Airlines may have thought they had come up with neutral methods for surcharges across the air cargo industry but the carriers suffered a rude shock. Authorities in Europe launched a series of "surprise inspections" on air cargo offices of the continent's largest airlines last week, brandishing suspicions of illegal "cartel" behavior in a price-fixing probe that spread quickly to the United States and Asia.
The list of airlines, some handed subpoenas for full-scale searches of several offices and others admitting only to visits or "inquiries," ran to a Who's Who of the world's freight carriers and a scale apparently unprecedented in its scope.
Launched by the European Union on Valentine's Day and backed up by the United States Justice Department and other government bodies in Europe and Asia, the probe struck right at areas of growing concern for shippers around the world and across all modes - the shopper's list of surcharges that now make up a large portion of freight bills.
"Shippers are entitled to expect to operate in an environment of keen commercial competition regarding both cost and service, and events in the recent past have created doubts in confidence," said Andrew Traill, head of air freight policy for the British Freight Transport Association. Traill added it is remarkable when one carrier sets a surcharge "how quickly the airlines follow suit, and with a very similar charge.
"Even if this isn't collusion, there has to be suspicion," he said.
Tim Sailor of Navigo Consulting, a freight shippers advisory firm in Long Beach, Calif., said as the raids were under way that "we have already seen little distinctions between the airlines with accessorial fees, especially fuel and security add-on charges."
With the launch of searches in concert with national authorities in Europe, the European Commission, the EU's enforcement body, issued a statement saying the commission "has reason to believe that the companies concerned may have violated Article 81 [of the EC treaty], which prohibits practices such as price fixing."
No companies were charged at first, and although officials at the U.S. Justice Department and other countries confirmed the investigation of air cargo pricing they refused to identify companies involved or even what they were looking for.
Several carriers, many of them publicly traded and subject to disclosure rules, confirmed the raids and filled in details.
Scandinavian Airlines System said its cargo unit in Copenhagen was subjected to "an unannounced inspection" by authorities investigating "whether any form of prohibited cooperation has occurred in the air-cargo industry for the purpose of restricting competition."
SAS said authorities were looking at airline cooperation on routes since 2000, mainly involving surcharges such as for fuel, extra security measures after the September 11 terror attacks and war-risk insurance after the start of war in Iraq in 2003.
Reports said the authorities in some cases issued subpoenas and seized computers and documents. Industry sources said some of the contacts were no more than efforts by authorities to get information about pricing practices generally.
European airlines that said they were visited included British Airways, Air France and partner KLM Royal Dutch Airlines, Germany's Lufthansa and Cargolux of Luxembourg. Industry sources said BA offices at London Heathrow Airport and New York's Kennedy International Airport were searched. A spokeswoman for British Airways World Cargo said authorities were seeking information "relating to alleged cartel activity involving British Airways and a number of other airlines and cargo operators. British Airways' policy is to conduct its business in full compliance with all the applicable competition laws."
In the United States, carriers contacted included American and United airlines and Polar Air Cargo. American Airlines released a statement saying it had received a subpoena but added the airline "has not been notified that it is a target of an investigation and unlike some other airlines American has not received a search warrant."
A UPS spokesman said UPS has been "informally contacted" by the Justice Department while FedEx said it had not heard from investigators.
Asian carriers mentioned were Japan Airlines, Cathay Pacific in Hong Kong, and South Korea's Korean Airlines and Asiana.
Polar's parent, Purchase, N.Y.-based Atlas Air Worldwide Holdings, said in a brief regulatory filing that Polar "was one of a number of cargo carriers that received formal requests for information from the U.S. government in connection with an investigation into air cargo pricing practices. Polar and Holdings are fully cooperating in such investigation."
U.S. customers were watching the events closely.
"The airlines are long-term partners, and we're hoping for the best resolution for the industry," said Brandon Fried, executive director of the Airforwarders Association. "But if there is price-fixing occurring, then the question is whether our members have been receiving the most competitive rates available."
Surcharges have been a key point of contention between airlines and their customers, both shippers and forwarders, since they many started to rise in the late 1990s. Shippers in Europe at that time threatened formal complaints over the surcharges and the airlines sought to dispel those concerns for fuel surcharges with public fuel price indices that trigger automatic movement of the charges.
The added security charges after the September 11 raised an even greater rift between airlines and many cargo customers, however, and some forwarders have challenged airlines to detail their use of the security surcharge revenue.
Most recently, combination airlines around the world as well as many all-cargo carriers hiked fuel surcharges this month after watching jet fuel costs push upward for weeks. But the increases hit just as fuel prices were ebbing again, reviving complaints by some that carriers treat the surcharge as a profit item.
The fuel surcharge "is a revenue item for the carriers," said Andy Williams of M33 Integrated Solutions, a third-party logistics operator. "Sure, their costs are going up dramatically, but the fuel surcharge is over-exceeding that cost. So from a shipper's standpoint, there is a push-back to [use] a more generic fuel surcharge structure."
Even before last week, there were hints of official resistance.
A New Zealand judged last year ruled against Air New Zealand over the special fees, saying fuel is a normal operating expense that should be covered within other pricing. The commerce commission there recently warned it would prosecute any companies that add fuel surcharges.
The airlines also have come under fire in recent years as they have worked together to set common pricing standards, if not precisely the pricing, in some areas.
Shippers and forwarders around the world protested loudly three years ago when carriers, working through the International Air Transport Association, sought to raise prices through a change in their dimensional weight calculations. The Justice Department in a regulatory filing said that effort was "clearly a price-fixing agreement."
The department also said that broad industry agreements under IATA on air freight and passenger rates were "contrary to fundamental United States competition policy set forth in antitrust laws" and urged that they lose an antitrust immunity they had enjoyed.
Peter Gatti, executive vice president of the National Industrial Transportation League that represents major freight-system customers, said "shippers have been concerned about the fuel surcharges in all the modes" as a growing way to lock in a higher charge.
"Particularly on the rail side and on the ocean side, there has always been a feeling that these surcharges are just disguised general rate increases," he said.
One issue is that many carriers are imposing the same level of extra fee as competitors, regardless of an individual carrier's cost structure. "There is nothing illegal about a carrier building in an additional charge over the basic charge," he said. "What is illegal is if everybody is using the same level of surcharge. You then could have a prima facie case that the airlines are colluding. If there is no deviations among the airlines subscribing to an index [used to set the fuel fees], there could be a cause for Justice to look at that."
Associate Editors Bill Carey and John Gallagher contributed to this story.
John D. Boyd
