Are lowest airfares really guaranteed? Travel industry practices under scrutiny in Flight Centre case

Flight Centre versus the ACCC: commonplace travel industry practices are under the spotlight. AAP

Australia’s biggest travel agency chain Flight Centre has been accused by the Australian Competition and Consumer Commission (ACCC) of illegal price fixing for attempting to collude with Singapore Airlines, Malaysia Airlines and Emirates.

The lawsuit filed in the Federal Court alleges that on six occasions between 2004 and 2009, Flight Centre tried to persuade the airlines to withdraw their internet-based discounted seats, which undercut the prices offered by the agency network. Flight Centre’s decision to fight the case, rather than settle, means that long established and commonplace travel industry practices are in the spotlight and of public interest.

Though the court may take years to determine any wrongdoing, it is timely to reflect on the travel industry’s inter-firm relationships and their appropriateness in an online and fast changing business environment. Are consumers really getting the best deals, or is the “Lowest Airfare Guarantee” boast of Australia’s most powerful travel retailer only possible because the cheapest POSSIBLE consumer prices have already been ruled out by an insistence on taking their cut?

A brewing brawl

The case raises challenging issues about the appropriateness of the price related dealings which occur between travel “principals” (for instance, airlines and hotels) and their “agents” (for example, retailers such as Flight Centre). In the battle for consumer hearts and minds and an atmosphere of freewheeling assertions about the “consumer interest”, a public brawl is likely to draw in different parts of the industry with unpredictable and risky consequences.

For consumers, travel businesses are generally “good guys” working hard to deliver the best possible fares (“Lowest Airfare Guarantee” and “Unbeatable”), unlike banks, which are widely viewed as profiteers. In a public spat involving airlines and a travel agency chain when questions are being asked about whether prices really are “unbeatable” or are artificially high, the “good guys” label will be harder to sustain.

Debates about the most effective system for distributing air tickets have occurred ever since mass international tourism boomed in the post-war period. In this context a key question behind the ACCC price fixing dispute is whether “direct selling” of tickets by principals should be a prominent feature of the travel industry landscape, or whether using an agent is the norm. Agencies such as Flight Centre undoubtedly provide important value-adding services to consumers by packaging the various components of travel (for instance, accommodation, flights and attractions).

Online inducements

And it is a successful business with a loyal and high-yielding customer base - in 2011, its profit was $249 million. But in the world of social networking where customers may prefer to go online to purchase a simple point-to-point airfare, should airlines be prevented from offering potential customers an inducement (say a cheaper price that includes no agent commission plus bonus frequent flier points)? Hotels commonly urge their repeat customers to make a direct online booking next time in return for a discount. Expressed simplistically, the principal is saying to the customer, “by cutting out the middleman, I’ll share the saving with you”.

Direct selling by airlines to customers has been surprisingly rare in Australia, with most relying on third parties such as Flight Centre and resisting the temptation to make savings by undercutting.

However the industry dynamics are changing. A combination of rising aviation fuel costs, increased seat capacity (like the A380 superjumbos) and a proliferation of new entrants (from China and the Middle East) have squeezed airline profits and made direct selling online a tempting way to exercise greater control over distribution.

Stagnating inbound tourism

And unlike retailers such Flight Centre which have been positioned to capitalise on Australia’s outbound travel boom, airlines have been exposed to stagnating inbound tourism with recessionary conditions in many source markets. Though Flight Centre is undoubtedly a major Australian employer and generator of income, it is the airlines which have been working harder to support inbound tourism.

It may be argued that airlines should routinely be capable of offering cheaper seats than those available through third parties, particularly when delivered online and to repeat customers. Did Flight Centre attempt to influence its airline suppliers because it needs to support a costly distribution infrastructure (“bricks & mortar”) that is only relevant to some airline customers? Is maintaining this infrastructure in the consumer interest if the system and network of relationships which support it has the effect of retarding the availability of cheap seats supplied direct by the airlines?

Again the court will need to assess the evidence, but in the interim the question will be asked, if I go direct to my airline, will that provide me with the best available price? And if not what is preventing this from occurring?

Whether the court finds for or against Flight Centre is yet to be determined. However the fact that the ACCC case has been launched against an organisation which, however successful, represents an older-style high street style of retailing means that it will be closely studied by all travel industry principals including airlines and also by Flight Centre’s competitors such as Wotif and Webjet which have put all their faith in the online approach to distribution.

Flight Centre’s success has kept the beacon of the high street travel agent alive. An unfavourable court decision could signal high tide for old-style travel distribution and for the “bricks and mortar” retailer.