WASHINGTON — 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.
Keith H. Packer, a former senior manager of sales and marketing for British Airways, pleaded to conspiracy to restrain trade and was sentenced to eight months in prison in 2008. He admitted joining the cargo conspiracy in 2002 and participating until February 2006.
British Airways and Korean Air pleaded guilty to violating the Sherman act; each was fined $300 million in August 2007.
British Airways admitted fixing cargo surcharges from 2002 to 2006 and passenger fuel surcharges from 2004 to 2006. Korean Air admitted fixing cargo and passenger surcharges from 2000 to 2006.
Announcing four guilty pleas in June 2008, O'Connor said the case "conservatively, has affected billions of dollars of shipments. Estimates suggest that the harm to American consumers and businesses from this conspiracy is in the hundreds of millions of dollars.
"As an example of the impact of the conspiracy, fuel surcharges imposed by some of the conspirators rose by as much as 1,000 percent during the conspiracy, far outpacing any percentage increases in fuel costs that existed during the same time period," O'Connor said.
In one of several lawsuits by passengers and cargo shippers now being heard in a California federal court, San Francisco-based lawyer Christopher Lebsock and others allege airline officials routinely gathered at industry meetings to discuss fuel costs and how to make up losses.
Lebsock said they agreed to add or increase the fuel surcharges that are tacked onto passenger fares and cargo fees.
"We have seen in public documents that they were concerned and wanted to raise revenue to offset the increasing price in fuel," Lebsock said.
According to published notes of an October 2005 meeting of airline representatives in Jeddah, Saudi Arabia, a host of executives openly spoke about surcharges already in place. One official, identified in meeting minutes only by the initials" GF," suggested the group create "a subcommittee to study this subject and come up with a joint proposal."
According to published notes of another meeting of airline representatives in Saudi Arabia in September 2004, "the participants agreed to make uniform policy for such (insurance and fuel) surcharges to be applied."
Not all airline officials at these meetings agreed to join the conspiracies.
During a 2004 industry meeting in Thailand, executives from U.S. based-United Airlines and Northwest Airlines left the meeting when others started discussing setting fares and fuel surcharges, according to a court filing by lawyers in one class action suit.
Warren Gerig, an international manager for United when he walked out of that meeting, declined to discuss the case. The Northwest executive was identified only as Sarathool M. and could not be reached.
While meeting notes make it appear the discussions were open to anyone who accidently walked into the wrong ballroom, Lebsock and Justice officials believe executives were more careful to hide their activities.
"My sense is they weren't really open to the public," Lebsock said. "They weren't that stupid."
Lebsock said documents obtained in pretrial discovery make clear that many surcharge discussions carried over from large group meetings around the world to more private office settings and e-mail discussions
According to one passenger lawsuit, several Asian airlines – including Cathay Pacific Airways, Japan Airlines, and All Nippon Airways – confined many discussions to phone calls and e-mails. Lebsock said evidence shows some airline executives tried to hide or destroy incriminating documents and e-mails.
Lebsock believes the conspiracies were so well hidden that it's possible they would have continued undetected had Lufthansa not come forward.
"In the absence of someone coming forward, and ratting it out, it is very, very difficult to establish that there was a (conspiracy)," Lebsock said.
Justice Department's antitrust division: http://www.justice.gov/atr/index.html