Allegations of corruption, predatory pricing, incompetence. Boss “in meetings”. Another day at SAA.

Cobus Rossouw
Cobus Rossouw – Imperial Logistics Chief Integration Officer

I met SAA’s financial director Wolf Meyer about a year ago. It wasn’t in the greatest of circumstances. One of my then colleagues had discovered the GM of a Moneyweb subsidiary, Editor’s Inc, had been bribing SAA’s procurement officer to ensure its publication was carried in the airline’s cabins. I was horrified at the discovery and arranged an urgent meeting with Meyer. He came across as a decent man who wanted to get to the bottom of it, but asked me to hold off public disclosure until the internal investigation was concluded. The bribe-eliciting procurement officer resigned; SAA swept it under the carpet; I left Moneyweb; and, like so many of these corruption cases, the matter seems to have since slipped everyone’s mind. Moneyweb’s only reference in its recent results was the write-off of an investment in Grist Publications, holding company of Editor’s Inc. Heaven knows what happened to my lengthy affidavit handed in at the Parkview Police Station. C’est la Vie. We tried to get hold of Meyer for a different reason today. Imperial Group’s overnight cargo arm IAC has made a formal request for the Competition Commission to investigate SAA Cargo. As you’ll see from the interview, the facts laid out by Imperial’s Cobus Rossouw are disturbing. I was hoping Meyer would give the other side. Is this deliberate predatory pricing? Or incompetence? Unfortunately, the response from Meyer’s office was that he is “in meetings all day”. So we’ll have to wait for the Competition Commission’s investigation to find out. Maybe. Imperial’s Rossouw says the Commission is complaining about a lack of resources. After the near R1.5bn fine harvested from construction companies, how is that possible? – AH  

To watch the video of the interview with Cobus Rossouw on CNBC Power Lunch click here

ALEC HOGG: One of the strange things that’s happened in the micro-lending field is that Abil – African Bank is down 55% – the share price in the past year, and Capitec is down 8%. Well, I guess if you would like to go long on one and short on the other or to have a view on where they’re going to, that kind of gives you the insights. Both similar kinds of businesses – in fact, identical business – and yet the one’s taken a pounding. The other one – nothing yet. There’s another good story that we’re going to get our teeth into now. An urgent request has been made by Imperial Logistics – that’s part of the Imperial group for the Competition Commission to initiate an inquiry into the general state of competition in the domestic overnight express airfreight market. That’s quite a mouthful but we’re going to find out more about what exactly it is from Cobus Rossouw. He’s the Logistics Chief Integration Officer at Imperial. It’s really unhappiness at SAA Cargo.

COBUS ROSSOUW: Well, it’s unhappiness at the market, so we say…

ALEC HOGG: Well, who’s the market?

COBUS ROSSOUW: The market comprises ourselves and them, but the market also comprises a structure that is in place in terms of daytime cargo and night-time cargo. We are playing only the night-time environment and we think the way it’s being structured with the two players – specifically with the conduct of the SAA – is making it an unhappy place.

ALEC HOGG: What do you guys do? Just unpack it for us.

COBUS ROSSOUW: Imperial Cargo operates three planes. They fly cargo between Johannesburg and the other major centres on a nightly basis. It’s a scheduled airline. Typically, if you have urgent cargo that needs to go from Cape Town to Durban it will be handed in typically through the courier companies and then we operate as a consolidator of that freight and move it overnight to the other destination.

ALEC HOGG: You have three planes. How many does SAA Cargo have?

COBUS ROSSOUW: Also three.

ALEC HOGG: Also three?

COBUS ROSSOUW: Yes.

ALEC HOGG: And the problem in this; that they aren’t increasing their costs – their prices – so certainly the courier companies are not going to be complaining, but you are.

COBUS ROSSOUW: We are. We’ve got some loyal customers who stayed with us, but they’re also not happy with it. So we are currently trading at quite a price premium to SAA, but it’s not a rational commercial environment – I think it’s the words we used – to be able to operate in, so clearly for us it’s important to make some decisions about how this market should operate.

GUGULETHU MFUPH: So, in a nutshell, wIhat are you hoping the Competition Commission will do?

COBUS ROSSOUW: I think what is different here is that we’ve applied for a market inquiry, so this is not a complaint. This is not a punitive thing against SAA. We believe that the Competition Commission should independently look at what’s the right to operate a market like this and they could make some rulings in terms of how SAA – should they be in the cargo market – how they should maybe not cross-subsidise that with passenger airfreight or not cross-subsidise it with international freight. So there’s currently many ways to make it really difficult for us and we think that SAA is not applying sound business principles and we think that by applying good competition rules we’d be able to get a better situation.

ALEC HOGG: Just say that again. “Should they be in the market…” Are you suggesting that they shouldn’t?

COBUS ROSSOUW: Well, I think that’s probably a question for government. In a previous turnaround plan, SAA did plan to get out of the cargo market and that’s pretty standard. Comair for instance doesn’t operate cargo. They outsource that to BidAir and therefore that capacity is used productively by specialists. So that could be an option that would open the market for another player.

ALEC HOGG: So how much are they actually losing in this area?

COBUS ROSSOUW: Are they losing?

ALEC HOGG: How much are they losing? Because from what I understand, they are predatory-pricing in this. They should have raised their prices. You feel they’re taking advantage of other parts of the business and no doubt bailouts by government and they are then being able to push you out of this market by reducing their prices. How much money are they losing by taking this approach?

COBUS ROSSOUW: I don’t know how much SAA cargo – separately – is losing or gaining. It’s not public knowledge in terms of the accounts of SAA. It’s a division of SAA. But even if you had to produce accounts, the question would be: How do you account for it? Typically cross-subsidisation… We don’t know. We think they think they’re not losing money. We know they must be losing money.

ALEC HOGG: Well, let’s put it differently: if you were pricing what SAA is pricing, how much money would you be losing? You’ve both got three planes so it’s a kind of level peg.

COBUS ROSSOUW: It would be tens of millions per year, so in the context of a major bailout it’s relatively small, but the reality is it’s damaging a market that’s probably the size of R500M per year. So if you take that tens of millions losses compared to revenue of R400M or R500M for the market, it’s substantial.

GUGULETHU MFUPHI: But then again, because there’s so few players in the market doesn’t this make the regulations and the rules and the nitty-gritty as to what the expectations are just so much more difficult 

COBUS ROSSOUW: But why does it have to be regulated?

GUGULETHU MFUPHI: Maybe it needs to be regulated to avoid such instances of anti-competitive behaviour or… What’s the word?

ALEC HOGG: Predatory pricing.

GUGULETHU MFUPHI: There we go.

COBUS ROSSOUW: The competition is there to avoid that, so if we have rational competition between players we don’t need to regulate it. We’re not asking for regulation. Our challenge is that we’re competing with a state-owned enterprise that operates on a non-commercial basis, so we don’t want it regulated. The better situation for us will be to have a competitor like us that’s operating on a commercial basis.

ALEC HOGG: Then you could have a duopoly and you’d both make lots of money and the market suffers.

 COBUS ROSSOUW: Well, I think free market has proven…even with duopolies there’s then behaviour that would ensure that people would end up in a more efficient situation than a state-owned or partly state oligopoly.

ALEC HOGG: I don’t know when last you’ve looked at Vodacom or MTN in the South African operation.

 COBUS ROSSOUW: Highly-regulated market.

ALEC HOGG: Well, duopolies don’t always seem to be the best for consumers. But in this instance you feel that it’s unfair. You’re taking on the government and it has bottomless pockets and it can in fact squeeze you out of the market by pricing incorrectly. What happens from here? You’ve told the Competition Commission your concerns. What are they likely to do?

 COBUS ROSSOUW: Well, they now… According to the new stipulation of the Act they should initiate a market inquiry or indicate why they can’t. They have responded with some concerns around capacity constraints, so we are in discussion with them. They have suggested that we could also lodge a complaint, but as I said earlier we don’t want to lodge a complaint. This is not about a punitive measure against SAA. It’s about a structural change in the market.

ALEC HOGG: Capacity constraints, meaning they don’t have enough people to do it?

 COBUS ROSSOUW:  Do you mean the Competition Authority? Well, they haven’t specified why. I think the specific response indicated that they are very busy with some market inquiry in the private healthcare environment.

ALEC HOGG: But Gugulethu Mfuphi, this is crazy. They’ve just got R1.5bn from the construction companies. Their coffers are overflowing. Why can’t they reinvest some of that? The one thing that the Competition Commission shouldn’t have is capacity constraints. 

GUGULETHU MFUPHI: Exactly, oddly enough. But just take us back to when exactly this problem started.  You’ve been in the game since 2006. SAA Cargo; how long have they been in the game for and when did these pricing problems initially start?

COBUS ROSSOUW: They’ve been in the game since they’ve operated so they obviously had capacity to handle freight. I can’t recall when they introduced overnight dedicated freighters. We entered the market on the basis that, at that stage the express industry which is now including the courier companies – so the land-based side – appealed that other players should enter. So at the time Safair, which was part of Imperial, entered the market in partnership with Comair – Imperial Cargo was still a shareholder. I think we’ve coexisted relatively well. We’ve always been at a price premium to them but we’ve coexisted – so relatively equal market shares. In the last 18 months they’ve not taken sufficient price increases from our perspective, so the fuel price has increased by 25%. Their fuel surcharges remained relatively flat. Landing charges/navigation charges, which are all charges that are levied by ACSA for instance, so it’s statutory charges. We’re not incorporating their pricing. And then this year, instead of the sort of annual price increase that was expected on the 1st of April, they didn’t increase their pricing. So we’re now trading at probably about a 10% premium to them on the standard pricing and probably a 25% premium on fuel surcharge. We’re maintaining our market share – we probably lost a bit of it – but obviously at the cost of profitability.

ALEC HOGG: Cobus, we hear the same story from Comair on the passenger side. Mango is not actually putting forward the real numbers. Is that your reading of the situation that you got from SAA? You’ve got this hump in the middle and they’ve got these satellites that are competing against the private sector and in fact, predatory pricing there.

 COBUS ROSSOUW: Ja, we think it could be similar. I’m not an expert on passenger travel, so I wouldn’t want to express myself on what they’re doing and I understand that Comair is obviously a direct competitor in a big way so their interaction with SAA is a very big part and a big bane in their life. But ja, I think there are issues around cross-subsidisation. Where do you allocate costs duly and therefore how do you use that to compete in the marketplace?

 ALEC HOGG: Are these guys clever? I mean, are the SAA people so smart that they’ve got this right or do you think it’s incompetence?

COBUS ROSSOUW: I wouldn’t say it’s either of the two extremes, but I would be more concerned that they don’t truly understand their cost drivers than that they are experts in understanding…

ALEC HOGG: It’s incompetence if you put it that way. We did try and get hold of Wolf Meyer, Financial Director of South African Airways. He’s in meetings all day so clearly, if they don’t know what they’re doing they’re certainly trying their best to find out about what they might be having to address here. We do hope that we can get Wolf Meyer to give us some [input] in as far as South African Airways are concerned. But it is a concern when you have an industry that is put under threat by the state, and the state forgets that the state is there because taxpayers pay them. Ja, it’s our money that’s been put there and maybe if these guys go out of business and there’s only SAA Cargo left; perhaps then we’d find that the cost of delivering a letter or a courier from Johannesburg to Cape Town would go up substantially. We’ll have only one player. So we don’t want monopolists. That’s really, I guess, what you are saying.

COBUS ROSSOUW: Yes.

ALEC HOGG: Have people left your market?

COBUS ROSSOUW: Well, all the other players that have left…the passenger market also withdrew freight capacity and there hasn’t been another scheduled freighter operation like ourselves and SAA, but obviously it is a total capacity market so I think there’s lots of victims in the airline industry internationally, but there’s not been a specific victim around.

GUGULETHU MFUPHI: Cobus, just before we go: have you seen similar predatory pricing take place on an international scale and hopefully some kind of format or method or solution to the problem that you guys can also implement here at home? 

COBUS ROSSOUW: Ja, I think the passenger industry internationally has got this problem and whether it’s around predatory pricing or loyalty schemes we’re essentially saying; we’re a logistics company. We don’t deal in passenger logistics. We deal in freight logistics. We have a comprehensive service offering. We’re happy to compete with competent competition out there and we have a lot of them. So maybe that should be the people who play in the market. So it is happening, but the freight market can be separated from the passenger market and maybe that’s the sort of conclusions that we need to drive towards.

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