Cartel on the wings

The Hindu Business Line, June 23, 2010

By Pradeep S Mehta

While the Competition Commission of India is yet to progress on one alleged case of airline cartelisation — code sharing deal — by Kingfisher and Jet Airlines, our national carrier, Air India, barely escaped being prosecuted by the Korean Fair Trade Commission in a recent case of cartelisation in cargo freight. In May, 2010 the KFTC levied a record fine of more than $98 million on 19 airlines in the biggest cartel case that it has handled.

Fuel surcharge rates

It was found that the airlines had conspired to raise fuel surcharge rates for air cargo to-and-from Korea between 1999 and 2007 in a concerted manner. The case included summoning 54 airline executives from all over the world for investigation and conducting a joint investigation with foreign competition authorities for the first time. The regulator found that the conspiracies took place on outbound shipments from Korea and inbound shipments to Korea from Hong Kong, Europe and Japan.

The case showed that the airlines overcharged by $5.71 billion in the local market by imposing or increasing fuel surcharges during the eight-year period.

The uncovering of airline cartels on fuel surcharge actually began in 2006, when European and US authorities investigated few airlines including British Airways. The investigation came at a time when the airlines were facing high fuel costs and competition from low-cost carriers.

The situation deteriorated further in 2007, as more airlines were inspected and charged for various anti-competitive practices. European Commission charged several airlines for fixing freight service prices. British Airways had to pay billions of dollars in fines as the UK and the US competition authorities denounced it for price fixing during the period 2006-07.

Difficult to detect

Cartelisation is very difficult to detect and investigate for its inherently secretive nature. The task is more difficult in aviation industry because it operates across borders. As a consequence of liberalisation, many large airlines such as British Airways and Lufthansa are now privately owned. These are being increasingly scrutinised as they engage themselves in collusive agreements.

In all the reported cartel cases, there was always one partner who spilled the beans with the hope of getting away with lesser penalty or what is called as leniency. In the case of British Airways, which was prosecuted in 2007, it was Virgin Airlines which cooperated with the authorities.

Even in the Korean case, it was the Korean Airlines which applied for leniency by becoming the prosecuting agency’s ‘friend’. Such a provision for leniency now exists in all competition laws, including the one in India. In fact, leniency can be sought by more than one perpetrator as the enquiry moves on thus buttressing the prosecution’s case.

The Australian Competition & Consumer Commission has to date named 15 airlines in its investigation and has already collected $38 million as fines while some of the cases are yet to be decided.

The damage that airline cargo cartels cause by raising the surcharge rates is huge as evident from the figures published by competition agencies. Consequently, the prices of goods transported also get overburdened from artificial hikes thus affecting consumer welfare adversely.

The fines from cases, such as the few discussed above, can be used to promote awareness about competition in developing countries and for capacity building. In the US, for example, fines in antitrust cases are often put into a trust account to pursue education and research on competition law issues.

The author is the Secretary-General of CUTS International.

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