March 10th, 2011
By: Alicia A. Caldwell
When the airline industry took a nose dive a decade ago, executives at global carriers scrambled to find a quick fix to avoid financial ruin.
What they came up with, according to federal prosecutors, was a massive price-fixing scheme among airlines that artificially inflated passenger and cargo fuel surcharges between 2000 and 2006 to make up for lost profits.
The airlines’ crimes cost U.S. consumers and businesses – mostly international passengers and cargo shippers – hundreds of millions of dollars, prosecutors say.
But the airlines caught by the Justice Department have paid a hefty price in the five years since the government’s widespread investigation became public.
To date, 19 executives have been charged with wrongdoing – four have gone to prison – and 21 airlines have coughed up more than $1.7 billion in fines in one of the largest criminal antitrust investigations in U.S. history.
The court cases reveal a complex web of schemes between mostly international carriers willing to fix fees in lockstep with competitors for flights to and from the United States.
Convicted airlines include British Airways, Korean Air, and Air France-KLM. No major U.S. carriers have been charged.
The price-fixing unraveled largely because two airlines decided to come clean and turn in their co-conspirators.
In late 2005, officials with German-based Lufthansa notified the Justice Department that the airline had been conspiring to set cargo surcharges. By Valentine’s Day 2006, FBI agents and their counterparts in Europe made the investigation public by raiding airline offices. After those raids, British-based Virgin Atlantic came forward about its role in a similar scheme to set fuel surcharges for passengers.
Investigators eventually found a detailed paper trail laying out agreements, stretching back to 2000, to set passenger and cargo fuel surcharges The probe expanded to airlines doing business between the U.S. and Europe, Asia, South America, and Australia.
The Lufthansa and Virgin Atlantic mea culpas allowed them to take advantage of a Justice Department leniency program because they helped crack the conspiracies.
Former Associate Attorney General Kevin J. O’Connor, who oversaw Justice’s antitrust division in the late 2000s, said he doesn’t know why they confessed, but the result “demonstrates the effectiveness of that amnesty program.”
Now in private practice, O’Connor said companies that confess for amnesty may be wisely trying to limit liabilities from illegal conduct.
“Generally speaking, if they have an inkling they might get caught, they come in,” O’Connor said. “The theory might be that eventually these things will be exposed and why risk continuing.”
Federal prosecutors and investigators declined to discuss details of the cases because they are still investigating.
“Lufthansa Cargo fully cooperated with the investigation launched by DOJ,” Martin Riecken, Lufthansa’s director of corporate communications for the Americas said. Virgin Atlantic referred all questions to the Justice Department.
Airlines and executives who didn’t come forward were charged with violating the Sherman Antitrust Act.
Two former airline executives were sentenced to six months in prison; two others were ordered to prison for eight months. Charges are pending against 15 executives, nine of whom are considered fugitives.
Bruce McCaffrey, one-time vice president of freight for the Americas at the Australian carrier Qantas, pleaded guilty to conspiracy to restrain trade. He was sentenced to six months in prison in 2008. He admitted working with other airlines to fix cargo fuel surcharges between 2000 and 2006.