Op-Ed: SAA’s civil damages burden piles up

PUBLISHED: Thu, 09 Mar 2017 19:55:44 GMT
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INTRODUCTION 

On 15 February 2017, the South Gauteng High Court awarded Comair R554-million plus interest at 15.5% on this amount, amounting to approximately R1.16-billion in total. This award related to a case initiated against SAA 14 years ago, over the national carrier’s anti‑competitive travel agent incentive schemes that were found to be in contravention of the Competition Act. Internationally, it has been accepted by competition authorities that anti‑competitive arrangements can have lingering effects on an economy and on market participants. Therefore, Comair sought compensation not only for the profits lost during the infringement period but also for the profits foregone after its termination.

But let us remind ourselves of what exactly SAA did wrong.

SAA’S ANTI-COMPETITIVE BEHAVIOUR

Over the period 2000 to 2005, SAA concluded and implemented so-called ‘override incentive schemes’ with travel agents. In terms of these incentives schemes considerable sums of money were paid to travel agents to book passengers on SAA rather than on rival airlines, such as Comair and Nationwide.

Prior to 1998 and consistent with international practice, SAA paid “base commissions” to travel agents over time for the sale of its tickets. Base commissions being standardised commissions paid to travel agents on each ticket sold.

However, during October 1999, SAA implemented agreements with travel agents significantly increasing the hurdle to earn commission both for override and incremental commission. In terms of this new arrangement, travel agents received a flat basic commission for all SAA sales up to a target figure that was set for them in their respective contracts with SAA. Also, each agent’s target was custom-made for that agent based on its previous sales figures, with a tailored percentage increment and if the agents exceeded these targets, they became eligible for two further performance-related payments (“overrides”) over and above the basic commission.

The first additional commission was an “override commission” payable on the total of all sales above and below the target, referred to as the ‘Back to Rand One’ principle. This meant that the additional percentage commission was applied to the total ticket sales made by the travel agent in the relevant time period, and not just to those sales made in excess of target sales.

The second category of commission was an “incremental commission”, which was much higher than the base and override commission rates, which was paid only on the amount in excess of the target. Therefore, and in itself, travel agents were induced to reach the base and then strive for maximum growth above that target because at that level they were handsomely rewarded. It is clear that without achieving similar compensation from a rival airline, the agent had little incentive to sell the rival airline’s ticket and a compelling incentive to sell SAA’s.

During the same time, SAA also ran the so‑called ‘Explorer scheme’, which incentivised individual travel agency staff to sell SAA tickets. The agency staff were rewarded with discounted or free international airline tickets based on the achievement of domestic SAA sales targets; and secondly, the entire staff of travel agencies were rewarded based on the sales of domestic SAA tickets by such agencies’ consultants in terms of a bonus pool arrangement.

This is the second time that a damages claim based on a finding by the competition authorities has been litigated in full.

The outcome of the second civil damages claim is a clear demonstration to all companies that the risk exposure, once found to have contravened the Competition Act, is significant. Not only will companies not escape prosecution by the competition authorities once found out, the cost of defending civil claims can take its toll let alone the award of a civil claim in itself.

Learning from the SAA history, it clearly highlights the importance of understanding, when considering pricing structures as well as incentive arrangements aimed at enhancing company performance, that competition law risks should be considered and not ignored.

SAA spokesperson Tlali Tlali stated post the Comair judgment and award that the airline has taken note of the judgment involving SAA’s anti-competitive behaviour from 1999 to 2005. He said this case related to legacy matters and that these arrangements by SAA were implemented by managers who have since left the company and “new business management processes were since introduced to ensure compliance with all relevant prescripts”.

CONCLUSION 

Let’s us live in hope that the newly implemented business processes at SAA will indeed bring about compliance with competition law and prevent further SAA financial exposure. Fines by competition authorities and civil claim awards can result in financial and credibility “poverty” for organisations. May all companies be diligent in their business practices in order for competition law misery not to awake executives in the morning and shame them at night.

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