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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general guide to the subject matter. Specialist advice should
be sought about your specific circumstances.
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