In the latest twist in the long running saga surrounding the Australian Competition and Consumer Commission’s (ACCC) attempts to hold Flight Centre liable for allegedly attempting to make price fixing agreements with international airlines, is the ACCC’s recent announcement that it will be asking the High Court of Australia for special leave to appeal the Full Federal Court’s recent dismissal of its case.
Here, Special Counsel Brett Bolton discusses the background to the case and the possible competition law implications for organisations that use a dual distribution model (i.e. a model that sells directly to customers and indirectly via agents and third party resellers) to run their businesses.
Flight Centre is, of course, a travel agency. It supplied customers with booking services for international air travel and received payment from customers for airfares on behalf of international airlines. It was also paid a commission by these airlines for making a booking and had preferred carrier agreements with Singapore Airlines, Malaysian Airlines and Emirates (carriers) under which it was paid additional commission if certain sales and revenue targets were reached.
Flight Centre extensively advertised and promoted its so-called “Price Beat Guarantee” which said that it would beat the price of any other airfare available to customers.
When the carriers started offering airfares on their websites at prices lower than those Flight Centre was offering (which had the effect of lowering Flight Centre’s sales and “squeezing” its commission margin), Flight Centre told the carriers it might have to stop selling their airfares unless they agreed not to undercut Flight Centre’s advertised prices.
The ACCC alleged that this amounted to an attempt by Flight Centre to fix the price at which the carriers would sell flights when selling directly to customers. In order to succeed, the ACCC had to prove that Flight Centre and the carriers competed with each other in a market. This involved the court considering and answering the following key questions:
- When airlines sold flights directly to customers via their websites, were they simply supplying international air passenger transport services in a market for those services or were they also separately and distinctly supplying distribution and booking services for international air travel?
- When a travel agent such as Flight Centre sold flights to its customers on behalf of airlines, was it also supplying distribution and booking services to those customers and the airlines?
Logan J found that the relevant market was a market for the supply of distribution and booking services for international travel and that the carriers competed with Flight Centre in this market. Logan J did not (indeed could not) find that Flight Centre was a supplier of air travel. Instead, he found on the evidence that the airlines and Flight Centre both provided booking and distribution services to customers and that a carrier could “cut out the middle man” and deal directly with customers booking flights via their websites. In making these findings, Logan J relied on:
- Flight Centre emails and other internal documents which indicated that Flight Centre believed that it was competing with the carriers;
- evidence from an expert economist who said that travel agents such as Flight Centre and airlines competed for a “retail or distribution margin” (i.e. if the airline makes the sale, Flight Centre does not, and the airline gets the commission that it would otherwise have paid to Flight Centre); and
- evidence given by two travel agents who considered that they were competing with carriers when booking international air travel.
Flight Centre’s appeal
Flight Centre successfully appealed Logan J’s judgment to the Full Federal Court. Its grounds of appeal all related in one way or another to Logan J’s findings that the relevant market was the market for the supply of distribution and booking services, and that the carriers and Flight Centre competed in that market.
The Full Federal Court allowed Flight Centre’s appeal on the ground that Logan J had made an error in finding that Flight Centre and the carriers competed in a market for distribution and booking services. In the Full Court’s view, Flight Centre’s attempts to persuade the carriers not to undercut its prices was conduct that occurred in a separate market for the supply of international passenger air travel, a market in which Flight Centre was merely acting as the carriers’ agent, and not competing with them.
The Full Court stated that, in its view, Logan J’s characterisation of the market was imprecise, unclear and artificial because it did not reflect how the carriers organised their business structures and conducted themselves when dealing with customers and travel agents .The Full Court concluded that:
- there was no single market for distribution services to the carriers because, although Flight Centre supplied flights offered by multiple airlines (i.e. in addition to the carriers) the carriers only supplied distribution services with respect to their flights;
- booking services were an inseparable part of the sale of passenger air travel services and there was no separate supply of a booking service.
Therefore, Flight Centre did not compete with the carriers for the supply of distribution and booking services to customers. Consequently, there was no attempt by Flight Centre to fix prices with competitors.
Special leave application
The ACCC recently announced that it intended to apply to the High Court of Australia for special leave to appeal the Full Federal Court’s decision. The High Court will only grant special leave if it decides that the Full Federal Court’s decision is of great public significance and that it is an appropriate time for it to reconsider the legal issues that were “in play” in the Flight Centre proceedings.
The outcome of the Flight Centre proceedings centred around issues of market definition and the circumstances in which parties will be considered to be in competition with each other in the defined market. The High Court examined these issues in detail in 1989 when it handed down its seminal judgment in Queensland Wire Industries Pty Ltd v Broken Hill Pty Co Ltd (Queensland Wire). Given that over 25 years have elapsed since Queensland Wire, the High Court may decide that the Flight Centre case is an appropriate vehicle in which to re-examine these issues, and grant special leave to the ACCC.
If special leave is granted, the matter would then be heard by a full bench of the High Court. There are a number of potential outcomes at such a hearing.
One outcome is that the High Court is persuaded to overrule the pragmatic commercially focussed approach adopted by the Full Federal Court and find in favour of the ACCC. That is unlikely in our view. The Full Federal Court’s legal reasoning seems to be solid.
Another potential outcome is that the High Court reviews the market definition principles outlined in Queensland Wire, particularly with regards to the application of those principles in a dual distribution business model of the type adopted by the carriers in Flight Centre. Alternatively, the High Court may simply confirm the continued application of the principles laid down in Queensland Wire and provide guidance as to their application to a dual distribution business model. Neither of these potential outcomes would result in liability for Flight Centre.
Implications for suppliers and distributors
The unease felt by suppliers who sold directly to end users and indirectly via distributors and agents after Logan J’s decision at first instance in Flight Centre went away after the Full Federal Court overruled His Honour. Some of that unease may have returned following the announcement of the ACCC’s intention to seek special leave. Until the Flight Centre case is finally determined (either by the dismissal of the application for special leave or a final ruling by a full bench of the High Court of Australia), companies with a dual distribution business model will still face some uncertainty about the characterisation of their arrangements with their distributors and agents.