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Could Airlines be Fined for Increasing their Prices?

Could Airlines be Fined for Increasing their Prices?

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In Hungary the Government recently issued a decree introducing extra profit taxes affecting several sectors, among others the aviation sector. Pursuant to the Governmental decree, as of 1 July 2022 an extra profittax is payable by ground handling companies based on the number of passengers departing from Hungary, with the exception of transit passengers. The new special tax is HUF 3,900 (approx. EUR 10) or HUF 9,750 (approx. EUR 25) per passenger depending on the passenger's final destination.

Albeit the tax is payable by ground handling companies under the Governmental decree, shortly after its publication rumors took flight that in reality the airlines would have to pay, who would consequently pass the cost on to the passengers – presumably by selling the flight tickets with elevated prices reflecting the increased amounts. The Ryanair dispute with the Hungarian Government is in the spotlight at the moment. The dispute arose following Ryanair's statement that as of 1 July the passengers would have to bear the extra cost even after tickets had been bought, irrespective of the date of the booked flight. Although the passengers were also provided with the option of full reimbursement for the ticket, the Government was not that pleased with this approach. As a result there is now a consumer protection case pending against Ryanair.

The question arises: would it be lawful to impose fines on airlines for incorporating the taxes into their ticket prices? Let's take a brief glance at the general legal aspects of this question.

The price increase is not a consumer protection issue

Airlines - being corporations driven by the aim to generate profits - apply prices according to various factors such as time (travelling within or out of peak season), the recovery of costs (fuel, staff), and the taxes. The Civil Code also stipulates as a basic principle that the main purpose of companies is the pursuit of business - recognizing that making profit is the basis for their existence. Thus, the mere fact that the price of a flight ticket is dependent upon certain aspects and that flight companies increase or decrease prices in reaction to the changing circumstances is not an unlawful practice. In fact, this is not even a consumer protection law issue.

In principle, companies can set their prices at their own discretion. The consumer protection law only requires them to communicate this clearly and appropriately to the passengers - the consumers - who buy the tickets. We note that this is in line with, inter alia, the provisions of Regulation (EC) No 1008/2008 on the application of free pricing in air transport as well.

Moreover, corporations may set their prices freely even without being obliged to reveal the reason for a price change. The only exceptions to this lie within competition law. This is because competition law has explicit prohibitions forbidding market participants among others from colluding on prices or from setting prices along aspects falling outside of market conditions and costs incurred. Competition law also forbids dominant companies from applying their prices in an abusive way. Therefore, it may happen that an undertaking must justify how it has set its prices to the competition authority. The factors determining prices can be very diverse: inflation, changes in taxation, purchase prices, raw material stocks, human resources, demand, market competition. As can be seen, costs and tax burdens are explicitly accepted aspects from a competition law point of view.

The underlying reason behind the price increase in the airlines market that could be experienced in general in the past years can be traced back to the following main factors: the mitigation of financial difficulties resulting from the coronavirus crisis and increased fuel costs. Now, the price increase is a result of the newly introduced extra profit taxes.

Let's assess the current situation in more detail. Below we examine the case with a specific consumer protection law focus while separating (i) those people who will travel after 1 July 2021 and have not purchased a ticket; and (ii) those who will travel after 1 July 2021 and already have their flight tickets.

Those who will fly after 1 July 2022 but don't have a flight ticket yet

As we have noted, companies must comply with certain consumer protection law provisions when it comes to the communication of their prices. They are for example obliged to display the total prices in a clear, identifiable and unambiguous manner, showing the currency as well.

And so, airline passengers must be aware of the total and final price of a flight ticket they intend on buying. This means that the prices visible must also include the charges for extra services such as travelling first-class. It is crucial that the passengers are aware of this at the time they make the purchase. If the passengers can see the total prices clearly and unambiguously when making a purchase, the increase in the amount of the price is not a consumer protection issue. It is also not relevant whether the increase is due to the rise in fuel prices, the coronavirus pandemic, the extra profit tax or anything else.

Therefore, as long the passenger is aware of the prices clearly and unambiguously when making a purchase – irrespective of the exact amount of the price – that qualifies as being a lawful practice from a consumer protection law aspect. It must also not be forgotten that passengers can still choose not to buy the flight ticket.

Those who will fly after 1 July 2022 and have a flight ticket

The Government decree on the extra profit tax was published on 4 June and the extra profit tax is payable on flights departing from 1 July onwards. This means that theoretically airlines had the possibility to increase their prices on 4 June or soon afterwards, i.e. before 1 July. As we have made clear, the price increase is lawful until anyone who buys a flight ticket is clearly aware of the total price of the journey. In addition, it is also lawful for airlines to raise prices at the same time or shortly after each other - provided they do not do so in the context of concerted practices, which is strictly prohibited by competition law, as explained above. However, the question still arises as to what happens to tickets purchased before 4 June for travels after 1 July.

The tax will be payable in any case after 1 July, even though the airline could not have calculated it before 4 June and thus could not have been reflected in their prices either. The above referred EC Regulation provides guidance in this respect: when indicating the price of the tickets, the airline is obliged to indicate, in addition to the fare, all taxes, charges, surcharges and fees that are unavoidable and foreseeable at the time of publication of the price. Therefore - since the airlines were unable to foresee the extra profit tax or that it will be paid by them before 4 June - the failure to communicate this to the passengers in advance should not be regarded as an infringement.

Can the airline increase the ticket price after purchase?

Airlines, like other similar larger companies, have GTCs and these GTCs usually cover the possible cases of ex-post price increases and the conditions under which they can be applied. Ryanair's GTC also includes such provisions setting forth the possibility to impose ex-post charges. The EU and Hungarian legislation on unilateral contractual modifications in GTCs - in this case, unilateral price increases - stipulate that these can be regarded unfair if the consumer does not have the possibility of cancellation or withdrawal. In other words, if the airline communicates the inclusion of the extra profit tax in such a way as to offer the possibility of a refund, this appears to be lawful. The legal pre-question that will probably need to be clarified in this context is whether this can be considered as a tax transfer or merely the inclusion of a newly incurred cost on the part of the airline.

However, there are also other aspects that will need to be considered here. Case law usually deems it unfair for a company to make the performance of an obligation subject to additional conditions. This could be compared to a situation where someone pays for goods in a shop, then leaves and suddenly the shop assistant rushes after them asking them to pay again before taking the goods home to consume. This is a bit unrealistic, right? However, it would require a further analysis of the case law to decide whether the payment of an extra profit tax could be considered such a situation. In this regard, it should also be considered that the passenger has the possibility to opt out and request full reimbursement instead of paying the tax. Yet, it would presumably be hard to find an airline that would take the passenger to the same place at roughly the same time for the same price, i.e. without including the extra profit tax.

Even though the details of the consumer protection procedure lodged against Ryanair are not public, we can assume that the case will address some of the questions above. Needless to say, perhaps several thousand passengers are concerned since it is not unrealistic to buy summer flights in spring.

By Alexandra Bognar, Attorney at law, and Dora Balogh, Associate, Schoenherr

Hungary Knowledge Partner

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