It was reported last week that SAA received an emergency bailout from government to cover short term fuel costs to prevent the potential grounding of its local and international flights. The loan of R570-million was provided by Absa and Investec and tops up an emergency loan of R550-million granted to SAA at the end of December. 

The loan comes against the background of a R5-billion guarantee that the South African Government issued in favour of SAA at the end of last year.

There have been various suggestions from SAA competitors that the seemingly “open ended” state funding of SAA gives the carrier an unfair advantage and that this conduct could fall foul of the Competition Act. In an industry where 10 of the last 11 entrants into the market have not survived, these questions certainly seem pertinent.

But, Jac Marais, partner and competition law specialist at Adams and Adams, is not convinced that the Competition Act provides the right foil to challenge government’s generosity. Says Marais, “although there could certainly be questions whether or not the bankrolling of SAA is a sufficient utilisation of governments resources, it seems unlikely that this could give rise to a contravention of the Competition Act. Internationally it is notoriously difficult to be successful in the airline industry.”

If SAA is, however, purposively engaged in a strategy to drive competitors out of the market the position could be different. According to Marais, “one would have to consider whether SAA is utilising the funding it receives from government in a way that could contravene the Act by, for example, pricing its products at below cost. If that is the case it would suggest that SAA is driving prices down to a level where it is impossible for competitors to compete effectively, forcing them to exit the market.”

Despite various complaints lodged with the Competition Commission by competitors and political parties, regarding the impact of the relationship between government and SAA, including its low cost carries, Mango, no complaint referral has been made to the Competition Tribunal.

Although it is not impossible that a contravention of the Competition Act has occurred there could be legitimate reservations from the Competition Commission to drive the process. Says Marais “the short term impact of pricing below cost will be to drive prices down. The competition concern only arises when prices are kept so low for long enough that equally effective competitors are forced to exit the market, allowing the incumbents to increase prices with impunity. Very specific evidence of such a strategy will be required for a finding that the Act has been contravened.”

SAA will, however, need to be extremely vigilant not to cross a seemingly fine legal line: According to Marais, “Given SAA’s high market share it is critical that it considers the market impact of any marketing or pricing strategy to avoid potential contraventions of the Act.”

Written by Jac Marais, partner and competition law expert at Adams & Adams