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“Price fixing is not profit enhancing” says judge and fines Garuda $13 million

Pictured: an airplane in Garuda Indonesia livery. Photo: Shutterstock.

Airline Garuda Indonesia (IDX: GIAA) has been ordered by the Federal Court of Australia to pay A$19 million (US$13.14 million) in penalties for air cargo price fixing as part of a massive international cartel. Australian penalties of A$132.5 million (US$91.64 million) have so far been levied against 14 airlines, according to the Australian Competition and Consumer Commission.

Garuda has been ordered by the Australian courts to pay the second-highest amount of penalties for air cargo price fixing. But these are only the Australian penalties – fines have been levied on price-fixing airlines by courts and regulators around the world.

Garuda will also have to pay the legal costs of the Commission, which was the complainant in the case.

Numerous international airlines have been accused of collusive behavior including, but not limited to, Air New Zealand, British Airways, Cargolux Airlines, Cathay Pacific, Emirates, Malaysia Airline, Martinair Holland, Qantas Airways,Singapore Airlines Cargo, Societe Air France, Thai Airways, Japan Airlines,

The litigation has been long and complex. As Judge Perram noted in the opening comments of the judgement, “after more than nine years of litigation including, at least to this stage, a six month trial, two appeals to the Full Court of the Federal Court and two appeals to the High Court, the Australian Competition and Consumer Commission has succeeded in demonstrating that Garuda Indonesia Ltd contravened the Trade Practices Act 1974… by reaching and implementing a number of understandings with other international airlines to impose various pre-determined surcharges on the supply of air cargo services from overseas ports to ports in Australia”.

Two separate penalties imposed

Judge Perram imposed two separate penalties. A penalty of $15 million was imposed because Garuda fixed the price of security and fuel charges, along with a customs fee from Indonesia. A second penalty of $4 million was imposed because Garuda imposed insurance and fuel surcharges from Hong Kong.

The combined penalty levied on Garuda is the second-largest of all the airline price fixing cases. And it exceeds Garuda’s annual cargo revenue between 2003-2006 on all routes.

“The penalty to be imposed upon Garuda must be such as to make crystal clear to international commercial airlines engaged in air freight that collusive price fixing is not profit enhancing,” Judge Perram said.

Airline Garuda Indonesia will have to pay millions of Aussie dollars in penalties;
Photo Shutterstock

“Price fixing is a serious matter”

The Australian Competition and Consumer Commission was the investigating and prosecuting authority. Commenting on the decision of the Federal Court, ACCC chairman Rod Sims said, “Price fixing is a serious matter because it unfairly reduces competition in the market for Australian businesses and consumers, and this international cartel is one of the worst examples we have seen.

“The ACCC has recently entered more formal agreements with the FBI on cooperation and information sharing, and has strong links to other competition regulators worldwide”.

There were five types of behavior, from 2001 to 2005, that were under consideration. There was a rolling series of fuel surcharges. For instance, in 2002 there was a fuel surcharge of US$0.05 / kg on all routes from Australia to Japan. A kilogram is equivalent to 2.20 U.S. pounds. There were other fuel surcharges. For instance, there was a Hong Kong Imposition Understanding in which the airlines levied a fuel surcharge of HK$4.80 (US$0.61) per kilo of cargo between October and November 2005. There were many other fuel surcharges.

There were insurance and security surcharges. For instance, there was a rolling series of Indonesia Security Surcharges set at US$0.05 per kilogram of cargo.

For about 17 months between May 2004 and October 2005 there was a fee of US$5 on every airwaybill. This charge was referred to as a “Customs Charges Data Processing”.

Fixing the overall freight rate

And then there was also fixing of the overall freight rate. Garuda took part in the “Indonesia Air Freight Rate Understanding” in which the airlines agreed to set a floor on various air freight routes into Australia.

The fourth behavior, which formed the bulk of the ACCC’s case that there was anti-competitive conduct, including price-fixing, was that in Hong Kong, Singapore and Indonesia, the airlines (including Garuda) had set up industry representative bodies called “cargo sub-committees”.

“The Commission’s basic contention is that the [committees) became forums in which the airlines were either able directly to engage in price fixing with respect to the surcharges and customs fees or that they provided an environment in which such conduct was facilitated,” Judge Perram said.

The judge ruled that the Commission had shown that Garuda and other international airlines agreed to, and then actually did, set fuel surcharges, security charges, and a customs fee at predetermined levels. The Commission was also able to prove that, in at least one instance, Garuda had fixed an actual air freight rate.

Garuda acted contrary to law

Such conduct was held by Judge Perram to be contrary to section 45 of Australia’s national Trade Practices Act (1974), which was in force at the time. Under that law, it was unlawful for a company to make a contract or an arrangement, or come to an understanding, if the purpose was to have the effect of substantially lessening competition. Such agreements and behaviors were also caught if they were “likely” to, or actually do, substantially lessen competition. The Trade Practices Act has since been replaced by the Competition and Consumer Act 2010.

As the High Court of Australia (which is the nation’s final court) has already refused permission to hear an appeal, for Garuda this long-running litigation is now over. Garuda has to pay before the end of June.

Internationally, according to the ACCC, regulatory authorities around the world have taken action against price fixing airlines. “Fines or penalties ordered against various airlines in Europe, the United States, Korea, New Zealand, Canada, and India,” the ACCC said in a statement.

FreightWaves contacted Garuda Indonesia for comment but did not receive a response.