Flight Centre’s High Court Loss: Lessons for Principals, Agents and Consumers

When Flight Centre, Australia’s largest travel agent, tried to protect its revenue from the sale of airline tickets for Singapore Airlines, MAS and Emirates, it could not have imagined that it would end up in the High Court defending price-fixing allegations. But that is precisely what happened. And last week the High Court handed down a judgment that will have ramifications well beyond Flight Centre itself.

The ACCC claimed that Flight Centre attempted to persuade the airlines to stop directly selling tickets cheaper than they did through Flight Centre. This is an increasingly important issue as more and more goods and services are sold both directly online and through intermediaries.

Price-fixing involves two or more competitors fixing, controlling or maintaining the price for goods or services they each sell. The essential question in this case was whether or not Flight Centre and the airlines were competitors.

There are two opposing viewpoints. First, Flight Centre could simply be an agent discussing pricing practices with its principals – something that happens naturally in the principal-agent relationship. Alternatively, if Flight Centre and the airlines were to be characterised as competitors when it came to selling airline tickets, even though it might have been the airlines’ agent, their interaction amounted to price-fixing. The majority of the High Court decided that is was the latter.

Flight Centre was clearly the agent of the airlines, under a global agency agreement established by the International Air Transport Association on their behalf. But justices Kiefel and Gagleler took the view that this did not mean they were not in competition. This is because, to the extent that an agent is free to act, and to act in the agent’s own interests, the existence of the agency relationship did not preclude the agent from competing with the principal. Whether or not competition exists is a factual matter depending on the competitive forces at play.

Flight Centre’s authority under their agency agreement allowed it to decide whether or not to sell the airlines’ tickets in the first place, and also to set the own prices. In addition, Flight Centre was free to act in its own interests in selling the tickets, and did so.

The fact that Flight Centre had no proprietary rights in the tickets it sold, was required to hold sale proceeds in trust and remit them to the airlines less commission and was subject to a number of other requirements and restrictions, was not sufficient to remove it ability to compete.

This may end up being one of the most important competition decisions of the year, with ramifications well beyond the international aviation sector. That is because it is common for firms to use multiple distribution channels to distribute their products and services. The airlines sell tickets both through agents like Flight Centre, and through their own websites and apps. Hotels take bookings directly through their websites and by phone, while also using online travel sites. Manufacturers often sell products through franchisees or agents, while also selling directly through the internet. There are countless other examples and many of them will be affected by this decision.

The Flight Centre decision provides guidance on when principals and agents can safely discuss pricing and when they cannot. Where, as is often the case, agents represent a number of suppliers and have pricing discretion, both parties will need to be cautious about discussing pricing practices with each other. Depending on the circumstances this may prove to be quite problematic where the agent receives a commission on the sale price. It will only really be safe to discuss pricing practices when the agent is not permitted to independently determine its own pricing conduct.

All firms that distribute their products though agents as well as through direct channels will need to review their trading relationships and conduct in relation to pricing within those relationships in the light of this decision. Their agents will need to do so as well.

Time will tell whether or not the benefit to consumers being protected from collusion under the guise of agency will outweigh the costs to consumers as a result of suppliers eschewing agency as a vertical method of distribution.

Subscribe toLegal Insight

Discover best practice and keep up-to-date with insights on the latest industry trends.