Fuel surcharge price-fixing judgments against British Airways and Korean Air this month are part of a wider ongoing U.S. Department of Justice probe into airline antitrust activities. A spokesperson last week said the investigation goes "beyond simply fuel surcharges," but would not disclose other carriers DOJ is investigating.
Meanwhile, British Airways' admitted improprieties "add fuel" to ongoing class-action suits alleging price-fixing among BA, American, United and Virgin Atlantic, a spokesperson for the law firm Cohen Milstein Hausfeld & Toll said. The firm last June filed the suit that since has been consolidated with similar district court cases in California. The class is "seeking damages on behalf of all individuals who have been victimized by price-fixing on passenger tickets, including fuel surcharges, on long- haul flights in and out of London."
British Airways this month got hit with fines on both sides of the Atlantic. The U.K. Office of Fair Trading and U.S. DOJ fined the carrier more than $540 million (£266 million) after it admitted to "collusion over the price of long-haul passenger fuel surcharges" with rival Virgin Atlantic between August 2004 and January 2006. OFT and DOJ granted Virgin immunity from fines since the carrier was the first to give "full details" in relation to the "cartel conduct." DOJ, however, said the carrier is "obligated to pay restitution to U.S. victims."
DOJ also fined Korean Air $300 million after the carrier pleaded guilty to fixing prices on passenger and cargo flights. A DOJ spokesperson last week told BTN the department is "unable to say, due to continuing investigation," with which carrier Korean Air is charged with colluding.
OFT said between August 2004 and January 2006 the average fuel surcharge rose from £5 to £60 per ticket "for a typical BA or Virgin Atlantic long-haul return flight." OFT found the two carriers on at least six separate occasions "discussed and/or informed each other about proposed changes to the level of the surcharges, rather than setting levels independently as required under clear and well-established competition law principles."
DOJ said British Airways passengers flying between the United Kingdom and the United States in the investigation period "paid more for their tickets as a result of the illegal cartel," noting the fuel surcharge increased from $10 to $110 per ticket in the time period investigated.
"When British Airways, Korean Air and their co-conspirators got together and agreed to raise prices for passenger and air cargo fares, American consumers and businesses ended up picking up the tab for their illegal conduct," said acting associate attorney general William Mercer.
John Caldwell, president of consulting firm Caldwell Associates, said that fuel surcharge increases do not necessarily mimic those of fuel costs and generally are not negotiable, which frustrates many corporate travel buyers. "The surcharge may or may not be the same as the actual cost of the fuel increase," he said. "It can be an excuse for hiking prices. That's another thing that has customers upset and skeptical: They're not sure there's been any proof or audit trail between the actually incurred cost of fuel and the surcharges."
Caldwell noted, "The government is not in the business of getting recourse back for consumers when they've been subject to price-fixing. That would have to be pursued privately, but for the time period for what the fine covers, there's big-time civil liability that those airlines could be exposed to, and I would imagine there would be a hell of a lot more involved in that than the fine. That, then, has the ironic twist that maybe the companies that used BA may get a little bit back, but an awful lot pours into the pockets of the lawyers."
Several class-action lawsuits followed disclosure of the investigation and have since been consolidated. They go a step further than U.K. or U.S. authorities in alleging British Airways, American Airlines, United Airlines and Virgin Atlantic for years have colluded on pricing for fuel surcharges (BTN, July 17, 2006).
Charles Tompkins, an attorney with Cohen Milstein Hausfeld & Toll, the class' lead counsel, last week said the suit is in mediation and he expected a quick resolution. "We've never had any doubt about the fact that the two companies conspired. British Airways' recent guilty plea confirms that even further," he said.
He said companies subject to fixed fuel surcharges are "entitled to receive the overcharge amount, even if they weren't the traveler. There are going to be some entities who are going to be owed a very significant sum because they probably paid for 50, 100 or more employees to travel a year. That $50 surcharge for each one adds up," Tompkins said.
BA CEO Willie Walsh in a statement issued this month said that such surcharges "are a legitimate way of recovering costs and when set independently do not breach competition law. I want to reassure our passengers that they have not been overcharged. However, this does not in any way excuse the anti-competitive conduct. This behavior is entirely unacceptable and we condemn it unreservedly."
Europe-based Citigroup Equity Research airline analysts in a research note this month said, "We believe BA did not make excess revenue over the surcharges and therefore there should be no other impact on revenue or profitability besides increased net interest" since the carrier already had provided for the fines in its earnings outlooks.
The U.K. OFT and U.S. DOJ last year began conducting separate but parallel investigations into the alleged price-fixing schemes (BTN, July 17, 2006).
OFT said Virgin Atlantic prompted the investigation when it came forward with information about fixing prices. "British Airways has also provided full cooperation with the OFT's investigation under the leniency program and this is reflected in the penalty announced today," OFT said in a statement. The investigations resulted in the resignation last October of BA commercial director Martin George and communications head Iain Burns (BTN, Oct. 9, 2006).
"BA already let go two senior managers in 2006 when it admitted to wrongdoing," Citigroup analysts said. "If the CEO had been implicated, we assume he would have resigned already. Most of the alleged discussion took place before he joined BA."
DOJ said it would arraign and sentence British Airways and Korean Air on Aug. 23, and the carriers' fines would be remitted to the Treasury Department for the Crime Victims Fund.
British Airways said it entered into a plea deal with the U.S. antitrust authority, agreeing to pay a $300 million fine. DOJ's Antitrust Division said BA and Korean agreed to cooperate in its "ongoing investigation into the air transportation industry." Virgin Atlantic and Lufthansa also are cooperating in the investigation.
British Airways' OFT fine of £121.5 million includes only penalties for passenger price-fixing, as its cargo price-fixing investigation continues. OFT said that it also is in the midst of a criminal investigation "into whether any individuals dishonestly fixed the levels of the surcharges." It further noted that "the corporate admission by British Airways that it infringed civil competition law does not imply that any individuals dishonestly fixed prices."
"We informed regulators as soon as our legal team was made aware of the nature of contacts that had occurred between some individuals at British Airways and Virgin Atlantic," Virgin Atlantic said in a statement. "We take complying with competition laws extremely seriously and regret that contacts were made between the two companies. As a criminal investigation is continuing, we are unable to give further details until the regulators publish their full findings."
DOJ said Korean Air "reached an agreement with its rival to fix certain passenger fares for flights from the United States to Korea," as well as coordinating air cargo rates with competitors.