The lid has been lifted on the shadow world of airline travel agency negotiation in a sensational case that has just concluded in Brisbane, Australia – the home of Flight Centre, one of the world’s largest and most powerful travel agents.
Flight Centre was found guilty of attempting “to induce specified airlines to make collusive arrangements in relation to retail air fares for international air travel” – a Federal Court decision it immediately appealed.
This case goes to the very heart of how the global travel industry operates, where friends can be enemies, and so-called partners fight tooth and nail for the same customer.
Some would argue that this judgement sets a disturbing precedent with potentially widespread ramifications on the way travel does business, determining that it’s not ok for retailers to pressure suppliers for access to all its deals because that reduces competition.
Ergo, price parity, which is an especially big issue for hoteliers and certain online travel agents, is wrong.
In this case, the “collusive arrangements” revolved around Flight Centre trying to gain access to airfares that Singapore Airlines, Emirates and Malaysia Airlines were selling exclusively through their own websites, in some cases AUD500 less than via Global Distribution Systems, during the period from 2005-2009.
So Flight Centre blew up and requested access to these fares or deals.
“It is difficult to be both friend and foe,” read one email. “We are not a charity,” said another.
Further inflaming the situation was Flight Centre’s ‘Flight Beat Guarantee’ which meant its consultants – who make 50% of their wage through commission – were obligated to beat the web fares by $1 despite not having access to the rate.
It also cost head office. Darren Burgess from Flight Centre at one point wrote to Emirates: “We are currently paying out some AUD50K per month to consultants in order for them to make a margin on fares that are matched from the EK [Emirates] website.”
Margin was a common theme throughout negotiations with all the carriers.
“I must again impress on you that we are not a charity and need a margin to operate,” Mr Burgess wrote to Malaysia Airlines.
“I would like to suggest a margin of AUD30 on your cheapest (internet) fares.
“This will ensure that you do not alienate our front-line consultants by not providing any margin and therefore no earn for them personally.
“As explained, if our consultants are consistently not earning money by selling any given product, they will stop offering it as an option to potential clients.
“It is then very difficult to break this habit and get them selling the product again.”
Much of the evidence revolved around Flight Centre’s negotiations with Singapore Airlines (SQ).
Mr Burgess to SQ: “I would like to formally express our opposition & concern at the recent Singapore Airlines (SQ) internet initiative.
“Why you would go out of your way to undercut travel agents in general by such a large amount?
“At a time where we are going out of our way to sell SQ, we are faced with being uncompetitive to the effect of some AUD150-200 per person to a wide range of destinations.
“I am frankly at a loss as to why SQ would want to undermine these initiatives, not to mention alienate our front-line consultants.
“The main problem with these initiatives is the enquiry they generate to our stores – more and more consumers use the internet to shop then bring to us to match.
“The losses we are incurring matching this offer are significant.
“It is difficult to be both friend and foe.”
FLT was also concerned about the SQ strategy acting as an industry catalyst.
“As I am sure you are aware a carrier of SQ’s size commands significant market power and the precedent this sets for other carriers is of great concern,” Mr Burgess wrote.
“We have already seen MH [Malaysia Airlines] come out with something similar using SQ as their justification. If these initiatives continue no doubt all major carriers would follow.”
Under cross-examination Flight Centre MD Graham ‘Skroo’ Turner was asked: “Did you seek to have them [Singapore Airlines] withdraw particular fares from the market?”
“No,” Mr Turner replied.
“We wanted access.
“That was our whole point if they [were] having other fares – cheaper fares.”
For Mr Turner the web fares were a potential deal breaker. In a 2009 email to Subbas Menon, a senior officer of Singapore Airlines, he wrote:
“The web is an issue and may be the clincher why may be best to go our separate ways.
“In the current market with all the seats around we can’t go with all carriers. I would like to hope we can resolve this but I accept we may be out of your court.…”
It was the continuation of a long-running saga between FLT and SQ.
Three years earlier in March 2006 Mr Burgess had written to the carrier: “Last year there were many instances where SQ either undercut or allowed us an insignificant margin.
“Whilst you have every right to explore different distribution channels, there must be acknowledgment that these excursions eat into the available market, not to mention alienate our consultants.
“As you know, our consultants are paid 50% based on commission on profit. The less margin, the less likely a consultant will want to sell it, it stands to reason.”
There were also issues with Emirates.
Mr Burgess to local Emirates manager Stephen Pearse: “Even though EK [Emirates] have reduced commission from 9 to 7%, you are still discounting 4% on the web. This leaves our consultants a margin of 3%, not a lot I am sure you agree.
“With the additional rewards you give to book online why is it necessary to also discount the fare? You say we earn 7% but in fact in many instances now we are only able to earn 3% because of this offer.
“For your information, we are currently paying out some AUD50K per month to consultants in order for them to make a margin on fares that are matched from the EK [Emirates] website.
“Additional mileage offers online are also continuing to cause great difficulties for us in retaining customers. As I have said before, even Qantas can make the same offers available to us as they do direct to the consumer.
“Why would a consumer book through us if you can earn more (frequent flyer) points online AND receive a 4% discount if booked online (direct) AND receive a discount of 10% on their accom in DXB by paying with Mastercard (direct)?”