International air cargo cartel to be prosecuted

Release no 75, Issued 15 December 2008
New Zealand Commerce Commission

The Commerce Commission is today initiating proceedings in the High Court in Auckland against 13 airlines and seven airline staff, including senior executives, for extensive and long-term cartel activity in the air cargo market.

The Commission alleges that airlines throughout the world colluded to raise the price of freighting cargo by imposing fuel surcharges for more than seven years. This affected the price of cargo both into and out of New Zealand.

It is alleged that airlines first entered into an illegal global agreement in 1999/2000 under the auspices of the trade organisation International Air Transport Association (IATA). The airlines imposed the fuel surcharges between 2000 and 2006. The allegations also involve a series of regional price fixing agreements. In addition, the Commission alleges that a number of airlines conspired to price fix through the imposition of a security surcharge immediately following the 9/11 terrorist attacks.

The airlines the Commerce Commission is filing proceedings against are:

• Air New Zealand Limited
• British Airways plc
• Cargolux International Airlines S.A
• Cathay Pacific Airways Limited
• Emirates
• PT Garuda Indonesia
• Japan Airlines International Co Limited
• Korean Airlines Co Limited
• Malaysian Airline System Berhad Limited
• Qantas Airways Limited
• Singapore Airlines Cargo Pte Limited and Singapore Airlines Limited
• Thai Airways International Public Company Limited
• United Airlines Incorporated

Although the case potentially involves 60 airlines and a great number of individuals throughout the world, the Commission has focused on those airlines which had the greatest impact on New Zealand as well as the most culpable individuals. All the individuals named in the proceedings were managers holding positions of responsibility and were allegedly actively involved in promoting the conspiracy and/or they were allegedly in a position to stop the conduct and deliberately refrained from doing so.

Some airlines are cooperating with the Commission and an early resolution may be possible in some cases.

Airlines earn more than an estimated $400 million each year transporting air cargo to and from New Zealand, and over the more than seven years this agreement was in place the total revenue was approximately $2.9 billion.

Commerce Commission Chair Paula Rebstock said, “The alleged collusion to impose additional charges will have caused extensive harm to the New Zealand economy. New Zealand is a long way from its overseas markets and so the harm to our economy and our ability to compete internationally will have been disproportionately greater than in other jurisdictions in which the conduct took place. Many New Zealand businesses and every consumer will have been directly affected by the increased air freight costs over many years. It will have resulted in increased costs for exporters and importers and higher overall prices for many consumer goods. ”

“Anti-cartel enforcement activity is a priority for the Commission,” said Ms Rebstock. “Participation in cartel activity is internationally regarded as one of the most egregious forms of anti-competitive behaviour. It results in consumers and businesses paying higher prices and having less choice than if competitors were competing honestly. Cartels have grown on a worldwide basis and often operate at a global level. Importantly, cartels undermine New Zealand’s international competitiveness.”

Ms Rebstock said, “Cartels are insidious. They are difficult to detect and extremely difficult to investigate because of their secretive and international nature. The Commission’s leniency policy, where the first member of a cartel to inform the Commission of the cartel’s existence is given immunity from prosecution in return for providing evidence of the illegal conduct, has been successful in detecting both international and domestic cartel activity. The Commission will continue to strongly pursue cartels involved in price-fixing and other anti-competitive conduct.”

The airlines are under similar scrutiny by other competition authorities around the world including the US Department of Justice, the Australian Competition and Consumer Commission and the European Commission. “The Commission will continue to work with its international counterparts in the drive to stamp out this conduct. Not only must the Commission stop the economic harm cartels cause, but we must take strong enforcement action to deter cartels from using New Zealand as their base,” Ms Rebstock said.

Background

Cartels

Cartels are groups of businesses or executives who, instead of competing against each other to offer the best deal, secretly agree to work together and keep prices high. Cartels harm competitors by sharing customers with other cartel members, rigging bids, agreeing to charge higher prices than they would be able to charge in a competitive market, restricting volumes and by squeezing non-cartel members out of the market. Cartels harm the New Zealand economy by making consumers and other businesses pay inflated prices for goods. This also results in exports being more expensive and thus less competitive in overseas markets.

The relevant parts of the Commerce Act prohibit contracts, arrangements or understandings between competitors which have the effect of substantially lessening competition and in particular understandings between competitors which have the effect of fixing, maintaining or controlling prices.

Alleged cartels operating in the air cargo market

Overseas competition authorities are also investigating the air cargo market.

In the United States – British Airways, Korean Air, Qantas and Japan Airlines have settled and agreed to pay record fines. Most recently, Air France KLM has also settled in the US courts and has been fined US$350 million. In total, the US courts have already awarded penalties of US$1.2 billion against airlines for participation in a cartel that has increased air cargo rates to and from the United States. At least one US air cargo executive will pay a fine and also serve a sentence in a US prison as a result of his activity in a cartel. In Australia, the Federal Court in Sydney has ordered Qantas Airways Limited to pay Aus$20 million and British Airways plc to pay Aus$5 million in pecuniary penalties for breaching the price fixing provisions of the Trade Practices Act 1974.

Criminal prosecutions of airlines for non compliance with Commerce Act statutory notices

During this investigation, and common in all cartel investigations, the Commission uses a variety of tools to gather evidence. The Commission also issued notices requiring the airlines to provide information. Three airlines did not comply with the terms of these notices. As a result the Commission filed summary proceedings for non-compliance against Cathay Pacific Airways, Singapore Airlines Cargo and Aerolineas Argentinas earlier this year. Aerolineas Argentinas have entered a guilty plea. The District Court in Auckland will next consider this case in January 2009. The penalties for not responding to a request for information fully can be summary conviction and fines of up to $30,000 for companies.

Leniency and Cooperation

The Commission began this investigation in December 2005, triggered by a leniency application.

The Commission encourages participants in cartels to approach the Commission as soon as possible to admit liability. The first company or individual who brings a cartel to the Commission’s attention and fully cooperates automatically gains immunity from Commission prosecution through the Commission’s Leniency programme. Companies or individuals who wish to admit liability once the Commission has started to investigate a cartel can cooperate with and assist the investigation in return for a lower level of enforcement in the form of discounts on penalties, subject to the endorsement of the High Court.