Flight Centre ordered to pay $12.5 million for price fixing

On 4 April 2018, Flight Centre was ordered by the Full Federal Court of Australia to pay penalties totalling $12.5 million for 6 counts of attempting to induce certain airlines to enter into price fixing arrangements. The penalties follow a High Court decision that an agent (distributor) setting its own prices for goods supplied by a principal is likely to be competing if not obliged to act in the best interest of the principal.

The penalty is an increase from the original $11 million imposed by the trial judge in 2014, and comes only a week after the OECD report finding Australian competition law penalties to be significantly lower than other OECD countries. The Flight Centre case signals to businesses that breaches of competition law in future are likely to be met with harsher penalties by the Australian courts.

Background

Between August 2005 and March 2009, travel agency Flight Centre offered a range of travel agent services to its customers, during which it was also arranging international air travel directly with airlines.

Flight Centre was a party to the Passenger Sales Agency Agreement (PSAA) with the International Airline Transport Association (IATA) (on behalf of its members), under which Flight Centre received “at-source commission” from the airlines when it sold tickets on their behalf as their agent. At-source commission was calculated as a percentage of the “published fares”, which Flight Centre obtained through an electronic reservation system known as the Global Distribution System (GDS). Upon collecting the fares from purchasers, Flight Centre remitted the nett amount (published fare less the at-source commission) back to the airlines. Flight Centre was at liberty to determine the price at which it sold the tickets. Whether Flight Centre made more or less commission, or made a loss, was dependent on the price at which it sold the tickets.

Flight Centre was also a party to, in industry jargon, “preferred airline agreements”. Flight Centre entered into such agreements with Singapore Airlines, Malaysia Airlines and Emirates, under which it received additional “back-end commission” calculated on total “flown-revenue” or growth targets.

During this time, it was possible for airlines to directly offer fares to customers as well, which at times were cheaper than the published fares Flight Centre could access via the GDS. Flight Centre’s “price beat guarantee” meant a customer presenting a cheaper quote from another agent or airline for a particular flight was provided with a fare cheaper by $1 and a Flight Centre $20 voucher.

The key conduct was that Flight Centre sent a series of emails to Singapore Airlines, Malaysia Airlines and Emirates to address the issue they were experiencing with the GDS, attempting to stop the airlines from offering international airline tickets directly to customers at prices lower than the published fares available on the GDS.

Federal Court proceedings

In 2012, the ACCC commenced proceedings against Flight Centre alleging it had attempted to induce the three airlines to enter into a contract, arrangement or understanding to fix, control or maintain prices for air travel, which would have the effect of lessening competition in the market for the distribution and booking retail sale of international air travel from Australia.

Flight Centre denied these allegations, relying on an argument that there can be no lessening of competition where the providers of the fares are the same regardless of who sold the services, and that Flight Centre was increasing competition by encouraging sale at the same price as the airlines.

Justice Logan found that Flight Centre, despite being an agent, was “in competition for distribution and booking services” with the airlines because the relevant market was the “downstream or distribution functional level of the overarching market for international travel and ancillary products”. That is, the market for the supply and distribution of fares was characterised as separate from the supply of international passenger air travel. Flight Centre was found to be competing with the airlines because it was also providing booking services to customers that could be substituted by the airlines’ direct dealings with customers via their websites. As a result, Flight Centre’s series of emails was found to constitute an attempt to engage in price fixing.

Flight Centre was ordered to pay $11 million for 6 incidents of attempting to induce price fixing.

Full Court of the Federal Court Decision

Flight Centre appealed the Federal Court’s decision and the ACCC cross-appealed in relation to the penalty.

In 2015, the Full Federal Court unanimously found the supply of booking and distribution services was not a separate market from the supply of international passenger air travel, but rather an ancillary part of it. Justice Logan’s characterisation of the market as a market for booking and distribution services was highlighted as an ‘artificial construct’. As a result, Flight Centre was found not to compete with the airlines in the market.

The ACCC’s cross-appeal on penalties was dismissed.

High Court Decision

The ACCC then filed a further application seeking special leave to appeal to the High Court.

In 2016, a majority of the High Court (French CJ dissenting) found the market in which the relevant conduct occurred was the market for the sale of international air tickets. The High Court agreed with the Full Court’s characterisation of the market.

However, the decision of the Full Court was set aside as the High Court found that a principal and agent are in competition with each other where an agent exercises its own discretion in the pricing of the principal’s goods or services, and where the agent is not obliged to act in the interest of the principal. Flight Centre was found to compete in the same market as the airlines and had attempted to induce the airlines to enter into price fixing arrangements.

The matter was remitted back to the Full Federal Court for the determination of penalties, with each party ordered to pay its own costs.

The ultimate outcome was that Flight Centre’s fine was increased from $11 million to $12.5 million.

Implications

Businesses engaging in vertical distribution channels (particularly those employing principal-agent relationships) should review their existing contractual arrangements to ensure any conduct arising out of supply of product or services, pricing and commission do not give rise to price fixing or other cartel conduct.

Going forward, the ACCC will pursue stronger penalties to better reflect the size of the company, in addition to the seriousness of the conduct and its economic impact. Although the Full Federal Court only increased Flight Centre’s penalty by $1.5 million, the Court’s quick response suggests future penalties are likely to be raised closer to the recommendations made by the OECD.

Macpherson Kelly has strong experience advising on competition and distribution structures.  Please contact Kelly Dickson for more information.

This article was written by Jason Han, Graduate Lawyer – Commercial.