British Airways and Korean Air are just the first of a series of carriers likely to be fined for their part in the price-fixing of passenger and cargo flights.
With three investigations underway or just finished the airline industry is coming under its most intense scrutiny ever from antitrust authorities around the globe. That scrutiny has already seen fines approaching $850 million handed out to BA and Korean.
Airlines from around the globe are bracing themselves for heavy fines from US, European and other national authorities over the next year or two as more carriers make plea bargains or as the investigations come to a conclusion. There is also the possibility that in some countries individual executives could be charged with criminal offences for their involvement in price-fixing.
The first fines to be announced came from the UK and US authorities, which have been working together since June 2006 to investigate the price-fixing of long-haul passenger fuel surcharges between BA and Virgin Atlantic between August 2004 and January 2006. BA's commercial director Martin George and its corporate communications head Iain Burns left the airline in October 2006 shortly after the investigation began.
In early August, the UK's Office of Fair Trading and the US Department of Justice (DoJ) said that BA admitted the collusion. In the UK its penalty is £121.5 million ($243 million), while the US handed down a fine of $100 million. BA's penalty was reduced because it co-operated in the investigation while Virgin is likely to receive no fine under leniency policies which favour companies that are the first to reveal price-fixing.
At the same time as it handed out the passenger price-fixing fine, the DoJ announced the first fine in another investigation: a multi-national probe into the price-fixing of air cargo fuel surcharges. In addition to its passenger price-fixing plea bargain, BA also agreed to pay a fine of $200 million to the DoJ for its part in the air cargo case.
At the same time, Korean agreed to a DoJ fine estimated at $100 million for its role in the cargo affair. Virtually every major cargo carrier is under scrutiny in the cargo investigation.
Most acknowledge they are part of on-going probes but are saying little publicly. Following the BA and Korean Air fines, Qantas says it has put aside $40 million to cover probable fines in the US. "These investigations revealed that the practice adopted by Qantas Freight and the cargo industry generally to fix and impose fuel surcharges was likely to have breached relevant competition laws," says Qantas.
Cathay Pacific chairman Christopher Pratt says the carrier is co-operating fully with the relevant authorities, but "given the uncertainties surrounding these issues, no reliable estimate of any potential liability can be made at this time by Cathay Pacific".
In the USA the DoJ says Lufthansa was conditionally accepted into its leniency programme "after it disclosed its role in the international cargo conspiracy". The airline has also asked for and received conditional immunity from the European Commission and cartel authorities in other countries, it says. Investigations are ongoing in Australia, Canada, South Africa and New Zealand.
In addition to the likely fines from cartel authorities, airlines may also have to defend themselves against class-action suits from freight forwarders (and in the separate cases of BA, Virgin and Korean from passengers) who claim they were overcharged. Lufthansa has already conditionally settled class-action claims in the USA for $85 million and in Canada for $5 million, it says.
The third investigation is into the price-fixing of fares on flights between Korean and the USA between 2000 and mid-2006. The DoJ has fined Korean Air an estimated $200 million for its part in this activity.
According to Michael Jürgen Werner, managing partner at Brussels-based law firm Norton Rose, there is an increasing trend across globalised industries, such as electronics and air transport, for worldwide investigations into unlawful activity. "It is a reflection of stronger co-operation between antitrust authorities in a more globalised market," he says.
Philip Collins, the chairman of the UK OFT, says its work in parallel with the DoJ has paid off: "Such close co-operation is intended to deal with companies that operate globally and who do not respect competition laws." Similar collaboration continues to take place with the cargo price-fixing investigation.
Over the past few years the industry has seen a few notable price-fixing cases, although nothing with the international scale of the current investigations. In 2004, Brazilian authorities found several carriers guilty of fixing prices on the Rio de Janeiro-Sao Paulo trunk route. In an earlier case, the entire supervisory board of Scandinavian Airlines resigned in 2001 after the carrier was fined for its part in fixing prices with rival Maersk Air.
The three price-fixing probes
1. Transatlantic passenger fuel surcharges
BA and Virgin Atlantic collude for 18 months over the price-fixing of long-haul passenger fuel surcharges across the Atlantic
BA fined $343 million by US and UK authorities
Virgin receives no fine under leniency policies
2. Air cargo fuel surcharges
Global probe into the fixing of air cargo fuel surcharges
BA fined $200 million
Korean Air fined $100 million (estimate)
Qantas sets aside $40 million for potential fine
Lufthansa enters DoJ leniency programme
3. Korea-US flight price-fixing
Alleged price-fixing of fares by Korean Air with other carriers on flights between Korea and the US
Korean Air fined $200 million (estimate)