U.S. DOJ, U.K. OFT Explore Long-Haul Airline Price Fixing Charges

British Airways revealed late last month that it is being investigated for alleged price fixing on transatlantic and other long-haul passenger services. The revelation follows a similar pattern to February's investigation of several airlines over cargo pricing and has resulted in the leave of absence of two BA executives, while spurring a pair of class action lawsuit filings in the United States—which extend allegations of price fixing and airline conspiracy to several domestic and international carriers.

BA said that both the U.S. Department of Justice and the U.K.'s Office of Fair Trading are probing "alleged cartel activity involving British Airways and other airlines in relation to pricing of passenger air transportation, including fuel surcharges."

American Airlines, United Airlines and Virgin Atlantic have said they are cooperating with the inquiry. American said it had "received a United States federal grand jury subpoena in connection with a government investigation into alleged price fixing in the air passenger industry." It added it had been told it was not the subject of the investigation.

A statement from BA said, "British Airways' policy is to conduct its business in full compliance with all applicable competition laws. British Airways is assisting the OFT and DOJ with their investigations." The U.K. Office of Fair Trading said, "no assumption should be made that there has been an infringement of competition law" until the investigation is complete. OFT added that it only has named BA so far because it is the only carrier to have announced it is under investigation.

BA has given leaves of absence to two senior executives as a result of the investigation. One is commercial director Martin George, widely regarded as the airline's second in command, and the other is head of communications Iain Burns, formerly American Airlines' head of public relations in Europe. "The situation must be very serious if BA has suspended a board member," said an airline source. "It would not do that lightly."

BA's disclosure follows a June 13 OFT raid on BA's offices at Heathrow Airport, just outside London. It is believed that an internal investigation team at the airline has been scanning computer and phone records since then.

In February, a whistle-blower from another carrier led officials from the European Commission and the United States to raid the offices of BA and several other airlines regarding fuel surcharges and levies on cargo prices. "When the authorities came to the BA office for cargo, they knew exactly what they were looking for," said the source.

Class action lawsuits—one in New York and one in Pennsylvania—shortly followed disclosures of the investigation, and 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, namely that of fuel surcharges. The suits said the carriers conspired to "fixing the amount of fuel surcharges imposed on air transportation passengers and to raise artificially, maintain or stabilize prices of passenger air fares."

Following an initial fuel surcharge implemented in May 2004, the suit filed in Pennsylvania noted, "British Airways further increased the fuel surcharge in August 2004, October 2004, March 2005, June 2005, and September 2005." Court documents filed late last month claimed BA, Virgin, American and United have engaged in illegally installing fuel surcharges since 2004.

"During defendant British Airways's steady rise in fuel surcharges, defendant Virgin Atlantic also increased the fuel surcharge assessed for air passenger services. In fact, on five occasions, defendant Virgin Atlantic's increases imitated defendant British Airways increases in both timing and amount, including the 2006 increase."

The most recent round of fuel surcharges made by transatlantic carriers came in March and April, when American, Delta, BA and Virgin all announced increases. BA and Virgin both have surcharges of £70 ($128) on return long-haul flights, or roughly $64 per way. "Defendant United Airlines charges approximately $67 and Defendant American Airlines also charges $67 on similar flights," court documents notes of charges per way.

The suit also points out that increases in surcharges were not commensurate with fuel cost increases, noting that the cost of oil has "roughly doubled," while fuel surcharges have grown "14-fold."

John Caldwell, president of consulting firm Caldwell Associates, said that fuel surcharge increases do not necessarily mimic those of fuel costs.

"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 is that they're not sure there's been any proof or audit trail between the actually incurred cost of fuel costs and the surcharges."

Commenting on the possibility that there could be collusion between carriers, another airline source said: "It doesn't come as a surprise to anyone who works in the transatlantic market. They have always tested prices on each other. Price increases can be matched within minutes."

Yet, there is a big difference between price matching and price fixing—especially from the viewpoint of governmental antitrust authorities.

Caldwell said that authorities and plaintiffs would need to show that prices or fuel surcharges "were put in through an unlawful mechanism of prior communications and agreement, prior to or at the time of the publication. The fact they equalize to what someone else published does not prove a conspiracy. It only proves you're engaged in vigorous competition."

Yet, the lawsuits claim such a conspiracy exists, saying the carriers for two years were "engaging in secret meetings and communications in furtherance of the conspiracy, and by holding themselves out as competitors to the public…" the suit filed in Pennsylvania alleged.

Ray Neidl, financial analyst for Calyon Securities, recently noted to investors that the airlines finally look like they are going to make money, so they have attracted the attention of authorities again.

"With everything that they have been through, if they really are price fixing they must be the dumbest people in the world," Neidl told BTN. "Airlines are very careful about pricing, from an analyst viewpoint. The airlines have always been bending over backwards to not discuss pricing and relying heavily on their lawyers regarding what they can and can't say."

Meanwhile, the European Commission is probing whether members of the SkyTeam airline alliance are acting anti-competitively on routes where there is no other significant competition. It has sent what it terms a Statement of Objection to all of the alliance's members concerning a list of routes between the European Union and the United States, as well as intra-E.U. routes and some between the European Union and other countries. In each case, SkyTeam members previously competed on the route but now face no significant competition from other carriers.

The airlines were given 12 weeks to reply. A SkyTeam statement said the airline has been subject to a European Commission competition investigation since 2000 and that the Statement of Objection is a routine part of such an inquiry. It added that the SkyTeam members are "confident that they will be able to settle the case amicably in due course."