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Some freight compaines under investigation for price-fixing

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Some freight compaines under investigation for price-fixing

Old 02-15-2006, 08:47 PM
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Default Some freight compaines under investigation for price-fixing

Inspecting the cargo

Feb 15th 2006
From The Economist Global Agenda
Some of the world’s leading airlines are under investigation for alleged price-fixing by their cargo divisions. If collusion is proved, it would deal a blow to the aviation industry just as it is starting to take advantage of a boom in passenger numbers

THE death of Sir Freddie Laker last week reminded the world’s air travellers of the high cost of flying before he took on, and helped to break, the transatlantic oligopoly enjoyed by the big airlines. The established carriers, their dominance threatened by the rock-bottom fares offered by Sir Freddie’s airline, colluded to slash prices and did their bit to bring down the interloper. His carrier went bust but he subsequently sued his rivals for predatory pricing, and won. So it is perhaps fitting that on Tuesday February 14th, just days after Mr Laker died, competition authorities launched investigations into possible price collusion by a number of large airlines. The probe kicked off with raids on the offices of carriers in America and Europe, and on Wednesday spread to Asia. The suspected price-fixing relates to fuel surcharges and other costs at the airlines’ cargo arms.

Deregulation of the airways and competitive pressures have now brought air tickets within the budget of the lowliest traveller. Now it seems that regulators are concerned that the big airlines may be taking advantage of the contents of the hold. Neither the European Commission nor America’s Department of Justice named the airlines concerned, but those raided include British Airways, Air France/KLM, Lufthansa, Luxembourg’s Cargolux, Cathay Pacific and Japan Airlines. United Airlines and American Airlines both said that they were approached to provide information as part of the probe. South Korean airlines admitted to visits from that country’s competition authorities. Some reports suggest that the alleged collusion goes back several years.

The probe could cause problems for the world’s big airlines just as their passenger businesses are poised for a boom after several lean years. The air freight industry, worth some $50 billion last year, remains a mix of large, cargo-only companies (such as the parcel firms), smaller specialist operators and passenger airlines that operate cargo divisions. The latter’s freight arms tend to be small compared with their passenger operations. For example, British Airways earned revenues of just £482m from cargo in the last financial year, out of a total of £7.8 billion. Even Korean Air, which was the leading freight operator among passenger airlines in 2004, derives only around 30% of its revenues from the cargo business.

However, profit margins in cargo can be big. And the business is set to continue growing at a healthy pace, contributing usefully to the coffers of airlines. Most long-term predictions suggest that, despite weak growth over the past couple of years, the total of freight-tonne kilometres flown will expand by around 6% a year over the next couple of decades (see chart). Airbus and Boeing, the world’s leading big-jet manufacturers, both expect freighter fleets to double over that period.

The growth of air freight over the past 20 years has provided an extra boost for Boeing and Airbus, which both registered record-breaking orders of over 1,000 aircraft a piece last year. Only 78 of Boeing’s new orders were for freight aircraft but that understates the industry’s importance, since many cargo planes are conversions of ageing passenger planes.

Impressive growth in air freight is largely a result of growing demand for transportation for high-value and perishable consumer goods. The globalisation of supply chains has created a need to send electronics, computer components, precision equipment and the like around the world quickly. And consumer tastes for out-of-season vegetables, exotic fish and fresh flowers have also added to the demand for air-freight services. As a result of all this, and the boom in e-commerce, the big parcel companies, such as Federal Express, UPS and DHL (not targets of the current investigation), have seen business boom. Confident that this demand will continue to grow, they are planning big investments in new cargo hubs and planes.

A spokesman for the European Commission pointed out that the fact that it is investigating the airlines does not mean that “the companies are necessarily guilty of anti-competitive behaviour and it does not pre-judge the outcome of our investigations.” The airlines have every reason to hope there is no case to answer. The European Union can levy a fine of up to 10% of worldwide revenues on any firm found guilty of participating in a cartel. That would hit airlines disproportionately hard, since their overall businesses are, by and large, so much bigger than their cargo divisions. In America, the threat of prison hangs over price-fixers.

The carriers concerned have vociferously protested their innocence. Some analysts have suggested that airlines are prone to copy one another’s pricing strategies without that necessarily involving direct collusion. Moreover, proving that firms have operated as a cartel is difficult without some sort of “smoking gun”, such as documents describing meetings in which price-fixing was discussed. But the raids around the world may yet turn up such evidence. And if they do, it could set back the recovery of some of the world’s big airlines just when the sky was starting to look a lot less grey.

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