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SAA's civil damages burden piles up - lawyer

Mar 08 2017 06:03

Cape Town – The new business processes at SA Airways (SAA) will hopefully bring about greater compliance with competition law and reduce the national carrier’s exposure to fines and civil claims due to uncompetitive behaviour, says Ahmore Burger-Smidt, director at Werksmans Attorneys in a company note. 

“Fines by competition authorities and civil claim awards can result in financial and credibility ‘poverty’ for organisations,” she said in reference to SAA’s uncompetitive practices in the past, which had led to a R1.16bn fine in February this year. 

READ: Court rules in favour of Comair in SAA case

On 15 February, the South Gauteng High Court ruled in Comair’s favour in a case that the airline had initiated against SAA 14 years ago in respect of the national carrier's anti-competitive travel agent incentive schemes.

Comair was awarded R554m plus interest at 15.5% on this amount, amounting to approximately R1.16bn in total.

“Comair sought compensation not only for the profits lost during the infringement period, but also for the profits foregone after its termination,” Burger-Smidt said. 

SAA’s anti-competitive behaviour 

Burger-Smidt recaps the extent of SAA’s wrongdoing 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,” she said. 

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 are 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. 

READ: Fine for abuse serves SAA right - ex-CEO 

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.

During the same period, Burger-Smidt notes, 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. 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.”

The civil damages claims against SAA is a clear demonstration to all companies that the risk exposure, once found to have contravened the Competition Act, is significant, Burger-Smidt said.

“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.”

Lessons for other companies 

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.

SAA spokesperson Tlali Tlali said after the judgment had been handed down that SAA’s anti-competitive behaviour from 1999 to 2005 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”.
 
“Let’s live in hope that the newly implemented business processes at SAA will indeed bring about compliance with competition law and prevent further financial exposure to SAA,” Burger-Smidt concludes. 

Myeni a 'delinquent director'

Meanwhile, Outa, in conjunction with the SAA Pilots Association, will at a media briefing present particulars about its court application to have SAA chairperson Dudu Myeni be declared a delinquent director.

Outa said in a statement it’s essential to take this legal action against Myeni (and others in similar positions of standing, when appropriate), in order to hold her accountable for her conduct and transgressions. "This action is also taken to prevent her from assuming senior positions on other boards or organisations, where such conduct and mismanagement might continue."

Read Fin24's top stories trending on Twitter:

saa  |  comair  |  fine  |  claims
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