The cargo price-fixing probe has entered a new phase with European regulators handing at least 15 airlines statements of objections. These and similar investigations by other governments could lead to hefty fines for several major carriers
Two years after government agents raided airline offices around the world, the cargo probe that is causing genuine paranoia in airline cargo departments everywhere is moving from an investigation into actual charges.
The European Commission has entered this phase ahead of the US Justice Department and other agencies by issuing statements of objection to at least 15 airlines. The EC has not said which or how many airlines it has served but 15 carriers have acknowledged they have received such statements (see list above right).
Other government-owned or privately-held airlines that have no duty to disclose may also have been served, but have not told anyone. Some sources claim as many as 25 airlines have received the EC statements, but this number is unconfirmed.
This list of airlines is instructive. First, it includes the three airlines - British Airways, Korean Air and Qantas - that have already pled guilty and agreed to pay fines of nearly a $1 billion. Second, several airlines whose offices were raided or were otherwise investigated have not been named. These include American and United Airlines, as well as Taiwan's China Airlines and EVA Air.
Both facts underscore a critical point. Even though this may be the world's largest antitrust investigation, each jurisdiction decides independently how and against whom to proceed. None of the three airlines that settled did so with the EC. Hence, it and any other competition agency that did not settle with these airlines may go after them. And even though the EC apparently has not charged American, United, China Air, EVA or a number of other airlines, this does not mean they are off the hook in other countries. It is possible, for instance, that the EC elected not to charge these carriers, not because it thought they were innocent, but because they did not transport enough cargo to or from Europe to bother.
It remains unclear how many nations are actively conducting their own investigations, as distinct from merely co-operating with the Europeans and Americans, but competition agencies in at least Canada, Australia and New Zealand have said they are. The UK Office of Fair Trading has also been active, but may now defer to the EC.
An airline receiving such a statement can review the evidence and file a written defence, citing any other evidence that supports its position. The Commission stresses that "sending a statement of objections does not prejudge the final outcome".
Airline responses are due in early March. At that time each airline may also request an oral hearing, and most likely will. If they do, proceedings could drag on for most of this year. Following each hearing, the Commission will decide whether that airline violated Europe's antitrust rules, and, if so, the amount of any fine.
Europe's procedure differs from that in the USA. As a US lawyer explains, in Europe "there is no criminal prosecution and no individuals are subject to punishment, unlike under our antitrust statutes". The EC also appears to be proceeding against each airline separately. Therefore, the Commission would not, for example, consider evidence implicating airline A in the case against airline B, unless A and B allegedly agreed with each other.
In the USA, the Justice Department could decide to prosecute all defendants in one group, and it would be up to each airline to convince a court that it should be tried separately.
The EC's claims allege a price-fixing conspiracy involving cargo surcharges. They do not raise any issues about passenger surcharges, although one of BA's settlements included claims about passenger fares. Conversely, and contrary to earlier suggestions, the cargo claim is not limited to an alleged agreement among airlines to stick with the fuel surcharges posted on Lufthansa's website. The allegations apparently extend to other surcharges to cover the added costs of anti-terrorism measures and war-risk insurance after the outbreak of war in Iraq.
Under EC rules, companies can be fined 10% of their annual sales for antitrust violations. In evaluating what fine to impose, a major consideration will be the seriousness of an offence and how much it hurt Europe. Neelie Kroes, Europe's competition commissioner, has gained an aggressive reputation for levying a record $4.75 billion in fines last year in an array of antitrust cases.
What effect will EC fines have elsewhere? Each country that prosecutes has its own authority for imposing fines. Although not limited by such a measure, a major consideration would be the damage caused by an offence within that country. Prosecutors are unlikely to seek less based on how much an airline was fined in another country.
Also lurking in the wings are the civil class actions brought mostly by freight forwarders. One is pending in Australia, and at least 20 in the USA. Until the statutes of limitations run, more could be filed. The US cases may be consolidated and some of them overlap, but they still represent a significant threat. Under US antitrust law, any proven damages are trebled.
Even though an airline may have settled criminal charges or prosecutors may have elected to leave it alone, this does not immunise it from civil actions for damages. Asiana and United, for example, have not been named in any criminal case, but they are facing one or more class actions.
Estimating the total impact of all these potential cases requires many assumptions. Liability is disputed and different agencies assess penalties differently. If most of the airlines that could be charged are found guilty by most of the countries where charges are likely, with an average fine in each case of $200 million, and treble damages are awarded in perhaps half the class actions, total airline liabilities could easily top $10 billion, not counting fees and litigation costs.
These cases are certainly affecting how airlines do business. Cargo managers are more cautious about talking with colleagues at other airlines, especially when the subject of prices is raised. And at conferences managers are careful about who they are seen with.
The potential total impact on the industry of price-fixing cases could top $10 billion, excluding fees and litigation costs
The toughest questions will be those about price leadership. Nothing is illegal about one airline following another's prices, so long as it acts unilaterally. But when will antitrust authorities begin to question parallel pricing? This gives in-house lawyers grey hair, because there is no precise answer. It depends on "plus" factors, meaning parallel prices accompanied by other actions that seem inconsistent with an airline's self-interest. For example, if airline B raises its fuel surcharge by the same amount as price-leading airline A, when B has hedged its fuel at a lower price and could afford to undercut A, this will attract the kind of attention that has created this cloud over the industry.
Read more about the impact of the cargo probe online at http://www.flightglobal.com/price