number of mechanisms: • Contractual conditions to postal airmail subsidy agreements. • Preconditions for the conclusion of airmail subsidy agreements, including the imposition of minimum air tariffs. • Proclamation of conditions under which feeder air services may be operated. • Legislation and regulations that regulated the economical entry of airlines as well their conduct in the market. 6) Chapter 6 Page 617 6.2.3 DEVELOPMENT OF SCHEDULED AIR TRANSPORT IN SOUTH AFRICA PRIOR TO THE ESTABLISHMENT OF SAA Prior to the establishment of SAA as departmental air services by the SAR&H, domestic scheduled air services in South Africa were provided by three foreign owned airlines and a domestic privately owned airline during the period 1929 to 1935. 7) These were: • Union Airways (Pty) Ltd, based in Port Elizabeth under an air mail contract for domestic air services in South Africa from 1929. 8) • Junkers Flugzeugwerk AG under an airmail contract for the establishment of South West Airlines in South-West Africa from 1931. 9) • The Imperial Airways Mail Service between London and Cape Town in 1929 which included domestic and regional services conducted by Imperial Airways which was later replaced by the flying boat Empire Air Mail scheme from 1934 to which the South African Government contributed financially.10) The original service connected at Kimberley with the services of Union Airways and Junkers Flugzeugwerk. SAA took over the control of the Germiston-Cape Town portion of the London-Cape Town airmail service in 1936. 11) A flying boat service of Imperial Airways/British Overseas Airways Corporation continued operations between the Vaal Dam and Durban but Imperial Airways’ Germiston-Cape Town service was not allowed. 12) • The Johannesburg-Pietersburg route operated by Rhodesian and Nyasaland Airways Ltd, that was extended to Salisbury in 1933. 13) During the Second World War, domestic services in South Africa were conducted by: • Southern Rhodesian Airways in terms of an agreement with SAA that was concluded in 1941. 14) • Imperial Airways/British Overseas Airways Corporation’s Vaal Dam - Durban services up to 1946. 15) • Cape Town – Johannesburg – Bloemfontein - Elizabethville services operated by Sabena as from 1946. 16) Competition developed between railway services of the SAR&H and Union Airways from 1931 to 1932, which resulted in SAR&H procuring governmental economic regulation of minimum tariffs for air transport services to protect its railway services. This was followed by financial Chapter 6 Page 618 difficulties at Union Airways and resulted in the purchase of the business and assets of Union Airways in 1934 by the SAR&H and that of South West African Airways in 1935. 17) 6.2.4 POST SECOND WORLD WAR SOUTH AFRICAN AIR TRANSPORT POLICY The development of post Second World War air transport policy granted a protected monopoly to SAA on major trunk routes but the establishment of a Feeder Air Service Policy in 1946 envisaged a limited role for smaller private sector airlines in South Africa. 18) The NTC extended the same principles of protection of the railways services to airways services in 1948. 19) In 1952 a comprehensive air policy was formulated by the NTC. 20) In a previous study, it was found that formal economic regulation of air transport services in South Africa was introduced in 1949 and applied in order to protect, subsidise and further the interests of the State-owned enterprise, the SAR&H currently Transnet Limited. The economic control over civil air transport in South Africa was not aimed at protecting the interests of the public ("users") directly affected by air services, but rather at the protection of the interest of the operator (SAR&H) as a result of its public ownership, which was regarded as being "in the interest of the public”. 21) The regulatory framework established by the Transport Co-ordination Act of 1948, the Air Services Act of 1949 and the Comprehensive Air Policy of the NTC protected the air services of the SAR&H (operated under the name SAA) until the adoption of a Domestic Air Transport Policy in 1990 and a new Air Services Act of 1990 that became effective during 1991. 22) The statutory position of SAA and protection against competition emanated from a governmental policy of state ownership of a public enterprise as a national carrier. As explained in the official yearbook of South Africa 1983, it was a “feature of the South African economy that ownership of a number of basic enterprises vested in the state. State ownership of these undertakings is the result not of nationalisation but of a policy of promotion by the state of those industries or services which are either key undertakings or industries of strategic importance” 23) and the desire to establish, protect and subsidise the state's own interest, namely that of the SAR&H.