Alleged attempt 1 - Singapore Airlines
81 This alleged attempt relates to an email sent on 19 August 2005 by Mr Darren Burgess to Mr Kieran O'Toole of Singapore Airlines (Ex 1, Tab A25). That this email was sent is not contested. In sending that email, Mr Burgess did so on behalf of Flight Centre.
82 The email of 19 August 2005 is not the only evidence relevant to whether this particular alleged attempt is proved. That same observation applies, mutatis mutandis, to each of the other Flight Centre communications which respectively form the centrepiece of the other alleged contraventions. Considering the evidence as a whole, what is revealed is a concerted pattern of reactive corporate conduct by Flight Centre, reactive to a threat it perceived to be presented by the direct retail offering by airlines of air travel at fares it could not offer to retail customers, as opposed to a series of unrelated, isolated, idiosyncratic aberrations. Events after 19 August 2005 cast light on what to make of the email sent that day and, by the same token, what to make of the later allegedly contravening communications is relevantly measured by viewing them as part of a continuum of conduct by Flight Centre. Each of the parties conducted their cases on that footing as, for example, will be seen in the way in which Mr Burgess was examined in chief as to the email of 19 August 2005 in a passage which I set out below.
83 For these reasons, it is also convenient to make, in the course of considering whether or not alleged attempt 1 is proved, some general findings as to the nature of the market in which Flight Centre operated and to discuss issues of law of general relevance.
84 In the email of 19 August 2005, Mr Burgess stated:
I would like to formally express our opposition & concern at the recent Singapore Airlines internet initiative.
At a time where we are going out of our way to sell SQ [Singapore Airlines], we are faced with being uncompetitive to the effect of some AUD150-200 per person to a wide range of destinations.
Whilst you may not be seeing a significant increase in web sales 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 matchings this offer are significant.
As I am sure you are aware a carrier of SQ's [Singapore Airlines'] size commands significant market power and the precedent this sets for other carriers is of great concern. We have already seen MH [Malaysia Airlines] come out with something similar using SQ [Singapore Airlines] as their justification. If these initiatives continue no doubt all major carriers would follow.
Whilst our current initiatives have not met our sales expectations to date, they should be seen in the light of an overall slowing in the outbound international market. We have both committed significant money to these initiatives and I am frankly at a loss as to why SQ [Singapore Airlines] would want to undermine these initiatives not to mention alienate our front-line consultants at a time of significant SQ [Singapore Airlines] focus and when we are about to begin a major campaign. The other question is why you would go out of your way to undercut travel agents in general by such a large amount - is a nett nett not enough?
As you know we are not growing at the same rate as we have historically and therefore need to be more strategic in our control of distribution so it is important for us know SQ's [Singapore Airlines'] future intentions here and be assured of your commitment to the agency distribution network. It is difficult to be both friend and foe.
I look forward to your response.
85 In the course of Mr Burgess' evidence during at trial it emerged and I find that, at time this email was sent, he was negotiating, on behalf of Flight Centre, with Singapore Airlines about entry into a preferred airline agreement (cf. T.274, LL37-42). Ultimately, such an agreement was reached for the 2006-2007 year (T.283, LL29-31) - the SQ Agreement 2006-2007.
86 Three days before this email was sent, Mr Burgess sent internal emails to another Flight Centre employee, a Mr Tim Hayden, about a number of "price beats" that Flight Centre had been granting to customers in order to match a promotion that Singapore Airlines was then inviting on that airline's website would-be passengers to take up directly with it. These "price beats" had been offered in accordance with Flight Centre's "Price Beat Guarantee" policy. On 16 August 2005, Mr Hayden sent an email to Mr O'Toole of Singapore Airlines asking if he [Mr O'Toole] could "help us with price beats?" (Ex 1, Tab 22). Mr O'Toole, who inferentially well understood what a "price beat" was, replied the next day, "these online fares are a short term initiative associated with our major sponsorship of the City to Surf in Sydney and the launch of our new website." (Ex 1, Tab 22). The reply from Mr Burgess, on behalf of Flight Centre, reproduced above, is what followed.
87 The Commission's case (para 38, ASOC) is that the effect of the email of 19 August 2005 was to propose that:
Flight Centre and Singapore Airlines make an arrangement or arrive at an understanding;
a provision of that arrangement or understanding would be that any particular fare that Singapore Airlines offered through its Internal Sales Division to customers:
(i) would also be made available to be purchased through Flight Centre; and
(ii) would be sold by Singapore Airlines at a total price, including any charge for its booking services, of no less than the total of:
(a) the nett fare; plus
(b) the commission that Flight Centre would be entitled to be paid for its services if Flight Centre had sold that fare to a customer.
88 The reference to an "Internal Sales Division" of Singapore Airlines is something of a distraction. That, organisationally and internally, Singapore Airlines may have ordered its affairs such that a particular division within the airline had responsibility for direct retailing of air travel cannot alter the position that, in law, when that airline sold air travel directly to the public it was the airline itself as a legal entity which was so selling air travel, not its "Internal Sales Division". It is also air travel by that airline, not any "Internal Sales Division", which Flight Centre offered to would-be passengers and, on the basis and at the fares set out by Mr Burgess in his email, wanted to offer.
89 The Commission submitted that, having regard to the terms of the email, it should be concluded that Mr Burgess and thus Flight Centre:
(a) was asking Singapore Airlines to agree to something, namely to commit to the agency distribution network, i.e. to permit Flight Centre to sell all fares on behalf of the airline;
(b) was asking Singapore Airlines not to do something, namely to stop selling fares on the internet at a price lower than that which was available to Flight Centre (to the extent of $150 - $200 per person);
(c) was stating to the airline that its (the airline's) conduct was causing Flight Centre significant losses;
(d) was stating (at least implicitly) that if the airline did not alter its behaviour, the Flight Centre would be 'more strategic in our control of distribution', which should be read as that Flight Centre would act in a way that would adversely affect the airline.
90 For its part, Flight Centre submitted that the alleged attempt could not be established because Mr Burgess' email omitted matters that one would expect to find in it, having regard to the provision said to form part of the arrangement pleaded by the Commission. More particularly, Flight Centre submitted that the email is silent as to the following:
(a) the nett fare;
(b) the commission to which Flight Centre would be entitled; and
(c) logistical arrangements regarding the arrangement including:
(i) how the Flight Centre would be given access to direct fares;
(ii) the amount Flight Centre would need to remit to the Singapore Airlines for the fares; and
(iii) whether back-end commission would be earned on those fares.
91 In his evidence, Mr Burgess accepted that low direct fares presented at least three problems for Flight Centre: the potential loss of a sale; the potential loss of a commission; and they operated as a disincentive to its employed, partially commission share rewarded consultants (T.316).
92 Flight Centre further submitted that, if an airline sought to sell at a lower fare than the published fare, it was not Mr Burgess's purpose to prevent it, but rather to have access to that fare. In this regard, Flight Centre relied on an exchange on this subject between its senior counsel, Mr Doyle SC and Mr Burgess in re-examination (T.329, LL42-47):
MR DOYLE SC: Okay. What I wanted to ask you was if the airline, whichever it was, sought to sell for less than that published fare, were you seeking to have that lower fare made available to you?
MR BURGESS: Yes.
MR DOYLE SC: Thank you. And tell me if we need to differentiate. Is that true of each of the various dealings, the episodes that you have been taken to?
MR BURGESS: Yes.
The latter question and answer exemplifies why I made the earlier observations as to a revelation of a concerted course of reactive corporate conduct by Flight Centre and as to the basis upon which the case was conducted.
93 Viewed in isolation, this account by Mr Burgess as to the reason for his sending this email and each of the others authored by him is consistent with a statement made by Mr Turner, who was the personification of the highest level of management in Flight Centre, in the latter part of an answer which he gave the course of his evidence in chief (T.344):
MR DOYLE SC: Did you seek to have them [Singapore Airlines] withdraw particular fares from the market?
MR TURNER: No. We wanted access. That was our whole point if they [were] having other fares - cheaper fares.
94 The extent, if at all, to which the blunt negative which formed the first part of Mr Turner's answer should be accepted requires further analysis in light of other evidence in the case, including his own. Was it "access" at all or alone which was sought or did Flight Centre seek or at least additionally or alternatively seek that the airlines in question withdraw from undercutting by direct sale fares the published fares on the GDS for particular flights? Further, the question posed of Mr Turner leaves unidentified the market concerned.
95 Over the material period, the financial cost to Flight Centre of honouring to its customers its "Price Beat Guarantee" policy, arising from the ability of those customers to cite to it a lower fare directly available from an airline via that airline's website, was of enduring and increasing commercial concern to Flight Centre. Mr Turner confirmed as much in the course of his cross examination (T.349). The operations of each of the three airlines in question in the present case, but especially those of Singapore Airlines, gave rise to such consequential "price beat" costs and that concern. A separate but not unrelated concern of Flight Centre was never seeing "the sale" at all, because of a choice made by a would-be customer, in light of the availability of a lower fare, to deal directly with an airline via its website.
96 That is not to say that addressing these adverse financial impacts on Flight Centre, which included consequential "price beat" costs, were the only imperative in its dealings with each airline, only that it was one consideration for Flight Centre in those dealings and an important one at that. The amount, nature, eligibility criteria (revenue or ticket targets, for example) and composition of commissions and other income to be earned by Flight Centre were other considerations in those dealings.
97 The importance to Flight Centre of addressing the impact of loss of "sales" and of consequential "price beat" costs is most starkly illustrated in the negotiations with Singapore Airlines in relation to a preferred airline agreement for the 2009/2010 year but it was a commercial consideration for Flight Centre throughout the whole of the material period. An aide memoire was prepared within Flight Centre in preparation for a meeting on 6 April 2009 with Singapore Airlines representatives concerning that proposed agreement (Ex 1, Tab 77). The following items appear in that aide memoire:
Under the heading "Questions"
Will FCL [Flight Centre] have parity with all SQ [Singapore Airlines] web offers including frequent flyer offers?
Can SQ guarantee FCL that we won't be undercut later special offers? If subsequent offers are available will SQ refund the difference?
Under the heading, "Wish list"
Allow FCL access to all competitor fares for price beat purposes only.
98 This aide memoire was prepared at a time when no proceedings by the Commission were in prospect. It is not a contrived document. Rather, it gives a contemporary insight into Flight Centre's corporate thinking. The "Questions" set out in this document were questions which Flight Centre sought to have answered in its negotiations with Singapore Airlines. Those questions were posed because their subjects were then commercial concerns held by and related, remedial aspirations of, Flight Centre. The "wish list" items were also aspirations of Flight Centre. This aide memoire nicely encapsulates the two, not one, goals of Flight Centre, which endured throughout the material period and which permeated each of its dealings with the airlines in question - access and parity ("won't be undercut").
99 Another contemporary insight into Flight Centre's concerns and aspirations is offered by an email of 6 April 2009 (Ex 1, Tab 82) sent by Mr Turner to Mr Subbas Menon, a senior officer of Singapore Airlines and copied to other officers of that airline. This email, too, was generated in the context of negotiations with respect to a proposed preferred airline agreement for the 2009/2010 year. Mr Turner sent the email on behalf of Flight Centre. It was responsive to an email which Mr Menon had earlier sent in which proposals were made on behalf of Singapore Airlines as to the terms of a 2009/2010 agreement. One of the comments which Mr Turner made (item 4) was this:
4. The web is an issue and may be the clincher why may be best to go our separate ways. In this case we may allow consultants to book anything they have to through the SQ website.
In concluding this email, Mr Turner observed:
Subbas 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. …
100 In the course of his cross-examination, the following exchange occurred between the Commission's senior counsel, Mr Wilson SC, and Mr Turner:
MR WILSON SC: But when you were having these discussions either via email or at a meeting with representatives of Singapore Airlines, your position is we want these fares on the GDS as published fares?
MR TURNER: Yes, and for two reasons, one because we want the price on that and we want the distribution through the GDS for ease of distribution for us.
MR WILSON SC: And so that Flight Centre earns a commission?
MR TURNER: Well, that would be assumed, yes, but, as I say, it's not always the case. We do have a fallback, even if we don't get the actual fully commissionable fares and different fares have different commission levels on at time, it's the access that's important as well as the actual airfare itself and the margin.
MR WILSON SC: I accept what you've just said, but what you were proposing to Singapore, that is, your desire was that it be loaded onto the GDS as a commissionable fare?
MR TURNER Yes.
101 Mr Turner later in his oral evidence downplayed the importance in negotiations for Flight Centre of Singapore Airlines making available to Flight Centre the same fare as that airline offered directly to the public via its website. That struck me as at odds with the language - "may be the clincher" - Mr Turner had himself used in his email of 6 April 2009. I prefer Mr Turner's contemporary assessment in his email of 6 April 2009 of the importance of the issue to that which he gave in his oral evidence. The significance of the passage from his oral evidence just quoted lies in its confirmation that two factors were at large in Flight Centre's dealings with Singapore Airlines. Flight Centre did not just want access to the same fare as the airline sold the air travel directly to the public; it wanted that fare to be made available to the GDS as a "published fare" on which it would earn commission. In short, it wanted Singapore Airlines to stop undercutting, by the fares it offered directly via its website, the published fare on the GDS for the same flight. In that way, Flight Centre's commission margin on the fare would not be subject to the dramatic reduction that would occur if the fare were not made available to the GDS and, instead, Flight Centre were faced with the prospect, via its "Price Beat" policy, of having to better it as a fare otherwise available to customers via direct sale by the airline. Further, fare parity would reduce for Flight Centre the prospect of never seeing the would-be passenger at all, because of an attraction offered by a lower fare directly from the airline. What Mr Turner's answer as to "wanting access" concealed but his email of 6 April 2009 revealed was that Flight Centre wanted Singapore Airlines to cease offering directly to the world at large via its website fares that were lower than the published fares it made available to Flight Centre via the GDS.
102 The relative advantages and disadvantages for Flight Centre of an airline either making its direct sale fare available to Flight Centre via the GDS, or at least not selling directly to the public air travel at less than its published fare on the GDS, as opposed to that airline adhering to selling directly to the public at a fare less than the published fare on the GDS, were candidly and accurately explained by Mr Burgess in an example which he gave in the course of an examination of him conducted under s 155 of the TPA the transcript of which was in evidence:
MR BURGESS: They pay pretty much everyone nine per cent commission, and then you've got an agreement over and above that which is based on volume - agreed volume targets. So they pretty much pay everyone the same. So in this instance, they would be offering a four per cent discount, so the consumer would get the fare for 960, using the $1,000 example. We're getting if for 910. They're not really giving us nine per cent, was my point. So instead of the $90 commission that we would normally make, we were only making 50, or the consultant's only making 50. Our consultants try and make as much money as they can, and if they continually come up against a situation where their earnings are inhibited, they're less likely to offer that product, which means we're probably less likely to reach out the targets that we've agreed to.
…
MR BURGESS: We have to beat the fare that's put in front of us. So it would be, in this instance, 960, not 1000.
MR KELLY: And you are able to beat that price in this instance by acquiring the fare that Emirates still for 910 - - -
MR BURGESS: Yes.
MR KELLY: - - - but with a reduced margin payable. Is that what you're saying?
MR BURGESS: That's correct.
…
MR KELLY: - - - is that when it comes to remit the margin, you ordinarily say you're automatically entitled on an Emirates sale to remit nine per cent, as I understand it.
MR BURGESS: Yes.
MR KELLY: That's pursuant to some - is that a contract with Emirates, or just the terms on which Emirate make their fares available on the GDS?
MR BURGESS: Yes, it's not really a contract, no. It's not written anywhere that we get nine per cent, but that's the standard industry rate that every travel agent gets.
MR KELLY: Right. An so when you remit the margin at the point of $960 ticket being processed, what is the margin on that?
MR BURGESS: Still nine - it's nine per cent off the gross level. So we would be remitting, whether a customer came into our store with an Emirates quote giving a four per cent discount, or whether we're quoting them direct, it doesn't make any difference to the nett level. It's still $910 in this example.
MR KELLY: Right
MR BURGESS: So we just would not make as much money on that customer.
Extrapolating this example so as to illustrate the benefit to Flight Centre of an airline making the direct sale fare available to Flight Centre via the GDS, or at least not selling directly to the public air travel at less than its published fare on the GDS, were the same, lower fare of $960 made available by the airline to the GDS with the customary 9% commission retained, Flight Centre's commission income would be $86.40.
103 These relative advantages and disadvantages for Flight Centre were not confined to any one of the airlines in question but were, instead, pervasive during the material period. The three "problems" mentioned by Mr Burgess are highlighted by the examples given in the preceding paragraph. A would-be passenger, aware of the lower fare directly available from the airline, may not go to Flight Centre at all, thus depriving Flight Centre of undertaking a transaction (making the "sale") that would yield or count towards the yielding of commission for it from the airline. If the would-be passenger, aware of the lower direct fare chose to deal with Flight Centre and brought that to its attention, Flight Centre's "Price Beat Guarantee" policy would be applied and inevitably lead to lower net income for it from the transaction for the booking of that air travel.
104 When these "problems" for Flight Centre are understood, its "Price Beat Guarantee" policy appreciated and contemporary communications by Flight Centre with the airlines and the aide memoire are examined, Mr Turner's negative answer to whether Flight Centre wanted the airlines to withdraw and his statement that, "We wanted access" truly does, as I have explained, conceal as much as it reveals. The word which is common to Mr Burgess' email of 19 August 2005 early in the material period and the internal aide memoire prepared late in the material period is "undercut". That is what Flight Centre was seeking to prevent by arrangement or understanding with each of the airlines concerned. The following answers (T.317) given by Mr Burgess in the course of cross examination concerning each of the five emails authored by him, which respectively form the basis of five of the alleged contraventions reveal rather than conceal this:
MR WILSON SC: And that in the five instances or the five occasions to which you were specifically taken yesterday, when you were asking for a fare to be made available to Flight Centre, it carried with it that meaning, that is, a fare that was going to be loaded onto the GDS and would attract a commission?
MR BURGESS: Ideally, yes.
MR WILSON SC: That's what you were asking for?
MR BURGESS: Yes.
MR WILSON SC: And if the fare was then made available - I appreciate you said that sometimes it wasn't, but if it was made available, Flight Centre would know at the time it sold that fare the percentage at-source commission it was entitled to?
MR BURGESS: Yes.
MR WILSON SC: Thank you. Now, we're aware from documents, and you gave some evidence about this yesterday, that from time to time, international airlines offer to sell flights - or fares, I should say, directly to customers via their websites at a price lower than the published fare?
MR BURGESS: Yes.
MR WILSON SC: Can I suggest to you that when you use the word "undercut", what you mean is what I've just described to you, that is, that the airline is offering for sale the flight, or the - I'm sorry, the fare at a price less than the published fare?
MR BURGESS: Yes.
Overall, I found Mr Burgess to be a more candid witness than Mr Turner.
105 Flight Centre put forward (para 28, Defence) that the relevant market was the market for the supply of international air passenger services. That market was but one of a number of alternative markets postulated by the Commission. Others were a market for booking services in respect of air travel and a market for the distribution of air travel.
106 Was the market in which Mr Burgess sent each of his emails and in which Mr Turner sent his email of 6 April 2009, as Flight Centre's contended, aptly described as "the market for the supply of international air passenger services"? Or was so to describe the market to conflate separate but closely inter-related markets, a market for the provision by air carriers of air travel itself, i.e. a flight between given destinations and a market for the distribution and a market for the distributing to the would-be passenger/consumer of the flights made available by air carriers and the booking of the same?
107 "Market" is a defined (s 4E) term in the TPA but that definition has a circular feature ("market" means a market …) which leaves the meaning of what constitutes a market to general principles of statutory construction:
4E Market
For the purposes of this Act, unless the contrary intention appears, market means a market in Australia and, when used in relation to any goods or services, includes a market for those goods or services and other goods or services that are substitutable for, or otherwise competitive with, the first-mentioned goods or services.
[emphasis in original]
108 Much has been written in the authorities, to say nothing of in texts and journals, about the meaning of the word "market" for the purposes of the TPA. At least for the purposes of this case, I consider that everything that needs to be said on that subject was, with respect, succinctly and accurately stated and summarised by French J (as his Honour then was) when a member of this Court in Australian Gas Light Company v Australian Competition and Consumer Commission (2003) 137 FCR 317 at [378] to [379] (AGL) and, earlier in time, by the then Trade Practices Tribunal in Re Tooth & Co Ltd (1979) 39 FLR 1 to which French J refers in the passage quoted:
378 The concept of market describes, in a metaphorical way, an area or space of economic activity whose dimensions are function, product and geography. A market may be defined functionally by reference to wholesale or retail activities or a combination of both. The concept of product encompasses goods and services and, having regard to the definition of "market" in s 4E, includes the range of goods or services which are substitutable for or competitive with each other.
379 The process of market definition was expounded in QCMA where the Tribunal defined "market" as the area of close competition between firms and observed that substitution occurs within a market between one product and another, and between one source of supply and another in response to changing prices (at 190):
So a market is the field of actual and potential transactions between buyers and sellers amongst whom there can be strong substitution, at least in the long run, if given a sufficient price incentive.
In Re Tooth & Co Ltd (1979) 39 FLR 1, the Tribunal identified the task of market analysis as involving:
1. Identification of the relevant area or areas of close competition.
2. Application of the principle that competition may proceed through substitution of supply source as well as product.
3. Delineation of a market which comprehends the maximum range of business activities and the widest geographic area within which, if given a sufficient economic incentive, buyers can switch to a substantial extent from one source of supply to another and sellers can switch to a substantial extent from one production plan to another.
4. Consideration of long run substitution possibilities rather than shortrun and transitory situations recognising that the market is the field of actual or potential rivalry between firms.
5. Selection of market boundaries as a matter of degree by identification of such a break in substitution possibilities that firms within the boundary would collectively possess substantial market power so that if operating as a cartel they could raise prices or offer lesser terms without being substantially undermined by the incursions of rivals.
6. Acceptance of the proposition that the field of substitution is not necessarily homogeneous but may contain submarkets in which competition is especially close or especially immediate. This is subject to the qualification that competitive relationships in key submarkets may have a wide effect upon the functioning of the market as a whole.
7. Identification of the market as multidimensional involving product, functional level, space and time.
[In the passage quoted by French J, "QCMA" refers to the Tribunal's decision in Queensland Co-operative Milling Association Ltd, Re; Re Defiance Holdings Ltd (1976) 25 FLR 169]
Thus, a market is not an artificial economic construct but rather a place, actual or nominal but recognisable not just by economists but also by its participants, be they suppliers or consumers, in which forces of supply and demand interact in the conduct of trade, a profession or commerce.
109 The expert economist, Dr Vincent Fitzgerald, gave careful and helpful oral and written evidence which assists in the answering of the question as to the market in which Flight Centre operated and whether the airlines were competitors in that market. In the result, Dr Fitzgerald was the only economist whose evidence was tendered in the case. That does not mean that his evidence must be accepted, only that there was no competing economic evidence led. Dr Fitzgerald was closely cross-examined on the opinion evidence which he gave but did not, in my assessment, resile from the opinions which he expressed in his reports.
110 One of the questions (Question 1) posed to Dr Fitzgerald, which he addressed in his report of 17 August 2012 (Ex 11A) was, "Do travel agents, including Flight Centre Limited, compete with international airlines, including Emirates, Singapore Airlines and Malaysia Airlines, for the supply of any services to customers?" In that report (para 17 to 19), Dr Fitzgerald opined:
17. Thus my answer to Question 1 is that travel agents do complete - horizontally - with international airlines at the retail level of the international travel market. This is very clearly so, since if one makes the sale, the other does not. What they are competing for at this level, of course, is the retail or distribution margin - since whichever does make the sale, an airline provides the flight (i.e. the actual core travel service) and the airline receives either:
(a) if a travel agent makes the sale, the nett fare - i.e. the gross fare inclusive of all taxes, surcharges and fees less the commission and fees that are retained by the agent. The nett fare is in the nature of a wholesale price, although the travel agent is indeed an agent in a narrow sense - that is, does not actually purchase the flight and re-sell it, but rather, sells it on the airline's behalf; or
(b) if the airline makes the sale through one of its own channels, the gross fare, inclusive of all taxes, surcharges and any fees of its own (e.g. credit card fees and any other service fees), i.e. in this case it retains the full retail or distribution margin itself.
18. Thus, in my opinion, by competing at the retail level of the international travel market, travel agents are competing not only with each other but with airlines' ISDs to provide the distribution services that airlines require in order to sell their travel products (as well as competing with those ISDs to provide travel arrangement services to customers).
19. Of course travel agents are also in a vertical (and in theory complementary) relationship with airlines. The airlines are at both the upstream and the downstream levels of the market, whereas travel agents operate only at the downstream (selling) level. Airlines rely on travel agents, indeed depend heavily on them, to sell their travel products. They offer them commission - both up-front commissions and generally performance-related 'back end' commissions - to do so. The latter are in the nature of principal/agent incentive mechanisms, which are common in vertical relationships (typically between a manufacturer/wholesaler and a retailer).
[footnote references omitted]
[emphasis in original]
The abbreviation "ISD" refers to the internal sales department within an airline. As I have mentioned above, an internal sales department is not an entity separate from the body corporate which is the airline itself. The force of Dr Fitzgerald's opinion loses nothing by reminding oneself of the legal entities entailed.
111 Dr Fitzgerald's use of the terms "horizontal" and "vertical" in the passage quoted also requires comment. These are descriptive terms employed in the discipline of economics. It is only natural therefore for Dr Fitzgerald to employ them. They are not terms found in s 45 and s 45A of the TPA. It is by reference to the language employed in these sections, not whether the relationship between the airlines in question and Flight Centre might be described as "horizontal" or "vertical" or having features of both that the question of whether Flight Centre has, as alleged, attempted to induce contraventions must be measured. In the High Court, while this economic terminology has been employed in a general description of Part IV of the TPA, that cautionary note has also been sounded. Thus, in Boral Besser Masonry Ltd v Australian Competition and Consumer Commission (2003) 215 CLR 374 at [158] (Boral Besser Masonry) Gaudron, Gummow and Hayne JJ made this general observation in relation to Part IV:
Part IV of the Act proscribes various practices in respect of pricing which merit the epithet "restrictive" in the heading for that Part. For example, s 45A deems certain horizontal price-fixing arrangements between competitors to be likely substantially to lessen competition and therefore to be unlawful under s 45 …
[emphasis added]
In that same case, at [354] and [425], Kirby J also employed the terms "horizontal" and "vertical" to describe relationships in a market. Even so, in a case decided later that same year, Visy Paper Pty Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 1 at [23] to [26] (Visy Paper), Gleeson CJ, McHugh, Gummow, and Hayne JJ cautioned, in relation to the construction of s 45 and, in particular, s 45(6) of the TPA:
23. In identifying the operation to be given to s 45(6), it is not useful to adopt a description of the relevant arrangement as "horizontal " or " vertical ". There are at least three related reasons why that is so.
24. First, the Act does not adopt a classification which uses those terms. Adopting them confuses the task of construing the Act's provisions. It is necessary to pay attention to the text of applicable statutes in preference to judicial or other glosses on that language. Not only does adopting these terms distract attention from the language of the Act, it does so by introducing terms which are, so it seems, intended to convey value or other judgments about the social or economic consequences that are assumed or expected to follow from the making of or giving effect to the arrangement to which one of these descriptions is applied. Much turns, therefore, on both the content given to the terms and the validity of the assumptions about consequences that their use entails.
25. Secondly, and no less importantly, employing the descriptions of " horizontal " and " vertical " appears intended to adopt, or at least runs a serious risk of inviting the adoption of, the usage of such terms in the wholly different statutory context of United States antitrust law. In particular, the use of these terms invites attention to the distinction drawn in the antitrust law of that country between arrangements which are to be condemned as "per se" violations of antitrust law and arrangements which are to be tested against the so-called "Rule of Reason". As Judge Posner rightly has written, "[t]hese are not illuminating terms. What they gesture at is the distinction, fundamental in law, between a rule and a standard." (emphasis added) It is unhelpful to use the language of gesture in preference to construing the statute.
26. Even in the United States, "horizontal" and " vertical" are not terms having agreed or fixed meanings. They are jargon, used as shorthand descriptions, sometimes conveying different meanings to different readers. Moreover, it is not accepted in that country that their use necessarily entails any conclusion about the economic consequences of the arrangement. As Professor Hovenkamp points out, "[s]imply to conclude that an agreement is horizontal establishes nothing about whether it is competitive or anticompetitive".
[footnote references omitted]
[emphasis in original]
112 What I take from Dr Fitzgerald's opinion is that Flight Centre competed not just with other travel agents such as Webjet or Travel by Tracey but also with, respectively and materially, Singapore Airlines, Malaysia Airlines and Emirates in relation to the distribution to and booking of available flights for would-be passengers. The reward available in the competition between them was for what Dr Fitzgerald termed in the passage quoted, "the retail or distribution margin". This margin formed part of the grossed up fare paid by a would-be passenger when the air travel was sold.
113 The precise nature of the market which Dr Fitzgerald apprehended existed is apparent from the following further passage in his report of 17 August 2012 (Ex 11A):
3.2.2 The Market
23. In my opinion it is best to identify only a single market in which travel agents compete for the supply of both of the services specified at (i) and (ii) in para 21 of sub-section 3.2.1 above [booking services and distribution services]. That market is the downstream or distribution functional level of the overarching market for international travel and ancillary products and is distinct from, but obviously intimately linked to, the market for the supply of those products themselves, which is essentially the upstream or wholesale level of the overarching market for international travel and ancillary products.
24. I note that the ASoC (paras 26 and 28) states both that there is a market in Australia for the supply of distribution services in Australia to international airlines and a market in Australia for the supply of booking services in Australia, to customers. In my opinion, while these are distinct services provided 'upwards' to airlines and 'downwards' to customers, respectively, they are best regarded as being inherently provided simultaneously in a single market.
[emphasis in original]
114 Some observations ought to be made to objections which were taken to Dr Fitzgerald's reports. First, for the reasons which I set out in these reasons for judgement, I do not accept that the Commission has not established that Flight Centre did not propose a provision which would prevent the airlines concerned from selling their air fares below a specified floor. The repeated exhortation by Flight Centre in correspondence with the airlines not to "undercut" or "undermine" is pregnant with just such a provision. Next, I have not found it necessary, in order to decide whether the alleged attempts are proved, to delve into whether the marginal cost to an airline of selling fares directly through a website it maintained is or is not lower than the marginal cost of selling fares via a travel agent such as Flight Centre. The objection directed to this assumption made by Dr Fitzgerald does not affect those parts of his evidence which I have expressly cited and is not necessary to resolve. I accept that so much of section 4 of Dr Fitzgerald's report as comments upon a report prepared by Dr Williams (an expert consulted but not called to give evidence by Flight Centre) should be excluded.
115 Objection was also taken to parts of Dr Fitzgerald's first report [paragraphs [60], first sentence, [63] (from therefore) and [65] (last sentence) and to the conclusion in his second report that the arrangement which he assumed would have the likely effect of "fixing, controlling or maintaining" the price for booking and distribution services. It was put that these passages were irrelevant because:
(a) he did not state what he understood the phrase "fixing, controlling or maintaining" to mean - I over-rule the objection on this ground because it is at odds with s 80(a) of the Evidence Act, which abolishes the rule that opinion evidence is inadmissible because it goes to an ultimate issue. At most, this ground now goes to weight. As to that, Dr Fitzgerald's use of "fixing, controlling or maintaining" did not strike me as idiosyncratic or contrary to how these words are to be construed; rather the conclusion which he reached struck me as logical and according with common sense.
(b) there is no pleaded case that the price for the booking and distribution services was fixed or controlled - I over-rule the objection on this ground on the basis that it is at odds with the amended statement of claim and the manner in which the Commission put its case against Flight centre at the trial.
116 Dr Fitzgerald's opinion accorded with the perceptions of Mr Clarke of Webjet and Ms Schwass of Travel by Tracey. They saw themselves as conducting business in just such a market and, further, that direct sales by airlines were competition in such a market.
117 Flight Centre also regarded itself as operating in such a market and subject to competition not just by travel agents or other distributors but also by airlines. The perception of airlines as competitors in such a market lies behind the three "problems" identified by Mr Burgess. Flight Centre's contemporaneous correspondence and other corporate documents in evidence are replete with this same perception, for example:
• Mr Burgess' email of 12 July 2005 to a number of Emirates officers, copied internally to various Flight Centre staff - "internet level playing field" (Ex 1, A19).
• Mr Burgess' email of 18 August 2005 to Mr Egan of Malaysia Airlines - "The problem with these specials is the enquiry they generate to our store - consumers more and more use the internet to shop then [sic] bring it to us to match." (Ex 1, A24).
• Flight Centre's 4 year Strategic Plan of November 2007 - "SWOT Summary" - identified "External Threats" include "Supplier competition, suppliers developing direct relationships with customers" (Ex 1, A30). In the sense used in this document and materially, Singapore Airlines, Malaysia Airlines and Emirates were each, during the material period, "suppliers".
• Flight Centre internal document headed "FCL Group London May 2008 - Top Strategic Elephants and the Top Strategies to Address Them" - Under the Heading "SWOT Analysis & Strategic Elephants", the identified "Threats" include, at item 3, "Dependency for profits on major suppliers who are also competitors" (Ex 1, A43). Once again and in the sense used in this document and materially, Singapore Airlines, Malaysia Airlines and Emirates were each, during the material period, "suppliers".
• Flight Centre's 5 year Strategic Plan of January 2009 - "SWOT Analysis & Strategic Elephants", the identified "Threats" again include, at item 3, "Dependency for profits on major suppliers who are also competitors" (Ex 1, A58).
• Flight Centre document entitled "2012/2013 Argenti Plan Overview - Update June 2009" - "Industry or Market Driving Forces" include, at item 2, "Disintermediation - suppliers going directly to customers" (Ex 1, A92). Once again, I take "suppliers" to include airlines. The reference to "disintermediation" I take to be a reference to a consequence of a supplier such as an airline dealing directly with a customer, which is the breaking down or loss of the intermediary role performed by a travel agent to which I make reference above. A less prosaic way of describing "disintermediation" is "cutting out the middle man". Flight Centre was a "middle man".
118 These documents show that, during the material period, Flight Centre took a close and continuing interest in the impact of direct sales by airlines. That impact was exacerbated the consequential effects of the application of its "Price Beat Guarantee" policy when customers brought airline website fare offers to its shop fronts. Once again, Flight Centre kept a close interest in the impact on revenue of these "price beats", as is evidenced by the monthly summaries which it kept. Those for the period January 2008 to July 2010 are in evidence (Ex 1, A134). "Price Beats" generated from Singapore Airlines, Malaysia Airlines and Emirates sources consistently appear in these summaries.
119 Flight Centre saw these airlines as competitors ("foes" to adopt Mr Burgess' term in his email of 19 August 2005) for the custom of a would-be passenger. If that would-be passenger either did not deal with it at all, because of a lower fare offered directly via a website by an airline or dealt with it only on terms that it honour its "price beat" guarantee as a result of a reliance by that would-be passenger on the amount of a fare available directly from an airline via that airlines website, Flight Centre lost money. What it lost when some or all of what was described by Dr Fitzgerald as "the retail or distribution margin". When a would-be passenger chose, because of a lower fare directly available from an airline, not to deal with Flight Centre at all, it lost the whole of that margin. The examples given by Mr Burgess, described above, highlight this. To generate at all or to maximise the generation of the "retail or distribution margin", Flight Centre, not the airline directly, had to be the medium by which the would be passenger came to book and pay the fare for the air travel.
120 It was put on behalf of Flight Centre that whether Flight Centre and the airlines in question were in competition was a question of law and that, as a consequence, its subjective opinions were not relevant. I reject this submission. The meaning to give to "competition" as defined for the purposes of s 45 by s 45(3) of the TPA and, within that definition, to the term "market" as defined by s 4E of that Act is a question of law. Whether, as so construed, there is competition in any market entails findings of fact. In the making of those findings of fact, "[t]he views and practices of those within the industry can often be most instructive not only on the question of achieving a realistic definition of the market but also on the question of assessing the quality of particular competitive conduct in relation to the level of competition and the impact of its cessation": Rural Press Ltd v Australian Competition and Consumer Commission (2003) 216 CLR 53 at [45] per Gummow, Hayne and Heydon JJ. I have found the views internally expressed within Flight Centre, "most instructive". Further, and insofar as Messrs Burgess and Turner acted on behalf of Flight Centre, their respective intentions are relevant to whether on the six occasions alleged, there was an attempt to induce a contravention.
121 Notwithstanding its manifest, internal understanding that it was in competition with airlines such as Singapore Airlines, Malaysia Airlines and Emirates, Flight Centre submitted that its conduct could not amount to an attempt to induce a contravention of s 45 of the TPA (as construed and applied in light of s 45A of that Act). Behind this superficially startling submission lay the salutary reminder, for which one need look no further than the passages from Visy Paper quoted above, that the elements of the contravening conduct are those specified in the language employed by Parliament, not economic theorists or business analysts. This submission was well and attractively developed by its counsel, particularly by analogy with statements made in an authoritative case concerning alleged third line forcing contrary to s 47 of the TPA, Castlemaine Tooheys Limited v Williams and Hodgson Transport Pty Ltd (1986) 162 CLR 395 (Castlemaine Tooheys v Williams and Hodgson Transport).
122 In essence, the submission was that the Commission's case was predicated upon an impermissible disaggregation of what was supplied. All that was supplied, so it was submitted, was the flight, the air travel. Services such as the notification via travel agents or otherwise of the availability (distribution) and the booking of that flight were, it was submitted, wholly ancillary and not susceptible of separate characterisation from the service to which they were ancillary. In short, there was but one market, that for international air travel; and the suppliers in that market were the airlines either directly or by their agents. In that market, so the submission went, Flight Centre was not a competitor, for how could it be when what its endeavours yielded was air travel supplied by its principal, the airline, not it? Further, it was submitted that the Commission's case was predicated upon a fiction, which was that an airline, in selling directly, supplied to itself services such as distribution of available air travel and flight booking.
123 In Castlemaine Tooheys v Williams and Hodgson Transport, Williams and Hodgson Transport Pty Ltd, a carrier, sought, ultimately unsuccessfully, to have Castlemaine Tooheys Limited enjoined from supplying its beer to publicans on the alleged basis that Castlemaine Tooheys Limited required the publican to accept the cartage services of a rival carrier, Queensland Railfast Express (QRX). The evidence was that Castlemaine Tooheys Limited offered to sell its beer to publicans either for collection by them at its Milton brewery or, alternatively, as delivered to the publican's retail premises. If the latter option was chosen, property in the beer did not pass to the publican until delivery. The beer was transported to those retail premises by Castlemaine Tooheys Limited's preferred carrier, QRX. Castlemaine Tooheys Limited had a contractual relationship with QRX for the purposes of that cartage of the beer. The invoices it sent to the publicans for the delivered beer showed a total made up of separate items for the beer itself and for the freight and insurance. There was no contractual relationship between QRX and the publicans. Williams and Hodgson Transport Pty Ltd alleged that the conduct so evidenced contravened s 47(1) of the TPA, as construed with s 47(6) of that Act.
124 The outcome, so far as s 47 itself was concerned, turned on the fact that, in the supply to them of the delivered beer, the publicans acquired no service from QRX, the position being no different than if Castlemaine Tooheys Limited had alternatively chosen to deliver the beer to them itself, as opposed to via an agent (QRX) which it, not the publican, retained. Gibbs CJ (with whom Wilson and Dawson JJ agreed) observed, at 400-491:
It was of course clear that if the appellant had itself carried the beer there would have been no exclusive dealing within s.47. The position was not altered when the appellant arranged for a third person to carry on its behalf. In those circumstances the services were acquired by the appellant and not by the retailer. No doubt in a loose sense the retailer received a benefit from the services, but in truth what the retailer acquired was the beer and not the services of the carrier. Certainly there was no condition that it should acquire (even in the sense of accept) those services.
It was held that, once the relevant relationships were properly characterised, there could be no exclusive dealing in terms of s 47, for there was neither any dealing at all by the publicans with QRX nor any condition imposed on them by Castlemaine Tooheys Limited that, if they wished to purchase and take delivery of the beer at the brewery, they must use QRX to transport that beer to their retail locations. This was so even though, in an economic sense, the publicans gained the benefit of a transport service as well as the goods (beer) from Castlemaine Tooheys Limited when they chose to take delivery of the beer at their retail premises.
125 The analogy pressed on behalf of Flight Centre in its submission was that, in paying the fare, what the prospective passenger acquired, whether that fare was paid to the agent or to the airline directly, was air travel provided by the airline, not any related distribution service in making the existence and availability of the flight known or the service in booking that flight.
126 More particularly, Flight Centre relied upon a particular observation with respect to characterisation made in Castlemaine Tooheys v Williams and Hodgson Transport by Wilson J (Dawson J agreeing) at 402-403 by reference to the definition of "acquisition", "supply" and "resupply" in s 4C and the definition of "services" in s 4(1) of the TPA. Wilson J observed:
The Act clearly contemplates that services may accompany the supply of goods in such a way as to constitute a single transaction properly described as a supply of goods. It follows that an act or series of acts, once characterized for the purposes of the Act as a supply of goods, cannot also be a supply of services: see Taperell, Vermeesch & Harland, Trade Practices and Consumer Protection, 3rd ed. (1983), p. 163. Thus a contract for the supply and fitting of a windscreen to a motor vehicle has been held to fall within a market in which persons supply goods rather than services: Cool & Sons Pty. Ltd. v. O'Brien Glass Industries Ltd. (upheld on appeal). It may not always be easy to make the characterization, the task being to identify, from all the circumstances of the case, the precise legal obligation undertaken by the supplier of the goods.
In that case, the transaction between Castlemaine Tooheys Ltd and a publican was for nothing more than the supply of goods. Thus, so Wilson J further observed (at 403):
Each supply was a single transaction which could not be broken up into its several elements of sale and delivery without doing violence to the reality. Delivery to the premises was an essential and therefore inseparable concomitant of the supply of the beer.
127 Here, Flight Centre submitted by analogy, there was a single transaction namely the contract for passenger air carriage, as between the between the airline and the passenger for a fare and this remained so whether that contract was made directly between the airline and the passenger via the medium of that airline's website or whether its was made with the passenger by the airline through the medium of its agent (materially, Flight Centre). It was, so the submission went, impermissible to break up this transaction into elements of the making available the carriage (the distribution), the booking of that carriage and the carriage itself. The former two were said to be "essential and therefore inseparable concomitants" of the supply of the service of the carriage, the air travel. A separate but not unrelated variant of this submission, also made on behalf of Flight Centre, was that, once one characterised what was supplied, and this was said to be the air travel (or the bundle of rights conferred in return for the payment of the fare), there could be no competition as between Flight Centre and any of the airlines, because "the agent is doing what it is doing for the benefit of the entity which, ex hypothesis, is said to be its competitor [its principal]".
128 The Commission's riposte was multi-factorial, reflecting the bases upon which it alleged that there was competition in a market. One submission it made was that, when Flight Centre caused an available flight to be booked and paid for it was doing that for its, not an airline's, benefit with the latter but the provider of a commodity, a flight which the travel agent "supplied" to the would-be passenger. In this regard, particular reliance was placed on passages in Australian Competition & Consumer Commission v IMB Group Pty Ltd (ACN 050 411 946) (in liq) [2002] FCA 402 (IMB), which were said to have been affirmed on later appeal, Australian Competition & Consumer Commission v IMB Group Pty Ltd [2003] FCAFC 17 (IMB Appeal), in support of a submission that, in terms of the TPA, an agent could "supply" its principal's goods or services.
129 "Supply" is defined by s 4C of the TPA but in an inclusive circular way; materially:
in s 4:
supply, when used as a verb, includes:
(a) in relation to goods - supply (including re-supply) by way of sale, exchange, lease, hire or hire-purchase ; and
(b) in relation to services - provide, grant or confer; and, when used as a noun, has a corresponding meaning, and supplied and supplier have corresponding meanings.
in s 4C:
(d) a reference to the supply or acquisition of services includes a reference to the supply or acquisition of services together with property or other services, or both;
130 Such is the breadth of the ordinary meaning of the word "supply", "[t]o provide, or provide with, something. a. trans; to furnish or provide (a person) with something; (in early use) to satisfy the wants of, provide for; (now usually) to furnish with regular supplies of a commodity. Freq. with with" (Oxford English Dictionary, online edition, accessed 14 Nov. 2013), I doubt that the inclusive quality of the s 4 definition adds much, if anything, to the meaning of the word for the purposes of the TPA. It has long been regarded as a word of wide import: Commonwealth of Australia v Sterling Nicholas Duty Free Pty Ltd (1972) 126 CLR 297 at 309. That said, statutory context and subject matter, scope and purpose of the Act and the provision in which a term appears are always relevant considerations when considering its meaning. The addressing of the restrictive trade practices to which Part IV of the TPA is directed and of which s 45 and s 45A are paradigms "can only be understood if economic theory and writings are considered": Boral Besser Masonry at [247] per McHugh J. To recognise this is not to violate the warning in Visy Paper against the substitution of economic jargon for the language of the TPA but rather to recognise that the context in which the term, "supply" appears in the TPA is in an Act which "combines legal and economic analysis": Boral Besser Masonry at [247].
131 Bearing this in mind, it may readily be accepted that the inclusive qualities in the definition of the word "supply" confirm what its breadth of ordinary meaning would suggest, which is that it is not necessary for a person to be in a contractual relationship with a consumer in order for that person to be a supplier of a service to that consumer. To this extent, the Commission's submission may be accepted. IMB and IMB Appeal, in which the meaning of s 47 of the TPA was considered, do not, in my view, support a further extension of the embrace of the word "supply" such that, in the different context of s 45 and s 45A of the TPA, where "supply" and "acquire" are not generally augmented by the adverbs, "directly or indirectly", procuration or facilitation by an agent of a service (the air travel) provided by that agent's principal is also a "supply" of that service by the agent.
132 The influence of the presence of "directly or indirectly" on the conclusion reached by Drummond J in relation to the breadth of what was captured by the word "acquire" is apparent from the following passage in his Honour's reasons for judgement in IMB at [98] to [101]:
98 In Trade Practices Commission v Legion Cabs (Trading) Co-operative Society Ltd (1978) 35 FLR 372, Franki J considered the meaning of the words "directly or indirectly" in what was then s 47(4) of the TPA. He limited the expression, an acquisition of goods or services "indirectly" from the second supplier, now found in s 47(6) and (7), to an acquisition from an agent of that other supplier, saying (at 381):
"… when s. 47 (4) of the Act [now s 47(6)] refers to the acquisition of goods directly from a second person it refers to the acquisition of goods from that person and when it refers to the acquisition of goods indirectly from a person it means an acquisition of goods from an agent of that person."
99 I doubt that the "directly or indirectly" dichotomy in s 47(6) and (7) is limited, as Franki J suggests, to acquisition under a contract with the second supplier, on the one hand, and acquisition under a contract made with an agent for the second supplier, on the other, ie, that an agent who supplies the goods of another can only ever be involved in the indirect supply of those goods by its principal and can never itself directly supply those goods. I do not think the term "indirectly" in the context of the old s 47(4) or the new s 47(6) and (7) can be limited so that only acquisitions from an entity in the particular legal relationship of agent to the other supplier are covered. To limit the expression "indirectly" in s 47(6) and (7) to the supply of goods or services by an entity who is the legal agent of the second person, I think, runs contrary to the discernible legislative intent that these provisions, like many of the provisions in the TPA, are to have a wide reach. That appears from the extended definitions of the expressions "goods", "services" and "supply", central to the operation of the provisions of Pt IV the TPA, including s 47(6) and (7). It is plain, I think, from the definition of "supply", from the definition of "services", from the definition of "acquire" (expanded even further by s 4C) and from the terms of s 47(6)(c) and (7)(c), which extends to "giving" or "allowing" discounts etc, that these sub-sections are not confined in their operation to the provision of goods or services under legally binding contractual arrangements only.
100 There is therefore no reason, in my opinion, to say that the concept of indirect acquisition "from another person" in s 47(6) and (7) refers to acquisition only from an entity which is in a legal relationship of agency with that other person. I think the term "indirectly" has the wide meaning it bears in ordinary speech: "coming or resulting otherwise than directly or immediately, as effects, consequences, etc". The Macquarie Dictionary, 3rd ed. In my opinion, when a question arises whether, in the context of s 47(6) or (7), a person has been offered goods or services by corporation X on condition that the person acquire other goods or services of a particular kind or description "indirectly" from Y, the question for the decision-maker is not whether the legal relationship of agency exists between the entity who delivers the goods or services of that kind or description and Y. Instead, the decision-maker must consider the facts of the case to determine whether the acquisition of those goods or services from the intermediate entity can be said to be an acquisition indirectly from Y within the ordinary meaning of that expression. Assume that the organiser of a public event, who does not sell liquor, obtains a payment from a brewery in return for the organiser offering catering outlets at the event to hirers on condition that they sell only X brand beer. The outlet hirers will have to procure that beer from someone other than the events organiser. Whether those hirers acquire their supplies of X brand beer directly from the brewery or indirectly from the brewery's agents or indirectly from liquor outlets that have purchased and own stocks of X brand beer, the organiser would, I think, contravene the sub-section.
101 Even though IMB sold the National Mutual and the Legal & General policies as agent for each insurer, the need for persons to buy those policies from IMB in order for IMB to be able to advance the scheme, I think, justifies the conclusion that the purchasers acquired their National Mutual and Legal & General policies directly from IMB for the purposes of s 47(6) or (7). For this reason, neither provision was infringed here.
In the Full Court, IMB Appeal, at [91], that reasoning was regarded as correct.
133 In contrast, neither in s 45 itself, nor in s 45A, nor in the s 4D definition of "exclusionary provision" is there a general augmentation of the meaning of "supply" and "acquire" by the adverbs, "directly or indirectly". Thus, in s 45(3), the adverbs are not to be found in the definition of "competition" for the purposes of that section and s 45A, only in s 45(7) with respect to share acquisitions. In s 45A, they are not to be found in the general deeming provision, s 45A(1), only in an exception, s 45A(4)(a) and then only in relation to "acquired". It is always a strong thing to read words into a statute which are not there, especially when that would extend the reach of a provision the contravention of which has penal consequences. Given that, I do not consider that there is open, from the limited use of the adverbial phrase "directly or indirectly" in s 45 and s 45A, to construe the words "supply" and "acquire" on the basis that there is a necessary implication that, where they appear in s 45(3), they carry with them that adverbial augmentation of meaning and application. Further, to construe the words "supply" and "acquire" as not implicitly extended by "directly or indirectly" does not render either s 45 or s 45A devoid of operation; much less render those provisions absurd.
134 Flight Centre's own use of the word "supplier" in its internal documents, quoted above, is not, in my view, just a reference to airlines but, read in context, also evidences an in-house view that available flights were a product "supplied" by airlines to that company (and travel agents generally), which Flight Centre in turn "supplied" to its would-be passenger customers. That use of "supplier" is not idiosyncratic but does have about an extension of meaning by an implicit presence of "indirectly". Where the adverbial phrase "directly or indirectly" is present, I accept that there is an analogy to be drawn from IMB that, so extended, an agent might be said to "supply" a service provided by its principal just as much as a consumer might be said to have "acquired" that service from the agent. Especially that is so, in relation to s 47 when, as in IMB, that particular service forms part of an integrated bundle of services offered by the agent to would-be consumers. The difficulty which I have in accepting the Commission's submission is that the adverbial extension is not materially present in s 45 or s 45A.
135 The long and the short of it is that, giving full voice to the breadth of meaning which the word "supply" carries, it is the airline, the operator of the aircraft which supplies air travel, not an agent such as Flight Centre. Flight Centre neither operates nor charters aircraft.
136 To reach that conclusion is immediately to confront another question, which is what, if anything, does Flight Centre supply and in what market?
137 The Commission's answer to this question was found in its alternative submission, which was that it supplied international air travel distribution and booking services. Each of these services is subsumed into the description "travel intermediary", which I have used above. I do not doubt on the evidence that there is a market for distribution and booking services in respect of available international air travel.
138 The consumers in that market reflect the travel intermediary role undertaken by travel agents such as Flight Centre. Thus, at one end of the distribution chain are the airlines who supply international air travel, which seek to have the existence, availability and related fares for the flights they operate made known to consolidators such as the operators of GDS and to travel agents so that they, in turn, can advise would-be passengers on these subjects. It is the airlines who seek the services of large travel agents such as Flight Centre and the operators of GDS such as "Galileo", "Amadeus" and "Sabre" to bring the availability of flights on aircraft which they operate to the attention of would-be passengers or, as the case may be, other travel agents (via a GDS) and then, in turn, to book flights with them and to collect the fare for those flights. At the other end of the distribution chain are the would-be passengers, who seek from travel agents details of available flights or the best fare for a particular flight and the booking of that flight, whether alone or in conjunction with other services provided or made known to them by the travel agent. In this sense, both airlines and would-be passengers are consumers of the services of travel agents such as Flight Centre. The travel agent is placed, Janus-like, in the distribution chain supplying intermediary services to each group of consumers.
139 The evidence of Mr Clarke and Ms Schwass but, a fortiori, Flight Centre's own in-house terminology ("Disintermediation") demonstrate that the relevant market is exactly as described by Dr Fitzgerald - "the downstream or distribution functional level of the overarching market for international travel and ancillary products", which "is distinct from, but obviously intimately linked to, the market for the supply of those products themselves, which is essentially the upstream or wholesale level of the overarching market for international travel and ancillary products".
140 Castlemaine Tooheys v Williams and Hodgson Transport is distinguishable. That case arose under s 47 of the TPA, not s 45, and the end result of characterisation on the facts of the case was that it was goods (beer) which were supplied. The transportation of the goods to the publican's premises was but a necessary incident of the supply of goods at that site by Castlemaine Tooheys if a publican chose to take delivery of goods there, as opposed to at the brewery. As Wilson J observed (162 CLR at 403) in that case, "No question of supplying a service arises". Castlemaine Tooheys v Williams and Hodgson Transport is most emphatically not authority for the propositions that QRX did not supply a transport service to Castlemaine Tooheys (it did) or that QRX and Williams and Hodgson Transport were not competitors (they were) in a market for the supply of freight transport services. It was just that, when the facts of that case were examined through the prism of s 47, it could be seen that Castlemaine Tooheys was not forcing publicans who bought its beer to use the services of QRX.
141 Here, though there is a supply of international air travel by the airlines, that conclusion says nothing about how the existence of the availability of that supply is made known to the consumer, the would-be passenger. To recognise that is to appreciate that, in the different circumstances and context of this case, there is no artificial splitting from what is truly to be characterised only as the supply of a service namely, the air travel (the flight), by separately identifying booking and distribution services. Those are services which a travel agent such as Flight Centre does supply.
142 On the evidence, airlines could, and did, make the availability of air travel known directly, or they could, and did, avail themselves of the distribution network of third parties such as Flight Centre so as to make that air travel availability known to would-be passengers. When it is recalled that the s 4E definition of a "market" materially includes "services that are substitutable for, or otherwise competitive with, the first-mentioned … services" it can be seen that the existence of these alternatives highlights the accuracy of Flight Centre's own in-house understanding, which was that the airlines also were its competitors. They were competitors not because Flight Centre was also a supplier of air travel but rather because an airline could, if it chose, make the knowledge of the availability of its flights known directly to would-be passengers and undertake directly with them the booking of those flights. These were services which were substitutable for those provided by a travel agent such as Flight Centre. An airline could, if it chose, engage in the practice of what Flight Centre termed "disintermediation" or, as it might less prosaically be described, "cutting out the middle man". When they engaged in this practice of substitution the airlines became competitors in "the downstream or distribution functional level of the overarching market for international travel and ancillary products". What the evidence also demonstrates is that the availability of the internet as a means of distribution and booking facilitated that substitution.
143 Yet further, the existence in practice of substitution demonstrates that, for the purposes of the s 4D definition of an exclusionary provision, Flight Centre was respectively competitive with Singapore Airlines, Malaysia Airlines and Emirates in relation to the distribution and booking of air travel supplied by those airlines. It is nothing to the point and does not negate the status of these airlines as competitors that they undertook the services of distribution and booking of available air travel in-house. The reason for this was explained by the Australian Competition Tribunal in Re Fortescue Metals Group Ltd (2010) 242 FLR 136 at [1035] to [1039]:
1035 Vertical integration raises difficult issues about market definition and the identification of market participants. Assume, for example, that technological interdependence is the cause of integration. That is to say, a firm carries out successive processes which dictate a particularly efficient manufacturing structure. The usual example is the integration of iron and steelmaking. One issue is whether the output of each successive process, which may be said to be supplied by a firm to itself (sometimes referred to as in-house or self-supply), is a product or service for which there is a market. Another issue is whether the in-house produced product or service is in the same market as similar or substantially similar goods or services produced by third parties. Yet another issue is the extent to which the in-house supply can be treated as an indirect constraint on suppliers of similar or substantially similar goods or services produced by third parties. Here it is necessary to deal only with the first of these issues, but passing reference will be made to the other two.
1036 In her important paper, "Market Definition Issues in Australia and New Zealand, Trade Practices Litigation" (1990) 18 Australian Business Law Review 86, Professor Brunt (a former member of the Tribunal) said (at 122) that: "Where there are such efficiencies of vertical integration [within the relevant organisation(s)] … market coordination between buyers and sellers is superseded by in-house coordination. There would, in such a case, be no functional split to create market transactions between stages of production." It is necessary to examine this proposition closely and in different circumstances. In all circumstances, it is assumed that the good or service supplied in-house is a good or service which could, without major adaptation, be sold to a buyer for at least marginal cost.
1037 First, assume there are existing vertically separated sellers (ie non-in-house sellers) of that good or service. The presence of vertical separation may be sufficient to conclude that there is a separate functional market. Evidence of actual market transactions by vertically separate firms is strong evidence of the existence of separate functional markets. But some care must be taken in reaching that conclusion. There may be unusual circumstances, such as where there are very few market transactions, to negative the conclusion of a separate market.
1038 Accepting there is a separate functional market, the question that then arises is: Should the in-house producer be included in that market? The in-house producer should be included in the dependent market if a hypothetical monopolist of vertically separated supply could not profitably increase its price. This is frequently the case with end products, where consumers do not consider whether firms are vertically integrated or not when making their consumption choices. The same analysis may also apply in upstream input markets. If a vertically separated supplier of an input increases its price, the increase is likely to be passed through to consumers of the end product. The in-house producer may help to defeat the price increase by selling the input to vertically separated suppliers or, alternatively, it may continue to supply it in-house but increase its production of both the input and the end product. In that way, the in-house producers will either directly (by selling) or indirectly (by increasing in-house supply) constrain the behaviour of vertically separated sellers in the upstream market.
1039 There is another way in which the vertically integrated producer can be treated. It can be excluded from the market but taken into account when analysing competition in the market because it acts as a constraint on market participants. The better view is that if the vertically integrated producer responds directly or indirectly to a price increase, it should be included in the market because it is in competition (whether directly or indirectly) with the other firms in the market.
144 There are less elaborate ways of making the same point. If the supplier of goods or services has an ability to "cut out the middle man" and deal directly with a consumer of those goods or services, instead of that dealing being undertaken by that middle man, that supplier is, to the extent it avails itself of that ability, in competition with that middle man. Once again, Flight Centre's own internal documentation with its use of the term "disintermediation" is proof enough of its complete contemporary understanding of and sensitivity to this source of competition. That understanding was not, for the reasons given, at odds with what amounts to "competition" for the purposes of s 45(3) of the TPA. It was though, curiously, at odds with the submission advanced on its behalf that the airlines in question could not supply distribution or booking services to themselves. This submission ignored that services undertaken in-house are a substitute for and a competitive threat to those third parties (such as Flight Centre) whose business it is to supply those types of services.
145 A like source of competition arises in an example which I put to Dr Fitzgerald in the course of his oral evidence, which he accepted was another way of illustrating this same economic reality. If a propagator of nursery stock chooses to sell some of its product directly to retail customers, instead of placing that stock with garden centres for sale to that same class of customer, that propagator and those garden centres are in competition one with the other. And that would remain true even if those garden centres sold plants only as agent for the propagator, taking as their profit a retail or distribution margin. This type of competition as between members at different stages in a distribution chain is hardly novel. It is present whenever a manufacturer of goods or the supplier of a service chooses to deal directly by retail with a consumer instead of its goods or services being made available to consumers via a third party distribution chain.
146 A corollary of a conclusion that Flight Centre does not "supply" air travel is that the relevant "price" cannot be the fare payable by a would-be passenger for that air travel. That fare is the price for the supply of the air travel by the airline. That does not mean that the fare is irrelevant. Dr Fitzgerald was correct in opining that Flight Centre and the airlines compete for "the retail or distribution margin". Flight Centre receives a fare in gross from a passenger but of that the airlines receive only a nett amount. The difference is a retail or distribution margin. The various emails which respectively form the basis of the six charges were each sent and received against the background of an industry where this remission of the nett fare was the norm. To reach an arrangement or understanding as to "parity" or absence of "undercutting" as to the published fare was, against this background, and with a given margin or commission, to maintain that commission.
147 Flight Centre was only able to retain this margin if it was the intermediary in respect of the acquisition by the would-be passenger of the air travel. As I have already observed, if the would-be passenger dealt directly with the airline, because the fare for the supply of the air travel was less than the fare at which Flight Centre could distribute that air travel to that would-be passenger, Flight Centre received nothing. If, alternatively, the would-be passenger chose nonetheless to deal with Flight Centre but used the lower fare directly available from an airline to hold Flight Centre to its "Price Beat Guarantee", Flight Centre, which had nonetheless remit the nett fare to that airline, had to sacrifice some at least (or an equivalent sum) of its retail or distribution margin in the "price beat".
148 Another consequence of not undertaking its role of intermediary in respect of the supply of air travel by a particular airline was that Flight Centre's ability to achieve transactional targets under preferred airline agreements was diminished, with potential, associated additional financial loss to it.
149 There was thus a commercial imperative for Flight Centre to "make the sale" of air travel on behalf of an airline, rather than that airline effecting the sale directly itself. Any contract, arrangement or understanding which fixes, controls or maintains the fare for that air travel so that it is price neutral as between the fare obtainable by a would-be passenger via an intermediary and that available directly from the airline is inherently likely, given standing arrangements in relation to remission only of the nett fare to the airline, to fix, control or maintain that intermediary's retail or distribution margin. It is that margin which, as I shall explain in more detail shortly, is the price for the distribution and booking service. Further, though Flight Centre does not supply air travel, the air fare price neutrality which I have mentioned does carry with it the aggravating, adverse consequence of denying to a would-be passenger that lower fare for the air travel which the airline supplies.
150 I have used the word "likely" in the preceding paragraph advisedly, for it is a word that the TPA materially employs both within the definition of "exclusionary provision" in s 4D as well as within the text of s 45 and s 45A themselves. Quite what the word "likely" means in the TPA has been left an open question at intermediate appellate level for over 30 years, from Tillmanns Butcheries Pty Ltd v Australasian Meat Industry Employees' Union (1979) 42 FLR 331 (Tillmanns Butcheries) to Australian Competition and Consumer Commission v Metcash Trading Ltd (2011) 198 FCR 297. In AGL French J, at [342] to [348] reviewed the divergent views as to the meaning to be given to the word "likely" in the TPA and concluded that the weight of authority favoured construing it as meaning a "real chance" rather than "more likely than not". So much, with respect, may be accepted but, like Bowen CJ (Evatt J agreeing) in Tillmanns Butcheries at 340, I do not consider it necessary in the circumstances of this case to express a concluded view as to the meaning of the word. That is because, even if it does mean "more likely than not" I consider that the inherent likelihood to which I have referred in the preceding paragraph obtains in this case.
151 The TPA defines (s 4) "price" in an inclusive way so as to include a charge of any description. Beyond that, it offers no assistance, save that to be derived from context and the subject matter, scope and purpose of the TPA as to what "price" means. In Australian Competition and Consumer Commission v Dell Computer Pty Ltd (2002) 126 FCR 170 Emmett J opined, at [64] that the "obvious purpose" of the inclusive reference in the definition of "price" in s 4 was "to make it clear that the word is to apply not only to a money consideration payable for a sale, or other supply, of goods, but also to a money consideration payable for the provision, or other supply, of services" (emphasis in original). The correctness of that expression of opinion is not affected by his Honour's difference from the majority as to the disposition of the appeal. It is not necessary in the circumstances of this case to consider whether "price" can embrace something other than money consideration for either goods or services. In this case, the money consideration was at the very least the retail or distribution margin retained by Flight Centre with the airline's permission from the gross fare paid by the would-be passenger. That was the price the airline paid for the distribution and booking service provided by Flight Centre. That was a transactionally specific consideration for that service. In addition, in transactional aggregate, Flight Centre might also become entitled to other consideration from an airline under a preferred airline agreement.
152 It would be sufficient, in order to engage this element of s 45A, that a contract, arrangement or understanding had the purpose or had or was likely to have the effect, as the case may be, of fixing, controlling or maintaining, or providing for the fixing, controlling or maintaining of, that transactionally specific retail or distribution margin. Even were the matter to be viewed in aggregate, the component of the overall money consideration paid by an airline represented by transactionally specific retail or distribution margins and thus the total consideration would at least be fixed, controlled or maintained or likely to be fixed, controlled or maintained by any contract, arrangement or understanding which fixed, controlled or maintained the fare for the air travel so that it is price neutral and thus fixed, controlled or maintained the retail or distribution margin able to be retained by Flight Centre.
153 Flight Centre is charged not with making any contravening contract, arrangement or understanding but with attempting to induce each airline to enter into a contract, arrangement or understanding.
154 As to what amounts to an attempt to induce a contravention, in Trade Practices Commission v Parkfield Operations Pty Ltd (1985) 7 FCR 534 at 539-540, the Full Court, differing from a contrary view expressed by the trial judge, Fox J (qv Trade Practices Commission v Parkfield Operations Pty Ltd (1985) 3 FCR 140 at 145), stated:
Finally, his Honour thought that there could be no attempt to induce XL to make an arrangement of the kind alleged if there was no arrangement which was in place or could readily be effected. He thought that the evidence established no more than that there was an invitation "to start to see if an arrangement can be made". We do not think that it was necessary for any arrangement to be in place, or readily able to be effected, with the other retailers. It was sufficient that the respondents sought to persuade XL to enter into an arrangement to increase prices. As was said in Yorke v Lucas (1983) 49 ALR 672 at 681 (affirmed by the High Court (1985) 59 ALJR 776):
"Inducing a contravention in the context of s.75B(b) connotes, in our view, some act of compulsion by force or threat of force or some act of persuasion or stimulation aimed at ensuring that an act is committed which constitutes a contravention. The word 'incite' is akin to 'induce', though induce probably covers a wider field."
We therefore cannot agree with the reasons which led his Honour to the conclusion that the Commission had not established a case against the respondents.
155 Assistance as to what constitutes an attempt to induce is also to be gained from observations made by Goldberg J in Australian Competition and Consumer Commission v SIP Australia Pty Limited [2002] ATPR 41-877 at [112]:
112. An attempt to induce particular conduct can take a number of forms. As is made clear by s 76(1)(d) of the Act, an inducement may occur although no threat or promise is involved. Section 76(1)(d) of the Act empowers a court to impose a penalty where a person has induced or attempted to induce a person to contravene a provision of the Act "whether by threats or promises or otherwise". What is required for an inducement is that there be an affirmative or positive act or course of conduct directed to the person who is said to be the object of the inducement. Accordingly "mere persuasion, with no promise or threat, may well be an attempt to induce ": The Heating Centre Pty Ltd v Trade Practices Commission (1986) 9 FCR 153 at 164. See also Yorke v Lucas (1983) 49 ALR 672, at 681-682 (affirmed on appeal (1985) 158 CLR 661).
156 Having regard to these expositions as to what amounts to an attempt to induce, it is just this endeavour and just this related state of mind which I see in Mr Burgess' email of 19 August 2005. His email was directed to persuading Singapore Airlines no longer to "undermine" or "undercut" Flight Centre by offering lower air fares directly to the public than those available Flight Centre via the GDS. His reference to Singapore Airlines not being able to be both "friend and foe" is particularly telling. It is quite obvious from this reference to "foe" in the email that he viewed Singapore Airlines as a competitor of Flight Centre which, by undercutting or undermining by direct sale the fare for air travel which Flight Centre could otherwise sell on behalf of the airline at a higher fare, was eliminating or reducing Flight Centre's retail or distribution margin income.
157 Mr Burgess' email of 19 August 2005 was deliberately sent to the end of persuading Singapore Airlines to stop undercutting or undermining Flight Centre. That is the essence of what on behalf of Flight Centre Mr Burgess knowingly set out to achieve and in these circumstances it is nothing to the point that the email is lacking in fine detail. The latter is not required to establish an attempt to induce. In seeking to persuade Singapore Airlines to do this Mr Burgess was attempting to induce that airline at least to enter into an arrangement or understanding, if not a contract, to an end which would fix, control or maintain Flight Centre's retail or distribution margin in the manner explained. That was his purpose and that was the likely effect of any such arrangement or understanding.
158 In Australian Competition and Consumer Commission v TF Woollam & Son Pty Ltd (2011) 196 FCR 212 at [82] to [83] I expressed agreement with an observation made by Professor Heydon (as his Honour then was) in Heydon JD, Trade Practices Law, (Lawbook Co., subscription service) at [4.810] (update 85) that it may be incorrect to split the components of the expression, "fixing, controlling or maintaining" and that this expression may well be a composite. I also there expressed agreement with the analysis of this expression by Lindgren J in Australian Competition and Consumer Commission v CC (NSW) Pty Ltd (1999) 92 FCR 375. I shall not repeat what I there stated. There is merit in the Commission's submission that the purpose or effect of what on behalf of Flight Centre, Mr Burgess attempted to induce Singapore Airlines to do was to put a floor under that margin. If the constituent elements of the expression are separately to be applied, then at the very least the purpose or likely effect of the arrangement or understanding proposed in this email was to "maintain" or alternatively to "control" Flight Centre's retail or distribution margin, if not also to "fix" it.
159 Once the purpose or likely effect of this email is appreciated and it is understood that, for the reasons given, Singapore Airlines and Flight Centre were competitors, it is readily apparent that Flight Centre's submission that it was seeking to promote competition must be rejected. Its purpose and the likely effect were anti-competitive. Price neutrality in relation to air fares obtained either directly from an airline or via it would neutralise or tend to neutralise the "foe" Flight Centre was encountering in the market for distribution and booking services. Further, the reference in the email to Flight Centre's needing to be "more strategic" was not, when read in context, benign. It was a threat that, if the undercutting or undermining did not stop, Flight Centre may choose not to promote and distribute Singapore Airlines air travel to would-be passengers.
160 Mr Burgess' email of 19 August 2005 did, for the above reasons, carry with it the invitation to reach an agreement or understanding in respect of air fares such that they:
(i) would also be made available to be purchased through Flight Centre (so Flight Centre could be "competitive"); and
(ii) would be sold by Singapore Airlines at a total price, including any charge for its booking services, of no less than the total of:
(a) the nett fare; plus
(b) the commission that Flight Centre would be entitled to be paid for its services if Flight Centre had sold that fare to a customer (so that there would be no undercutting and so as to maintain or control Flight Centre's retail or distribution margin).
161 An agreement or understanding with such a provision is, by s 45A(1) of the TPA deemed for the purposes of s 45 to have the purpose, or to have or to be likely to have the effect, of substantially lessening competition. In short then, the Commission has proved charge 1.