Crime and Punishment: a back-of-the-envelope analysis of the price-fixing case

The European Commission this week announced fines totaling 800 million euros (US$1.1 billion) against 11 air cargo carriers for “operating a worldwide cartel which affected cargo services within the European Economic area.” The gist of the charge is that the carriers worked together to fix prices of fuel and security surcharges for a six-year period from December 1999 to 14 February 2006. (See the table below for details) The EC said the carriers that were fined “contacted each other so as to ensure that worldwide air freight carriers imposed a flat rate surcharge per kilo for all shipments.” Allegations of collusion regarding freight rates and two other surcharges were dropped due to lack of evidence, as were charges against eleven other carriers. Air France-KLM and SAS have already said they intend to appeal the decision to the European Union Tribunal, while several other carriers, including Cathay Pacific and LAN said they were “weighing their options.”

This is not the first set of criminal penalties imposed on carriers for fixing the price of surcharges during that period. The US Department of Justice has imposed heavy fines, and criminal actions are ongoing in Australia, Canada, Japan, Korea, and New Zealand. In addition, civil lawsuits have been filed in many countries, for amounts as high, or even higher, than the criminal penalties. As an example of the latter, Ireland-based Claims Funding International is leading a lawsuit on behalf of a group of European shippers. That suit is seeking 400 million euros from the Air France-KLM group alone!

Cargo Facts is not in a position to comment on whether the actions involved were illegal — the courts have decided that. But add up the fines and penalties so far imposed, plus those likely to be imposed, and the total will probably be in excess of 5 billion euros. Five Billion Euros! Seven Billion Dollars!

This seems like a huge sum, but it needs to be viewed in context. Industry-wide revenues taken in by the combination carriers and all-cargo airlines involved in the international air freight market averaged about US$30 billion per year in the years in question. If the total of fines and penalties comes to $7 billion, it would equate to roughly 4.0% of industry revenue during the six-year period. Deciding how much of the industry revenue was the result of the price fixing of surcharges, and how much ought to be attributed to the carriers being fined, goes beyond back-of-the-envelope calculation, but it is clear that the amounts were significant, and that the fines, as a percentage of revenue, are not as huge as they at first seem.

But regardless of the size of the fines relative to the carriers’ revenue, the fact that ocean carriers are allowed to fix not just surcharges, but also base rates, makes a fine of any size a bitter pill to swallow.

Note that the fines shown are the final amounts, and include various reductions (including leniency reductions ranging from 0% to 50% for cooperation in the investigation). The total before the leniency reductions was 978.6 million euros. Lufthansa (and subsidiary Swiss) received 100% immunity “as it was the first to provide information about the cartel.”