The ACCC has forced Jetstar and Virgin to warn people who are booking online that a booking fee may be payable when a flight is selected, instead of drip pricing the booking fee by not disclosing it until the end of the online booking process.

The Australian Competition & Consumer Commission (ACCC) Chairman Rod Sims sees the decision of Australian Competition and Consumer Commission v Jetstar Airways Pty Limited [2015] FCA 1263 (Federal Court of Australia, Foster J) as significant in its campaign against drip pricing. In a media release on the day the judgment was handed down (17 November 2015), he said:

“It is encouraging that a number of businesses in the travel, accommodation and ticketing industries have adjusted their online pricing practices to improve disclosure of fees and charges since the ACCC began its work on drip pricing. This also has a positive effect on competition, allowing consumers to easily compare and choose the best price.”

In this article, we examine the Jetstar decision and how Jetstar and Virgin have changed their websites, and then follow with a marketing commentary contributed by Michael Field.

Why did the ACCC focus on Jetstar and Virgin in its drip pricing campaign?

Jetstar Airways and Virgin Australia Airways are the two largest low-cost passenger airlines in Australia.

Low-cost airlines have made an art form of stripping down the airfare to basics by hiding the extra fees they charge. They know that many travellers who browse the internet book flights which are advertised as lowest fares / cheap fares / cheap flights.

As they click through the booking process, the traveller notices what the ACCC calls drip pricing. Specifically, drip pricing is the practice of displaying the headline price as a firm price early in the booking process and then gradually adding / drip feeding extra fees to the price.

How did Jetstar and Virgin drip price?

The ACCC case against Jetstar and Virgin was that their service and booking fee was added to the price of the airfare late in the booking process, after consumers were seduced into the seller’s “web of negotiation” or “marketing web” once the flight was chosen. Consumers go on with the booking process and grudgingly pay the additional fee rather than quit the process and book elsewhere.

The Court identified the ‘class of consumers’ – travellers affected by the drip pricing by booking online - as being people who have ‘some level of experience of navigating the internet and of using online booking processes (including hyperlinks)’.

The Court examined bookings made via websites, mobile phone sites and emails. It found:

  • The Jetstar website initially did not comply because it was misleading - consumers saw specific fares for flights on the “Select Fights” page, but were not told that a booking and service fee would apply until the “Payment” page when they were advised that a fee of $8.50 per flight was payable (unless payment was made by direct deposit or with a Jetstar credit or debit card).

Jetstar changed its website in 2014 by introducing a pop up box when the fare was selected on the “Select Flights” page, which disclosed that a booking fee was payable, and a hyperlink to the “Fees and charges” and “Payment methods” pages. The changed website complied.

  • The Jetstar mobile site was also corrected, but the Court said that it remained difficult to navigate the site and considered that the fee disclosure was insufficient, and so it was still misleading.
  • The Jetstar emails did comply because the disclosure that the fee was payable and the amount ‘was there for all to see’ at the end in the section headed - Things you need to know.
  • The Virgin website did comply because consumers were told that a booking and service fee would be payable (even though the amount was not shown) when the specific flights and the base fare were displayed on the “View Best Fares” page. On the “Select” page, where the specific fare was displayed, there was a hyperlink to the “Fees and Surcharges” page.
  • The Virgin mobile site did not comply and was misleading because ‘the customer is required to undertake a series of relatively annoying steps’ to find that a booking and service fee of $7.70 per flight was compulsory if payment was made by debit or credit card.
  • The Virgin V-mails did comply because the price was asterisked and the fee disclosure for bookings by card was disclosed at the end of the email.

On 20 April, 2016, the Court will hear the ACCC’s argument that the Court declare that the Jetstar website pre 2014 was non-compliant, even though it now complies, because of its general relevance to ‘certain promotional and advertising techniques adopted by businesses which use the internet and mobile phone networks to promote and sell their products and services’.

The Court will also hear the ACCC’s argument that the Jetstar and Virgin mobile sites be declared non-compliant and be taken down.

What law regulates drip pricing?

Compulsory extras must form part of the price: what the ACCC calls a ‘single price’.

The law is found in section 48 of the Australian Consumer Law (ACL), which requires that the advertised price must include all compulsory extras, such as any tax, fee, levy, surcharge or other additional charges (e.g. GST and passenger movement charge). The single price must be displayed ‘in a prominent way’, which is where the headline price appears.

Because the booking and service fee that airlines charge is not a compulsory extra, the ACCC needed to rely on the misrepresentation provisions of the ACL to argue that displaying the price of the airfare was misleading, unless there was a warning that a booking and service fee is payable.

The law is found in section 18(1) of the ACL which prohibits misleading or deceptive conduct, section 29(1)(i) which prohibits false or misleading representations on price, and section 29(1)(m) which prohibits false or misleading representations on conditions attaching to the price.

The ACCC is campaigning to improve disclosure of booking fees in the travel industry

The ACCC regards the Jetstar decision as a precedent for e-commence in the travel industry.

On 16 December 2015, the ACCC announced that it had ‘swept websites and mobile apps of over 130 traders offering online bookings for services such as flights, accommodation, cruises, trains, vehicle hire, car parking and entertainment ticketing’. ‘The sweep identified 15 traders for follow up action’ for not disclosing fees ‘as early as possible in these traders’ booking processes’.

How Jetstar and Virgin have changed their website booking processes to comply

Two guides for compliance come out of the Court’s analysis of the Jetstar and Virgin booking processes –

  1. If ‘Direct Flights’ to a destination is chosen and the fare is described as ‘Price from’, then using the word ‘from’ is acceptable, and there is no need to warn that a booking fee may be payable until the ‘Select Flights’ page when a specific flight fare is displayed.
  2. The booking fee does not need to be disclosed next to the flight price, so long as it is disclosed on the same page. This is why the Court was satisfied that the emails complied.

But that is not where legal compliance should end. There are other extra charges payable in low-cost air travel if the traveller wants extras such as a flexible fare, seat selection and checked baggage.

Jetstar and Virgin have changed their ‘Select Flights’ website pages to not only highlight warnings that a booking fee may be payable, but also to highlight the extras that a traveller can pay extra for, so as to avoid any criticism by the ACCC that is drip pricing the extras.

The Jetstar website contains the booking fee warning on the ‘Find Flights’ page. On the next pages - ‘Select Flights’, the warning is repeated and highlighted. Jetstar provides a choice between a ‘Starter Fare’ or a ‘Business Fare’.

For the ‘Starter Fare’ a pop up box appears which displays what is included. There are two optional upgrades. One is a ‘Plus bundle’ with no change fees, free seat selection, a $5 inflight food and beverage voucher and 20kg checked baggage. The other is a ‘Max bundle’ with a fully flexible fare, a refundable fare, free seat selection, 30kg checked baggage and lounge access. The ‘Business Fare’ also has a ‘Max bundle’ upgrade.

The Virgin website contains the booking fee warning on the ‘Fight Specials’ and ‘Find Flights’ pages. On the ‘Select Flights’ page, the traveller has the choice between a ‘Saver’ fare or a ‘Flexi’ fare or a ‘Business Class’ fare. There is a drop down box for each, listing what is included.

Virgin provides a choice between three types of fare, each with a fixed list of inclusions, as opposed to Jetstar which has two types for fare, with upgrades available within each.

The important point is that Jetstar and Virgin have website which mean that there’s no more drip pricing because the cost for the extras is clearly displayed on the Select Flights page.

Competitive Strategy commentary by Michael Field (www.EvettField.com)

Why a business would prefer to use drip pricing, and how to work within the ACCC ruling that requires up-front disclosure of all add-ons to the price.

Drip pricing is common in the travel and hospitality industry, including accommodation providers, airlines and car rentals because they face heavy price competition.

Businesses  engage in drip pricing as it creates competitive tension in markets where purchasing decisions are driven by headline prices. Travel and hospitality is one such market where consumers are constantly seeking the ‘best deal’, often defined by the lowest price.   Businesses that include all fees and charges in the headline price are competitively disadvantaged.

Drip pricing entices the consumer to invest in the purchase cycle by offering low prices, and is intended to bond consumers to a key piece of information – the headline price. Sophisticated consumers will consider the total cost when comparing offers, and so drip pricing relies on a steady stream of naïve consumers who will fail to adjust their perception of value as the extra fees and charges are revealed.

Businesses engaged in this marketing tactic are hopeful that by the time the consumer recognises the additional fees, they are too invested in the purchase to start the ‘research’ phase again, and so go with the unexpected fees to save time and additional stress.

Recent research in the US has however shown that while drip pricing may increase consumer demand in the short term, it can also create negative feelings among consumers and lower their repeat purchase intentions with the seller in the long run.

Online marketers, especially in travel and hospitality, need to be extremely careful not to engage in deceptive drip pricing by using warnings early in the booking process.

When advertising, always use phrases such as ‘Prices starting from $x…’ and ‘Additional fees may apply’ so that customers are fully aware there may be additional charges. Terms and conditions should be freely accessible by link and regularly updated on the homepage of your website.