In line with Competition Ordinance, 2009: PIA agrees to implement rescheduling fee structure

Pakistan International Airlines (PIA) has voluntarily agreed to implement a non-discriminatory rescheduling/cancellation fee structure from January 1, 2010 in line with the provisions of the Competition Ordinance, 2009. In this connection, the Competition Commission of Pakistan (CCP) has issued a detailed order here on Wednesday.
An inquiry by the Commission discovered that the airline was basing its rescheduling/cancellation charges as a percentage of the ticket fare, which was discriminatory in nature. CCP issued show cause notice to PIA for what appeared to be a violation of section three of the Ordinance.
Member CCP, Dr Joseph Wilson, heard the case in two hearings. The arguments put up by representatives of the airline underlined that the policy was aimed at recovery of revenue loss and deterrence of last moment cancellation and could not stand the scrutiny of competition law.
The Member concluded that the rescheduling/cancellation policy of the airline was discriminatory, amounted to an abuse of dominant position and, thus, was against the very soul of competition. In a detailed order issued by CCP member stated that since PIA had agreed to address the Commission's competition concerns and remove any discrimination in the fee structure, a lenient view was taken and no penalty was being imposed on PIA.
According to the order, the rescheduling fee is an administrative fee levied to perform the service of rescheduling rendered by an airline. In the case of PIA, the rescheduling fee retains the character of administrative fee, if rescheduling is requested prior to 48 hours of flight departure. That is, everyone pays a fixed fee of Rs 400 regardless of the type of ticket purchased.
However, the moment one wants to reschedule the reservation within 48 hours of the flight, the rescheduling fee changes its character from fee charged for performing services to fee charged to recover losses. It a way to charge more to those who paid more for their ticket than from those who paid less for their ticket. This amounts to price discrimination and proscribed under section 3 of the Ordinance.
PIA argued that the industry practice of charging different fares from different passengers for the same flight also amounts to price discrimination. As the economy/business class cabins are divided into different classes, each having a different fare structure. Concept of multiple fares is not unique to PIA. The objective in setting fares is to maximise the revenue from each flight, by offering the known as versioning, which implies that one version of the product, in this matter, airline tickets, is deliberately made less attractive.
Economic studies have shown that versioning, even though amounts to price discrimination, is welfare enhancing and therefore allowed. The airline in its reply argued that the undertaking charges a percentage of the ticket fare whenever passengers re-schedule or cancel flights and these charges are not collected when the passenger reschedules his journey for the first time. This is true for international passengers only and not for domestic passengers, it said, adding that we are here seized with the matter that pertains to domestic flights, and to that extent this assertion is incorrect.
The airline after having understood the concern of the Commission, has volunteered to remove the discriminatory fee structured and offered a proposal on November 19, 2009: In line with recommendation of Competition Commission, Revenue Management, division of PIAC has worked out the following proposal for application of Rescheduling/Cancellation/Refund fee for Economy Class to fixed amount as against existing percentage based fee structure:
Once the above proposed amounts are agreed by the Competition Commission, we will put same for higher management approval for further implementation with effect from January 1, 2010.
This CCP bench appreciates the understanding and co-operation of PIA, and order as follows: "That the proposed non-discriminatory rescheduling fee structure be implemented in letter and spirit as of January 1, 2010. That a passenger who wishes to reschedule his/her flight to an immediate preceding flight be allowed to do that without any charge. In light of PIA co-operation and understanding, a lenient view is been taken and exonerated the undertaking from any penalty".
About the background of the case, the CCP order has specified that the Commission had received various complaints of the fact that PIA charges a percentage of the ticket fare whenever passengers reschedule or cancel flights which is not only contrary to the practice followed by other domestic and international carriers but is also discriminatory.
The airline policy was verified from its customer services department and was found to support the complaints received by the Commission. The preliminary research was conducted by collecting information from the official websites of both national and foreign air carriers to assess the national, regional and international industry practice regarding fee charged for rescheduling. On June 18, 2009, PIA was asked to explain the rationale for charging a fee based on a percentage of ticket fare for rescheduling of reservation -which makes an expensive ticket more costly for the passenger to reschedule than the one holding an inexpensive ticket for the same flight - as opposed to the industry standard of charging a fixed fee.
PIA responded on July 2, 2009 stating that their cost structure model is based on their social responsibility as the national carrier of Pakistan which necessitated operating on non-profitable routes as well.
Replying to the CCP show cause notice, PIA observed undertaking charges a percentage of the ticket fare whenever passengers reschedule or cancel flights and these charges are not collected when the passenger reschedules his journey for the first time. The charges on the rescheduling of the ticket have been established after a detailed study of cost, benefit and market analysis.
This strategy aims to minimise the last moment cancellation by the passengers and travel agents, who through their fake reservations used to book seats earlier and in the nick of the departure hours would back out of it, resulting in inventory spoilage and thereby denying seats to the genuine passengers and thereby incurring revenue loss to the undertaking which is the major source of its survival, and that such practice is followed by all major airlines for instance, Air Blue and Shaheen are charging Rs 500/- per ticket as Refund/Change of Booking Charges, 48 hours prior to flight departure whereas PIA charges Rs 400.
The two major arguments raised by PIA in support of its policy are: If the seats are cancelled at the eleventh hour on such high demand flights before departure, it results in major revenue loss to the undertaking as it is difficult to re-sell the available seats due to cancellation within short span of time, which results in revenue loss. For this genuine reason, high service fee is charged for high fare classes. The undertaking's service fee structure is not a source of revenue but a strategy of deterrence against last moment cancellation by the passengers and travel agents who through their fake reservations used to book the seats earlier and in the eleventh hour of the departure would back out of it, which resulted in seat denial to genuine passengers and revenue loss to the undertaking.