Analysis: What does the EC cargo decision really mean?

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This story is sourced from Airline Business
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Philippe Ruttley and Solange Leandro, who are European competition specialists at legal firm Clyde & Co, take a look at the air cargo case and its lessons for the industry

On 9 November 2010 the European Commission finally issued its long awaited decision and fined 11 airlines a total of €799 million ($1.1 billion) for price fixing on fuel surcharges and security surcharges and refusing to pay commission on surcharges. This included over €300 million for Air France-KLM and €104 million for British Airways. SAS had its fine increased by 50% to €70 million for its previous involvement in market fixing with Maersk Air in 2001. The decision contains important guidance for the aviation sector on the application of EU competition rules.

Over 20 airlines and a consultancy company have been involved in a lengthy cartel investigation by the Commission. The investigation started in February 2006 following Lufthansa's revelations to the Commission in late 2005. The Commission's allegations were almost entirely based on "leniency" applications made by the 11 airlines - i.e. statements made by them to the Commission confessing to illegal behaviour and implicating other airlines in it, in the hope of receiving reduced or no fines. Lufthansa as the "whistleblower" was rewarded with 100% immunity from fines. Martinair was rewarded with a 50% reduction down to €29.5 million.

Proceedings were started in December 2007 but the decision only appeared almost three years later. The delay was partly caused by a number of airlines pleading inability to pay the high fines they expected, based on adverse economic circumstances that the industry was facing. These included the financial crisis and the volcanic ash disruption which involved compensation to passengers under the EU flight cancellation compensation system. These pleas required extensive investigation by the Commission, but were rejected in each case.

 

 
Clyde & Co. partner Philippe Ruttley
The other airlines and the consultancy company mentioned in the Commission's statement of objections are now free from the prospect of spending Christmas busy with their appeals, but will certainly remain vigilant when it comes to competition law.

The first lesson of the air cargo case is that price fixing will be punished harshly. While some "credit" was given to several airlines for co-operating with the investigation once caught, the high level of fines indicates the continued seriousness with which price fixing is punished by EU regulators and US regulators. The total fines imposed in the USA and the EU, as well as the damages agreed in civil litigation, amount to a staggering £2 billion ($3.2 billion). This huge sum must exceed any illicit gains made by the cartel participants and brings into question the suitability of such punishment on an industry, where profitability is at best thin.

Another important lesson from the decision is the requirement for independence of pricing strategy. A common practice is "follow the leader" pricing with rates being set by reference to pricing announcements of a perceived market leader. A key lesson is that market leaders must ensure that the timing and format of any announcement is not designed to influence the conduct of other smaller market players. Equally, market "followers" must also ensure that their pricing decisions are demonstrably independent, keeping proper records to prove that their decisions were made independently.

The air cargo case has also been a reminder that EU competition law became fully applicable to routes between the EU and non-EU states from 1 May 2004 onwards. Airlines face higher risks because of their international operations, both from parallel investigations by various EU and non-EU competition regulators - which co-operate extensively and exchange of information when investigating international cartels - as well as from civil claims in various countries. While in the USA and in the EU airlines are more accustomed to competition law, many airlines whose countries do not even have competition law are now conscious of their exposure to competition law in the EU and the USA.

Clyde & Co. associate Solange Leandro
Of particular interest was the Commission's decision to grant a 15% reduction of fines on account of the regulatory environment in non-EU countries which, in the Commission's view, "encourage[s] anti competitive behaviour from the airlines". In certain third countries, air transport services are still subject to a high degree of regulation, including active encouragement to arrive at common positions on surcharges. The Commission recognised the pressures airlines must have been facing from such non-EU governments and thus granted some leniency. However, as the Commissioner stated in his speech, "none of the carriers was obliged to collude because of this regulatory environment () we consider this as a mitigating circumstance only, not as a valid excuse". Standing up to governmental pressure can be problematic in some countries. The state compulsion defence has seldom been accepted by EU regulators, and this may be a rare, if grudging, example.

A novel feature of the cartel proceedings has been the important role of civil damages actions started by business customers of the air carriers. In 2008, two flower growers and exporters claimed damages against British Airways in English courts, alleging breaches of EU and UK competition law in the context of the cartel. In October 2010, another damages claim in the context of the same cartel proceedings was lodged in the Dutch courts by Ericsson and Phillips against Air France, KLM and Martinair. It remains to be seen how the potential clash between these two civil jurisdictions will be resolved.

More interesting is the increasing enthusiasm for corporate customers to sue for damages in appropriate cases. Commissioner Almunia observed that these private actions were a matter of "basic justice" for customers harmed by the cartel. It is likely that such private claims by business customers, something routinely seen in US courts, will become prevalent in the EU.

About the autors: Philippe Ruttley is a partner and Solange Leandro is an associate in the EU/Competition team at international law firm Clyde & Co.