SAA and SA Express on Collusion Allegations, Mishandling of Baggage and Pricing of Tickets

Meeting report

Opening Remarks
The Committee elected an acting chairperson, Mr M Sonto, as the Chairperson was ill.

SA Express (SAX) briefing
Ms Siza Mzimela, CEO Designate: SAX, briefed the Committee on the alleged collusion on ticket prices. SAX received a letter from the Competition Commission (CC) on 28 January 2010 about an investigation into alleged collusion. SAX had only participated in discussions on transport capacity requirements for the 2010 FIFA World Cup. These discussions were confined to airline readiness for the World Cup.

SAX discussed baggage mishandling incidents. SAX reported that only 15.4 bags for every 1 000 passengers were mishandled for the year 2009/10. This figure had decreased by 23.7% from the previous year. The problems were mainly at OR Tambo International Airport. Two additional security staff members were appointed to monitor the movement of bags in the basement. A total of 300 bags were pilfered, damaged or lost in 2009/10.

SAX discussed factors affecting pricing decisions which included oil price fluctuations, inflation, market and demand, competition and economic conditions. Some charges included in ticket prices include VAT, airport tax, the South African Civil Aviation Authority (SACAA) tax and fuel levy charges.

Discussion
Mr S van Dyk (DA) stated that baggage theft and mishandling was a serious problem. What special measures were in place to deal with the problem and to limit luggage theft? He noted that additional people were being employed to work with existing personnel. What they would be doing?

Ms Mzimela replied that SAX had seen positive results by bringing in additional people who could assist with limiting pilfered and lost bags. Even if there was security on site, what would happen is that they would somehow become part of the problem if they worked there for too long. SAX was now employing people on a short term basis. SAX employed a different set of people every six months. SAX also identified that part of the problem occurred during interconnecting flights where baggage was sent down the wrong chute and would land up at the wrong place. This issue was also being looked at and the figures shown in the presentation indicated that SAX was making some progress. 

Mr P van Dalen (DA) noted that in 2009/10 there were 15.4 mishandled bags for every 1000 passengers. The presentation also showed that only 107 bags had been pilfered in 2009/10. He wondered if this figure was right.

Ms Mzimela answered that 107 bags had been pilfered. However, the overall total for bags that were pilfered, damaged or lost was 300 for 2009/10.

Mr van Dalen assumed that this meant that the airline only managed 6000 bags for the whole year. This did not seem right.

Mr Inathi Ntshanga, General Manager: Strategies and Business Development in SAX, replied that he did not understand how the Member calculated that there were only 6000 bags.

Mr van Dalen explained that if 15.4 bags for every 1000 passengers were pilfered and 90 bags were lost in the same year. He divided the 90 bags by 15, which equaled six. He then multiplied six by the 1000 passengers and received 6000. The figures provided by SA Express did not make sense to him.

Mr G Koornhof (ANC) stated that the SAX report was found lacking, as it did not show the Committee the way forward. He saw problem identification, but no solutions. He wanted to know what plans were in place to reduce baggage mishandling at the international level. When the Committee visited the Airports Company South Africa (ACSA), they saw that ACSA had a fairly sophisticated system in place to deal with the matter. However, Members got the impression that there was a security gap somewhere in the system. There was a difference between what ACSA was doing and what the airlines were doing when they handed baggage over to baggage handling companies. There was a weakness in this system.

Ms Mzimela added that the baggage issue was a difficult problem to resolve because there were so many entities that had to be involved. Unfortunately there was no clear cut-off point for where responsibility ended, which meant that all relevant parties had to work together. She acknowledged that SAX was far behind the international benchmark; however, they were improving.

The Chairperson commented that he could not understand why the relevant entities could not come together to resolve the matter. It was a very delicate issue that needed to be handled immediately. 

Ms Mzimela replied that the relevant parties met regularly. The problem at the moment was that someone had to take the responsibility for the liability stemming from lost bags. This was where the problems came in. If the parties decided that the problem lay with the ground handlers, then the issue of liability would come in to play and the airlines would be responsible for the liabilities. This clouded a lot of the improvement that airlines made about baggage mishandling and losses.

Mr Ntshanga added that ACSA's system stated that everyone that worked at the ramp was only allowed to use one exit out of the building. The idea was that everyone had to use that exit. They encouraged workers not to come with anything and the idea was that they would not leave with anything. ACSA was working with SAX and its ground-handling organisations to help them close any security gaps that were identified.

Mr M Nhanha (COPE) stated that where there was smoke there was fire. Last October, when air-ticket price increases were reported to the media, the Committee asked SAX, ACSA and SAA about a possible negative impact on World Cup preparations an on the image of the country. The Deputy President has spoken against them and foreigners had the impression that South Africans were gearing to “rip them off”. He asked SAX what they thought had propelled SAA to “jump the gun” and apply for a leniency application. 

Ms Mzimela answered that what could have triggered SAA's leniency application was an email that was sent by another airline discussing issues around capacity for 2010. Essentially, the gentleman from Comair Airways who sent the email was responding to a question raised by the Chairperson of the Public Enterprise Portfolio Committee around concern for the high fares that the airlines seemed to be charging. His response was intended to counter the statement made by the Chairperson. It was not saying that airlines should collude. It was SAX's view that the email did not indicate any collusion on the parts of the airlines.

Dr M Oriani-Ambrosini (IFP) asked if SAX would consider or react to instructions from shareholders to reduce base fares to R500 for the days on which the World Cup would be held.

Ms Mzimela answered that she believed that the current prices being charged were correct if SAX wanted to cover their costs and make a small return on services provided. She would find it very difficult to understand if shareholders asked her to lower base fares to R500. This request would mean that SAX would make a loss. She was not sure that this was something that the shareholders would ever request SAX to do.

Mr Rasool asked if there had been a definitive outcome from the Competition Commission (CC) since the matter had been considered by the CC. If not, why was the CC taking so long to investigate the matter and to give an answer on the findings? He thought it would be useful to find out what the rates were for arrests, disciplinary procedures, dismissals and fines for employees found guilty of pilfering baggage. He noted that the rate for damaged baggage decreased significantly. However, the rate for pilfered bags increased from 17.7% in 2008/09 to 35.3% of total baggage incidents in 2009/10. This meant that fewer bags were being damaged but theft was occurring at a higher rate. He suggested that ACSA should be brought in to discuss baggage incidents.

Ms Mzimela replied that they had hoped that by this point the CC would have already responded to SAX saying that they had been cleared. Ms Mzimela was confident that SAX never played any role in collusion.

SAX did not have the statistics on rates for arrests, dismissals and disciplinary procedures taken in incidents of baggage pilferage. However, SAX would be able obtain the information and send them to the Committee.

Mr C Gololo (ANC) asked if customers were compensated for lost baggage. How many people has SAX had to compensate and how long does the compensation process take? 

Mr Ntshanga answered that SAX compensated customers for lost or damaged bags. SAX used the Montreal Convention to make payments. SAX paid approximately $20 per kilogram that was lost. An investigation was performed first to find out what was lost. Once lost goods were identified, it should not take longer than 48 hours to process the payment. If customers said that they were not happy with the payment, then SAX would deal with the matter.

Mr van Dalen wanted to know how many passengers, on average, SAX transported in a year. He asked if it was a good idea to “shrink wrap” all the bags at airports. This could be a cheaper way for preventing theft and not having to compensate customers for losses.

Mr Ntshanga replied that SAX carried approximately 1.5 million passengers a year. The bulk of the passengers were business travelers that tended to only carry hand luggage. Therefore, the bulk of the bags did not get counted as bags that were checked in; hand luggage was not checked in. This was why SAX seemed to have a very low number of checked in baggage.

Mr van Dalen stated that if SAX was transporting 1.5 million passengers a year, and 15 bags were mishandled for every 1000 customers, it seemed that the figure of 300 bags that were lost, pilfered and damaged for 2009/10  had to be wrong. Somebody in SAX was lying because the figures just did not add up.

Ms Mzimela replied that there might be a slight misunderstanding. Most of SAX's passengers did not check in baggage as 85% of their passengers were business travelers who only traveled with hand luggage. The numbers that were reflected in the presentation were those of checked in baggage. There was a low number of checked in baggage given the type of operation that SAX ran.

Mr Ntshanga explained that the presentation should have spoken about 1000 passenger bags instead of 1000 passengers.

Ms Mzimela answered that the method of “shrink wrapping” baggage could also be considered as a safety measure. However, it also seemed like SAX was saying that they gave up on resolving the matter completely. 

Mr M Mangena (AZAPO) noted that security officers at airports became problems after a few months and became involved in baggage mishandling. He heard that part of the problem was that employees did not have job security and were therefore not loyal to the entity and more inclined to engage in baggage mishandling. He wondered if it would help if people were made full-time workers instead of being given six month contracts.

Ms Mzimela replied that Honourable Mangena could be correct. This was something that was highlighted by ACSA and ground-handling companies. The six month contracts would be given to employees who were brought in as extra measures. SAX preferred to bring them in on a short term basis, as it was found that the longer the employees were there, the more likely it was that they would be involved in incidents of baggage mishandling.

Mr Nhanha stated that it would be useful if SAX could provide the Committee with progress charts in the future. It would help to show improvements in problem areas.

Mr Koornhof noted that the CEO had stated that all the stakeholders needed to work together to address the matter of baggage mishandling. He asked who would champion the project and take responsibility for it. He stated that there was a proposal from ACSA to increase airport tax by an average of 133%.How would this affect SAX? In terms of airline related taxes and surcharges, what effect would this have on passengers?

Ms Mzimela answered that it would be good to get the various airlines, ACSA and ground-handling companies together to talk about the issue and liabilities associated with it. Currently, it was the airline that took the ultimate responsibility for liabilities. However, 80% of where the problems occurred was outside of the airlines' control. This was where the challenge was.

Ms Mzimela said that the increase in airport tax would have a negative impact on SAX. It would also add to costs that passengers needed to pay for their tickets. It was not in SAX's interest to have passengers think that their tickets were expensive.

South African Airways (SAA) briefing
Mr Chris Smyth, Acting Chief Executive Officer: SAA, briefed the Committee in the alleged collusion on flight tickets. He stated that SAA had many discussions with various players in the airline industry on requirements for the 2010 FIFA World Cup. The discussions were limited to matters of logistics and capacity requirements. On 25 November 2009, SAA received an email from a competitor carrier, which contained certain suggestions that could give rise to inferences of conduct that was in contravention of the Competition Law. On 1 December 2009, SAA informed the CC about the email and applied for leniency in the event that the Commission decided to refer the incident to the Competition Tribunal. SAA later received a summons from the CC requiring documents and correspondence relating to the World Cup. SAA cooperated with the CC fully at all times.

SAA discussed baggage pilferage incidences and counter measures that were pursued. SAA was having daily meetings with airport stakeholders such as Swissport and ACSA. Frequent searches were implemented and an intelligence network was set up to gather information from all parties. Staff was not allowed in loading bays while loading was not underway. In addition to this, SAA will be increasing third party undercover agent presence on the ramp, increasing management visibility on the ramp and increase the strength of intelligence by means of the Griffith Reid information system. Several staff members from different service providers were apprehended. A syndicate that specialises in theft was being investigated. Pilferage was down by 20% since January. The SAA admitted that there were still too many security gaps that allowed stolen items out of the airport. They also said that available technology was not being used effectively, and that the quality and ethics of if the staff on the ramp was below minimum.  

Baggage pilferage was substantially reduced after a concerted effort in 2008. However, since 2009 it has increased. It required a coordinated effort from SAA, South African Police Service (SAPS), ACSA and various airlines.

SAA discussed ticket prices. They used the example of a one-way flight from Johannesburg to Cape Town.  The total ticket price amounted to R1996, 48. Airport usage fees amounted to R42.98 while VAT on airport charges amount to R8.60. VAT on the ticket would cost R235, 24.

Discussion
Mr van Dyk asked why SAA requested not to be part of the investigation undertaken by the CC. SAA ticket prices for days that the quarterfinals, semifinals and the final game would take place were much higher than other airlines. He asked why SAA was overcharging customers during the 2010 FIFA World Cup.

Ms Louisa Zondo, General Counsel: SAA, replied that SAA assessed the situation and came to the conclusion that they needed to inform the CC and they needed to protect the overall interests of SAA. The CC then came to the view that it wanted to investigate the matter further. They saw that SAA had been communicated to about the pricing of air-tickets for the 2010 World Cup. SAA wanted to mitigate the risks that could stem from the application of the law by the CC. 

At this point, the SAA had an initial engagement with the CC. However, the CC has not come to a conclusion on the matter. This meant that the investigation was still underway.

SAA had not increased all of its domestic fares on its domestic routes over the duration of the World Cup. SAA increased its “everyday” fares in business class and economy class on domestic routes. There were discounted fares for each of these routes. There was no difference between the World Cup period and the period outside of the World Cup. SAA's fares or domestic routes were not the highest when compared with other airlines in South Africa. It was true that some ticket prices on certain days were higher due to demand and SAA's ability to supply seats to customers. On some other days, SAA prices were lower than some other carriers.

The Chairperson noted SAA's answer but wondered why they were still almost tripling air-ticket prices for those days.

Mr Smyth explained that the range of pricing was very wide. A highly prices ticket meant that a person could change their arrangements as many times as possible. It also came with other benefits. If a person wanted to concede certain benefits. S/he would be able to buy a discounted ticket. SAA used these kinds of price packets to attract passengers and to enjoy as much revenue as possible.

Mr van Dalen asked SAA how many passengers they transported per year. He asked if employees who worked “on the floor” were screened with lie detector tests. He wondered why they did not use the system where bags were “shrink wrapped” as soon as soon as it entered the airport. This would prevent damage and pilfering of baggage.

Mr Smyth answered that SAA was budgeting to transport approximately seven million passengers during 2010. He stated that the stated that it was SAA's intention to have employees take lie detector tests. However, they were expensive. Employees were sometimes given lie detector tests, depending on the matter at hand.

Mr Tebogo Tsimane, Head of Operations: SAA, replied that SAA tried shrink wrapping before and found that t was ineffective. The plastic still got ripped off and bags just seemed to disappear. Shrink wrapping seemed to increase the number of bags that were stolen.

Mr Koornhof stated that when SAA spoke of organised crime and syndicates being involved in the mishandling of baggage, it was a very serious matter. SAA did not speak about ways they would break the cycle apart from getting all the stakeholders together to work on the issue. He asked who would champion the process.

Mr Smyth replied that there was a small group of people within the ground-handling area that was perpetuating fraud. The majority of SAA staff did a great job; however, there were a few bad apples that had an ethical level that was low. For example, 25% were “rotten”, another 25% had high ethical values and the 50% that was left were the people who could be swayed. SAA was trying to make sure that they were swayed in favour of high ethic standards and morality.

Mr Smyth answered that ACSA was the champion of addressing the pilferage matter. SAA was not giving up on the fight against baggage mishandling. SAA needed to move away from being reactive to being proactive and they needed to find the source of the problem. Unfortunately, many of the actions that the SAA wanted to take were proactive and they could not talk about it publicly.

Dr Oriani-Ambrosini stated that, unfortunately, South Africa was not a tourist destination because it took too much money to come to the country. He would like tariffs to be decreased so that the country could be promoted. He stated that the Committee wanted supporting documentation that summarised and gave a clear indication of the charges that SAA was accused of. He asked if SAA would consider sting operations that created fake operations for thieves to steal luggage. This luggage would obviously be micro-chipped. This would discourage employees from stealing as they would not know if a sting operation is taking place or not.

Mr Smyth replied that SAA would not be able to reduce tariffs for flights. If they did, SAA would not be able to operate those flights profitably.

Mr Smyth answered that SAA would look in to giving the documentation to the Committee.

Dr Andrew Shaw, Director-General for the Department of Public Enterprises, stated that State Owned Enterprises such as SAA were given a mandate and a clear set of targets that focused on ensuring financial sustainability. Shareholders tried not to get involved in complicated issues such as air-ticket pricing and forcing certain requirements on airlines. A reduction in airline prices meant that SAA would have to operate at a substantial loss. It seemed that it was not an issue of price, but an issue of capacity and excess demand. This issue needed to be addressed and prices would self-adjust.

Mr Smyth concurred with Dr Shaw. SAA's primary mandate still focused on the entity becoming self-sufficient. However, he understood the Members point from a tourism point of view.

Mr Smyth answered that the suggestion of “sting operations” was an interesting idea. SAA used it sometimes but it would be a good idea to use it more often.

Mr Rasool stated that he felt that there was an “elephant in the room” during the discussion about prices. When Dr Shaw spoke, he understood the point that SAA made. He asked if the management of SAA had interpreted the mandate from its shareholder as saying that it could not run at a loss and had to be profitable at best. SAA did its market research and found out what various people would pay. It then pegged its prices at just below what this clientele would pay. SAA was effectively telling the Committee that lobbying for low fares and promotional fares was not going to happen, as they were already booked out for those important flights. At some point, SAA should have taken the Committee in to its confidence and explained the premise on which they were working. There had to be an openness and frankness in discussions between SAA and the Committee.

Mr Smyth replied that SAA was not fully booked out for all the flights. Certain popular flights on match days that were fully booked now, but there was always a possibility of booking changes. The demand for the world cup was lower than expected, but SAA was still gearing up for full demand.

He stated that profitability was important. However, SAA was very weary of extortionist pricing. SAA was a commercial entity that wanted to enjoy a certain level of profitability to ensure self-sustainability, but they were careful of being extortionist.

Mr Gololo asked how many people SAA had charged for stealing and pilfering luggage.

Mr Nhanha noted that the CC had initially ruled against the SAA in the matter that involved Comair. The Committee knew that the email had originated from a gentleman working at Comair. Was SAA applying for leniency during the investigation a “storm in a teacup” or was SAA taking revenge on Comair?

Mr Smyth answered that SAA was not taking revenge on Comair. SAA's actions were purely for purposes of self-preservation and protection.

Ms Zondo added that it was not possible for SAA to determine what the CC's view would be. SAA could just reassess its position and try to manage the risks that it would face as a result of the situation. This was why South Africa informed the CC of the problem and why they applied for permission to be excluded form prosecution in the event that the CC found reason to prosecute certain airlines for collusion.

Mr van Dalen noted that SAA planned to carry seven million people. This meant that 10 500 bags would be pilfered for the year or thirty bags a day would be pilfered. SAX reported that 107 bags were pilfered for the year. These figures did not make sense to him. This was a serious problem. It could not be that difficult to catch the thieves if thirty bags were stolen a day.

Mr Tsimane replied that SAA found that sixteen bags per day on average were pilfered. There were approximately 5-7 arrests made per month.

Mr Smyth added that the SAA did not have a key performance indicator for how many arrests were made per month. They just did the best they could.

The meeting was adjourned.