Although it could take months or even years for two major price-fixing probes to be completed, the shockwaves are already being felt around the industry
After a summer that saw two major price-fixing investigations move into top gear on both sides of the Atlantic, the probes have claimed their first big name casualty. Martin George, commercial director at British Airways, resigned in early October after a four-month leave of absence.
The resignation of George, along with BA's head of communications Iain Burns, came after the UK's Office of Fair Trading (OFT) and the US Department of Justice (DoJ) began investigating alleged price-fixing of long-haul passenger fuel surcharges in June. This on-going civil and criminal probe is being conducted independently by the two bodies into BA and Virgin Atlantic's activities but they are "in contact" with each other and swap information, says the OFT.
This investigation came to light a few months after competition agencies in Europe and the USA began examining alleged cartel activity over fuel and security surcharges among air cargo carriers. It is possible that one investigation followed the other, and it has been widely reported that Virgin Atlantic blew the whistle on the passenger case, giving the UK authority information about BA.
George, who was a key part of Willie Walsh's management team at BA, and who was up against Walsh as an internal candidate to succeed Sir Rod Eddington in 2005, said in a statement that he became aware there may have been "inappropriate conversations" in his department about long-haul fuel surcharges. Although he "was not involved in such conversations" and that BA's board had not found that he had behaved in a dishonest way, the right course of action was to recognise his responsibilities as head of the commercial department and resign, said George. He is replaced by BA's planning director Robert Boyle.
Lawyers in the USA have filed class actions against BA and Virgin alleging a global conspiracy to fix prices and fuel surcharges on flights across the Atlantic. BA introduced its first surcharge to compensate for the rising price of fuel in May 2004, and both BA and Virgin, in common with many international carriers, have regularly increased the surcharge since then as oil prices soared.
The OFT offers no guidance on when the investigation will finish, but the potential penalties if found guilty of collusion are steep. In the UK, a maximum fine of 10% of profits could be imposed on a company and the individuals involved could face up to five years imprisonment. Analysts say the case has echoes of the "dirty tricks" affair of the early 1990s when BA and Virgin's bitter rivalry erupted into a legal battle.
BA is also one of over 20 carriers that are being investigated in the cargo pricing-fixing case being conducted by the European Commission, the DoJ and cartel authorities in other countries like Canada. It could take a couple of years for this case to unravel, says a London-based competition lawyer, as all the evidence, such as e-mails and phone conversations, is gathered and examined.
The size of this investigation makes it potentially much more serious for the industry in general compared with the passenger probe that only involves BA and Virgin. This is particularly so following Lufthansa's $85 million deal in September with lawyers representing freight forwarders to settle civil class action lawsuits in the USA.
"The $85 million payment took this issue from one which we didn't think was material to the airlines to one which clearly is," said Chris Avery, London-based analyst with JP Morgan. Lufthansa says this payment has not yet been made as the settlement has to obtain court approval.
The investigation has unsettled senior airline cargo figures and, according to one source, has probably caused a delay in the formation of new cargo alliances that were being evaluated.
For now, the industry has to wait for the decisions of the authorities as to whether price-fixing will be proved. But as Avery notes: "If the industry has been colluding as much as has been implied, it's not been one of the world's most successful cartels."
The ironic thing is that fuel surcharges have been cut in recent weeks by both passenger and cargo carriers as the price of oil has dropped.
Source: Airline Business