UK: OFT Investigates Price Fixing by Airlines

Last Updated: 10 August 2006
Article by Guy Lougher

The OFT has announced it is conducting a criminal and a civil investigation into alleged price coordination by airlines. The Department of Justice in the US has started a parallel investigation.

In February 2006 the European Commission, US and South Korean competition authorities conducted dawn raids on airlines around the world over concerns about the way in which airlines imposed surcharges for fuel and security. The OFT announced in late-June 2006 that it had carried out a further raid on British Airways (BA) focusing on price co-ordination on fuel surcharges for long haul passenger flights to and from the UK. Virgin Atlantic has stated that it is assisting the OFT with its inquiry and both American Airlines and United Airlines have confirmed that they have received inquiries from the US authorities.

When the OFT's raid on BA began, BA announced that it had suspended two of its senior executives. Press coverage suggests one of them had passed on information to Virgin Atlantic regarding BA's planned increase to its fuel surcharge.

Comments

While the OFT has confirmed that no assumption should be made about an infringement of competition law until the investigation concludes, the public way in which BA suspended two senior executives indicates how seriously the investigation is being taken.

The Enterprise Act 2002 introduced criminal sanctions for individuals who have been dishonestly involved in hard-core cartel behaviour. The maximum punishment is 5 years' imprisonment and/or an unlimited fine. In addition, companies found to have infringed competition law may be penalised by civil penalties of up to 10% of global turnover.

This means that if BA and other airlines are found to have infringed the UK competition rules, the companies involved could be fined heavily. There is also the possibility that individuals who have been involved in any cartel activity could be prosecuted, although this would be the first time the OFT has attempted a prosecution using its Enterprise Act powers. However, if no prosecution takes place in the UK, as happened with the individuals known as the ‘NatWest Three’, who were recently extradited to the US on fraud charges, there is the potential for the US authorities to apply for the individuals concerned to be extradited to face prosecution under US antitrust laws.

Revised Commission policy will lead to higher fines

The European Commission has issued new guidelines for the calculation of financial penalties. Although the maximum penalty of 10% of the undertaking's global turnover remains unchanged, the cumulative effect of the revisions is likely to see many more fines imposed at or close to that 10% threshold.

Key changes to the previous (1998) guidelines are:

  • The basic amount of the fine will be fixed by reference to a percentage (maximum 30%) of the undertaking's turnover on the affected market (known as ‘relevant turnover’). The Commission will consider a list of factors before fixing the percentage;
  • That basic amount will then be multiplied by the number of years the infringement lasted. This is a significant change to the 10% annual uplift under the 1998 guidelines;
  • A sum known as the ‘entry-fee’, comprising between 15-25% of the infringer's turnover on the relevant market, may be added as a deterrent;
  • If the infringer is a repeat offender (whether at EU or national level), the Commission may increase the fine further by up to 100% (in contrast to the current practice of 50%);
  • Conglomerates with large turnovers on markets that are unaffected by their infringing conduct may find their fines increased even more for general deterrence purposes.

Comments

The new guidelines will apply to all infringement decisions that relate to Statements of Objections issued by the Commission any time after the guidelines are published in the Official Journal (expected in early-September 2006). This means that the guidelines have partial retrospective effect, since they could apply to Statements of Objections that contain references to conduct going back several years. In addition, the new fining methodology will permit infringers to calculate in advance their potential exposure to fines and may facilitate the introduction of plea-bargaining into competition enforcement policy.

European Court clarifies application of competition law to public bodies

The European Court of Justice has handed down its longawaited judgment in the FENIN case concerning the purchasing activities of the organisations managing the Spanish health system and whether they constitute undertakings for the purposes of competition law. The Court clarified that the offering of goods and services on a given market is the characteristic feature of an economic activity and that the competition rules do not apply when an entity purchases goods or services for use in a subsequent activity which is not economic in nature. This ruling is a helpful clarification of the position for many public bodies which could be alleged to be abusing their dominant position in relation to their purchasing activities, had they been found to be undertakings.

OFT withdraws decision on MasterCard interchange fees

The Competition Appeal Tribunal has set aside, with the OFT's consent, the OFT's decision of September 2005 prohibiting MasterCard's historic credit card interchange fee arrangements (payments made between banks when consumers pay by credit card). The OFT has decided not to continue with the appeal on the basis that the best use of its resources in the public interest lies in pursuing a new investigation of MasterCard's current arrangements for setting interchange fees, which are now set unilaterally by MasterCard itself, as well as a parallel investigation of Visa's interchange fees. The OFT will also have regard to the European Commission's investigation of MasterCard's cross-border interchange fee arrangements, in respect of which a new Statement of Objections has recently been issued, and the outcome of the EU sector inquiry into payment cards.

Second cartel in UK double glazing products

The OFT has published its decision following an investigation into market sharing and price fixing in the UK's aluminium spacer bar market. This is the OFT's second cartel decision in the UK's double glazing products sector, having previously fined five companies over £2.4 million in November 2004 for price-fixing in the insulated glass desiccant market. The OFT's latest investigation related to a 2002 meeting held in the West Midlands by the four companies involved, at which customers and prices were discussed. The four companies were fined a total of over £1.38 million for infringing the Chapter I prohibition of the Competition Act 1998. Two of the parties successfully applied for leniency and benefited from a 40% and 100% reduction in penalties respectively, bringing the total fine down to just under £900,000.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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