By Sarah Lacy, partner at Travlaw
One way or another, most cruise operators have cut base commissions to agents – Carnival UK in 2011 and other operators this January – which, they say, was due to the discounting practices of larger agents. But how does the law affect these developments?
The control of pricing, distribution and trading conditions, including the ‘squeezing’ of margins, could be susceptible to challenge by the Office of Fair Trading (OFT) under the UK Competition Act 1998 and EC law.
The law has a broad reach, applying to any agreement between companies that restricts competition – formal or informal, written or not. The legislation also clamps down on the imposition of different incentives or rewards across distributors operating in the same channels.
Findings of anti-competitive behaviour are serious and can potentially result in fines of up to 10% of worldwide turnover, as well as criminal penalties and disqualification of directors.
Where cruises are sold by agents via a traditional mode of agency – ie, where the cruise line pays a pure commission rather than the agent marking up the price – then allegations of ‘price fixing’ are more difficult to make stick as a principal is largely free to set its own prices.
But talk of ‘regaining control’ to ‘keep prices high’ might suggest to the OFT that restrictive trade practices are being employed.
Where agents are selling cruise packages as a principal, via a wholesaling agreement with cruise lines, price-fixing allegations are going to be easier to make if discounting is prohibited. However, the OFT will recognise some products may need a suggested pricing structure by virtue of being ‘novel’ and difficult to price without assistance. It’s possible that some of the more specialist cruises fall within this category.
If commercial agreements avoid the anti-competitive style of minimum price imposition, aiming instead for a ‘recommended retail price’, then they may avoid the wrath of the OFT.
UK and EU competition law doesn’t give the cruise industry a very clear steer. However, there is an industry-specific law that gives a slightly clearer picture: The Restriction on Agreements and Conduct (Tour Operators) Order 1987.
Article 6 of the order states: “It shall be unlawful for a tour operator to give or agree to give any preference in respect of the giving of orders for agency services to travel agents who do not offer inducements . . .”
Operators cannot favour agents who don’t discount, so talk of ending commercial agreements with those who do is dangerous.
However, if cruise lines have cut base commissions across the board, it may be difficult to prove a preference of one agent over another. Any discrepancies between commercial terms for agents or groups of agents could easily be explained as ‘economies of scale’ or simple differences in bargaining power.
In the same way that price can be manipulated by suppliers, the law can be manipulated by lawyers, leaving certainty in the cold.
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