Come down hard on those who tilt scales

RECENT revelations and backtracking by SAA about subsidising Mango underscore the findings in a study just completed by the Centre for Competition, Regulation and Economic Development at the University of Johannesburg.

Anticompetitive behaviour — particularly of “national champions” or state-owned enterprises such as the national airline — fails consumers by maintaining unnecessarily high costs, and disadvantages rival entrants into the economy.

A series of papers funded by the National Treasury and scheduled to be released next month examine barriers to entry and their potential to limit the advent of black industrialists. They include a study of low-cost carriers, which reveals that the entry and growth of low-cost airlines have reduced prices by as much as 38% on some routes, increased passenger volumes, and extended services to smaller cities and towns.

The knock-on effects benefit the communities where airports are located, the tourism sector, and small, medium and large firms domestically and regionally.

For example, passenger fares on the George-Cape Town and George-Johannesburg routes decreased by around 30% between 2014 and 2015 following the entry of FlySafair. Passenger volumes on these routes also increased significantly, as they did on other routes where there has been entry of competitors, with significant benefits to local economies.

With the launch of CemAir, the now regular flights to Plettenberg Bay contributed an additional R56-million to its economy in just one year. Passenger volumes on the Johannesburg Pietermaritzburg route, according to FlyGoAir, leapt from 3 500 a month in 2010 to 13 000 a month last year.

While there are barriers to entry relating to regulatory requirements, capital investment and industry experience, the number of entrants into the sector over the past two decades illustrates that these barriers are not necessarily high.

At the time of the liberalisation of the market in the mid-’90s, SAA held 95% of market share. By last year, competitors had eroded this to 38%; its subsidiary Mango held 18%.

The key challenges have been the ability to sustain the businesses through the volatility associated with fluctuations in fuel prices and demand shocks.

Support for the national carrier and the conduct of SAA and its subsidiaries and associated companies appear to have undermined many of these rivals.

This conduct includes repeat violations of competition laws — from price-fixing to predatory and cartel behaviour — which raises questions about the deterrence and penalties for repeat offenders.

To the extent that the ability of airlines to become and remain effective rivals is undermined by unfair or anticompetitive distortions in the market either by cartels, abuse of dominance or even regulatory manipulation, these need to be assessed as potential barriers to entry and expansion.

The Centre for Competition, Regulation and Economic Development would recommend harsh penalties for companies (and their management) in which the government is a

Competitors eroded SAA’s market share to 38%

shareholder and which violate the Competition Act.

Further, if efficiencies result from the state support of particular carriers, the requirement should be that they are passed to consumers, which does not appear to have been the case in respect of SAA.

Air travel in Africa has grown strongly and much faster than in the rest of the world. The government must decide if it is in favour of a market in which it has control over competition outcomes among a handful of established incumbents, versus one in which there is dynamic market rivalry between multiple operators leading to pro-competitive gains.

Vilakazi is a senior researcher at the Centre for Competition, Regulation and Economic Development, and Paelo is a researcher at the centre