If airlines are to survive the impact of the escalating oil price, and the global slowdown in economic activity, then they must become more efficient and increase their load factors, while maintaining their revenues per seat. Jet fuel now reportedly makes up about 40% of airlines' operating costs, and the recessionary mood means that people will fly less, because the demand for air travel is highly cyclical. But the Competition Act and the Consumer Protection Bill are additional sources of drag for struggling airlines.
Colluding to increase fuel surcharges is certainly not the answer – in 2006 the Competition Tribunal fined SAA and SA Express R20 million for this type of price fixing. Instead, airlines can deal with rising costs by entering into alliances on certain routes, for example agreements on code-sharing, joint marketing, pricing and capacity allocation. By combining their complementary routes into a more seamless and convenient network for passengers, airlines can achieve "end-to-end" efficiencies. Each airline can offer other airlines the benefit of access to connecting flights at its own hub.
The competition authorities, though, often suspect that airlines want to enter into alliances in order to raise prices, because competition between them will be reduced or eliminated on the affected routes. Weighing up efficiencies against the risk of anti-competitive harm, the US department of transportation recently approved an alliance between Delta, Northwest, Alitalia, Air France, KLM and Czech Airlines, allowing them to co-ordinate their transatlantic fares, services and capacity as if they were a single carrier. The department was persuaded that the alliance would create efficiencies that would lead not to higher airfares, but rather to the greater availability of discounted fares across the entire joint network.
In South Africa, airlines wanting to enter into alliances might need to apply for exemption from section 4 of the Competition Act, which prohibits agreements between competitors to fix prices or to divide markets. The criteria for exemption are narrow. Airlines must argue that their alliance will contribute to exports (as argued successfully by SAA and Qantas); or to the ability of SMEs or BEE firms to become competitive; or to a change in the productive capacity necessary to stop decline in the industry; or to the economic stability of the industry. It would be preferable if there were a more general efficiency criterion, so that exemption can be granted if airlines can show the efficiencies of their alliance are likely to outweigh its anti-competitive effects.
If airlines cannot raise airfares by enough to recover their increased fuel costs, they will at least want to preserve their revenues per seat. However, there are two provisions in the Consumer Protection Bill that further threaten the revenues of the airlines. Section 35 concerns loyalty programmes and stipulates that the sponsor of a loyalty programme must "ensure that the supply of those particular goods or services available at any time is sufficient to accommodate all reasonably anticipated demands for those goods or services in exchange for loyalty credits or awards". Airlines might be forced to redeem many more frequent flyer miles than they would wish to, thereby reducing their revenue per seat.
Section 47 on "over-selling and over-booking" stipulates that a supplier who accepts a reservation to supply goods or services on a specified date or at a specified time, but fails because of insufficient stock or capacity, must refund to the consumer the amount paid, together with interest and even consequential damages for any economic harm sustained by the consumer.
Admittedly, over-booking is very annoying to consumers, but if airlines didn't overbook to a certain extent, no-shows would mean too many empty seats, lower revenue per seat, a decrease in efficiency, and a reduced ability for airlines to cover their costs. The Consumer Protection Bill might punish airlines too harshly for overbooking and lead to precisely those outcomes. If governments must intervene in what would normally be sorted out by competition, then the approach in the EU seems preferable, as it sets out specific amounts of compensation for passengers.
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