The Travel and Leisure Law People

Cruise Commissions

Whether your support lies with cruise agents or cruise operators, the current cruise pricing and remuneration wrangle offers plenty of food for analysis. Sarah Lacy, partner in specialist travel law firm Travlaw LLP looks at recent events, and scrutinises which of them could fall foul of the law.

The debate between the two has been alight since February 2011 when the UK market leader Carnival UK cut agents’ base commissions to 5% and dropped their 5% online discount. Other large cruise operators followed suit last autumn with Royal Caribbean Cruise Line announcing a cut in base commission to 10% and the axing of its own 5% online discount. Norwegian Cruise Line did likewise, moving from a variable rate of commission to one of a flat 10%. MSC Cruises were the latest to announce a cut in their rates and ditch their 5% online discount earlier in January. All cuts are effective from this month.

One way or another, most of the cruise operators involved have publically linked the reductions to the aggressive discounting practices of the larger agents, which they say is more prevalent and deeper in the UK cruise market than in other markets. Royal Caribbean explained that their new commercial terms would include marketing funds “to encourage agents to stop discounting” and MSC Cruises says it will end commercial agreements with agents who refuse to stop discounting explaining that, ‘We have to be very strict’.

Travel Weekly notes: “Lines have always said UK law prevents them setting prices, but agents fed up of discounting have argued it is the line’s choice whether to work with them [the discounters]. Suppliers appear to be coming around to the idea that much of the discounting was . . . depressing prices.”

The result on the UK cruise trade has been mixed: some groups of agents and consortia have steered sales away from operators offering lower commissions, whereas others have welcomed the move to cut commissions as the creation of a level playing field by stopping the stronger agents from discounting to the detriment of the more vulnerable agents’ sales. The agents with the wherewithal to financially protect their sales have gone some way to avoid the issue by creating their own cruise-inclusive packages and adding a mark up at their own discretion.

The operators themselves have heralded the move as being positive for clarity on price. Carnival UK chief executive David Dingle said: “Customers need price transparency . . . but it was hard for us to do this when the last 10% of our pricing was out of our hands. Now we have that control and higher pricing is coming through to the benefit of all.”

The control of pricing, distribution and trading conditions in any market, including the ‘squeezing’ of margins, is an area susceptible  to challenge by the Office of Fair Trading under the UK Competition Act 1998 as well as under EC law. The laws have a broad reach, applying to any agreement between companies that has the affect of restricting competition, whether they are formal or informal, written or not. The legislation also clamps down on trade discrimination between distribution channels: the imposition of different incentives or rewards across different distributors operating in the same channels.

Findings of anti-competitive behaviour are serious and can potentially result in liability for fines on both parties to such agreements of up to 10% of worldwide turnover as well as criminal penalties and director disqualification.

Where cruises are being sold by agents via a traditional mode of agency (ie where the cruise line is paying the agent a pure commission rather than the agent ‘marking up’ the price of the cruise) then allegations of ‘price fixing’ are more difficult to make stick. After all, a principal is largely free to set its own prices. But blatant talk of ‘regaining control’ in order to ‘keep prices high’ can alert authorities to the potential that other restrictive trade practices might be being employed behind the scenes on closer inspection.

Where agents are selling cruise packages as principal, via a wholesaling agreement with cruise lines, price fixing allegations are going to be easier to make out if discounting is explicitly prohibited. However, The Office of Fair Trading will recognise that some products may need a suggested pricing structure by virtue of them being ‘novel’, and thus difficult to price without assistance. It’s possible that at least some of the more specialist cruises may fall within this category. If commercial agreements avoid the ‘hard core’ anti-competitive style of minimum price imposition, aiming instead for something more akin to a ‘recommended retail price’, then they may avoid the wrath of the OFT.

So all in all, the overreaching UK and EU competition law doesn’t give the cruise industry a very clear steer as to how likely the current wrangle could be stamped out by the authorities.

However, there is a piece of less-oft cited piece of travel industry specific law that does give a slightly clearer picture: The Restriction on Agreements and Conduct (Tour Operators) Order 1987. A Statutory Instrument enacted by the Secretary of State in exercise of the powers conferred on him by the Competition Act to deal with specific anti-competitive practices arising in specific industries.

Article 6 of the Order states that: ‘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…..’.

It’s pretty clear from this that tour operators can not favour agents that don’t discount. So blatant talk of ‘ending commercial agreements with those  that discount’ is dangerous talk. But if indeed, as it seems they have, the cruise lines have cut base commissions across the board (albeit not for every brand), 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 away as ‘economies of scale’ or plain and simple differences in bargaining power.

In the same way as price can manipulated by suppliers, the law can be manipulated by lawyers, leaving certainty out in the cold!

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Travlaw LLP is a limited liability partnership registered in England & Wales (Reg. no. OC342402) and is authorised and regulated by the Solicitors Regulation Authority.

Members include: Stephen M Mason* MA, Rivka Hawley ACILEx (Non-Lawyer Member), Matt Gatenby BA (Hons), Farina Azam LLB (Hons). *Holding Higher Rights (Civil) qualification **CEDR accredited mediator.

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