Flight Centre Limited (ASX: FLT) announced on Friday 9th March 2012 (after market close), that the Australian Competition and Consumer Commission (ACCC) has instituted proceedings in the Federal Court in Brisbane against the company, alleging that Flight Centre attempted to induce competitors to enter into price fixing arrangements with it.
The ACCC has alleged that, on six occasions between 2005 and 2009, Flight Centre attempted to induce international airlines Singapore Airlines, Malaysia Airlines and Emirates to agree to stop directly offering and booking their own international airfares (including over the internet) at prices less than Flight Centre offered.
The ACCC alleges that Flight Centre's prices include both the airfare (which is paid to the airlines) plus the commission that Flight Centre retained for its booking and distribution services. The allegation is that the main purpose and likely effect of the arrangements sought by Flight Centre was to maintain the level of Flight Centre's commissions.
Simple English please
What the ACCC is basically alleging is that Flight Centre asked the airlines mentioned above to stop selling airfares below Flight Centre's prices. The main purpose is to stop consumers booking flights directly with the airlines mentioned above, rather than using Flight Centre's agents. This would result in less commission for Flight Centre.
It also erodes Flight Centre's brand, by not being able to offer the same low prices, unless they were prepared to take little or no commission on sale of airfares for those airlines.
Flight Centre's argument
Flight Centre's Managing Director, Graham Turner said the ACCC action, related to legitimate discussions between Flight Centre and some airlines to ensure the company had access to all fares that were released to the market. He also said that Flight Centre had clearly outlined its position to the ACCC almost three years ago, when the ACCC first requested information and would vigorously defend the case.
"[Flight Centre] is not in the business of making airfares more expensive and does not ask suppliers to raise prices or to withdraw fares. As an agent, Flight Centre asks for adequate commissions and also reasonable access to all fares that they release to the market," he said.
Mr Turner told the Australian Financial Review that based on legal advice, the chances of Flight Centre losing were "very, very slim". The impact on Flight Centre is also likely to be minor, should the ACCC win, and is likely to take a few years to reach a conclusion.
How it started
In 2009, Flight Centre terminated 2009/2010 preferred contract negotiations with Singapore Airlines, stating unattractive contract offerings that would have led to uncompetitive customer offerings. This meant that Flight Centre agents would instead recommend other airlines instead of Singapore Airlines, but customers could still book Singapore Airlines airfares if that's what they wanted.
I suspect that Singapore Airlines refused to price flights at a level which left Flight Centre with hardly any commission, compared to the commissions other international airlines paid to Flight Centre. This follows on from Singapore Airlines' decision in 2008 to stop paying commissions to Indian travel agents. That resulted in Indian Travel agents boycotting the sale of Singapore Airlines tickets.
Flight Centre now has preferred supplier agreements with all three above-mentioned airlines (it would be interesting to know what the agreement with Singapore Airlines looks like). It's unlikely that 2012 profits will be affected by the ACCC action.
The share price has fallen marginally from $21.67, when I wrote this article on 23rd Feb 2012, down to the current price of $21.06, (down 1.5% today), and still looks cheap to me.
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Motley Fool contributor Mike King owns shares in Flight Centre. The Motley Fool's purpose is to educate, amuse and enrich investors. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson. Click here to be enlightened by The Motley Fool's disclosure policy