August 01, 2007

Don't Break It Down Again

by PG

The over half a billion dollars in fines imposed on British Airways by the U.S. and U.K. for its collusion with Virgin in fixing fuel surcharge prices provides an excellent illustration of why the Expedia system of pricing, in which only the final price is shown, with all surcharges, taxes, etc. included, is good not only for the consumer but also for the company.

I understand why an airline might want to break out its base fee from the other fees that it wants to characterize as not being its fault; that way, it can advertise fares at a lower price than the consumer ultimately would have to pay. But this also gives regulators more to scrutinize. While presumably the government-related fees (is there still the industry-wide $2.50-per-flight post-9/11 security surcharge?) can and should be consistent across the industry, without inviting claims of collusion rather than coercion, something like a fuel surcharge is trickier. Some airlines have negotiated better long term fuel contracts than others, and thus the high cost of fuel has differing impacts on each airline. By distinguishing the cost of a surcharge over which they have some control, BA and Virgin made it quite easy for regulators on both sides of the Atlantic to note that those surcharges were in lockstep over an extended period, which is the warning bell to start an investigation into price-fixing. (Good ol' horizontal price fixing, still per se illegal!)

Had BA used Expedia style pricing in which potential customers saw only the final price for fares, regulators merely checking price lists never would have been able to discern a fuel surcharge distinct from that final price at any given time, which would make it impossible to know if Virgin's surcharge was the same. I suppose the regulators could require companies to file long lists of the components that make up final prices (cost of cleaning blanket: 3 cents; cost of fuel surcharge: $10; forcing regulators to read all of this: priceless). Now, just like BA CEO Willie Walsh, I think “Anticompetitive behavior is entirely unacceptable and [I] condemn it unreservedly,” but people, if you're going to do it, don't make it so easy to get caught.

August 1, 2007 06:22 PM | TrackBack
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