The managers said they were meeting for coffee. It sounded better than calling it a cartel.
For years, senior representatives from more than 30 global airlines met to discuss prices. They gathered in an unassuming conference room at Toronto’s airport, at a summer barbecue of the Air Cargo Club near Boston or on the golf course of a country club in South Korea.
The managers had plenty to hide, according to a lawsuit presented to a U.S. federal court in New York. Lufthansa, Air France, British Airways, KLM, Swissair and other carriers presented customers with fixed prices for flying their freight from 1999 through 2006.
Now, the German rail service Deutsche Bahn has decided to get even and sue the 33 airlines involved for compensation. It marks the first move of its kind against the airline cartel and one that observers said could unleash a new wave of lawsuits by other victimized companies, marking a new and tougher approach toward recouping vast sums of money lost to cartels.
We want to continue to work well with each other. But one thing has to be clear: We cannot accept that resulting losses of wealth are not compensated. Gerd Becht, Deutsche Bahn board member, legal
Deutsche Bahn’s chief target is its German transport rival Lufthansa, according to cases brought in Cologne and New York.
There is much at stake for both companies: Deutsche Bahn faces financial difficulties stemming from newly-liberalized competition from buses, while the legal costs that Lufthansa faces could erode all of its annual profits. Both companies have also faced rolling strikes this year from train drivers and pilots that have cost hundreds of millions.
Deutsche Bahn already submitted a general complaint last year to ensure the case did not fall away under the statute of limitations. Now, the rail carrier has made the complaint more specific and is calling for record levels of compensation of €2 billion, or $2.4 billion. This is the amount that Schenker, the freight line run by Deutsche Bahn, apparently overpaid due to the fixed prices.
Deutsche Bahn is calling for 10 airlines including Lufthansa and British Airways to pay most of the sum: €1.2 billion plus €560 million interest. They argue that Lufthansa was one of the key culprits.
“Lufthansa played a decisive role in the cartel,” said Gerd Becht, Deutsche Bahn’s legal board member. “That’s what investigations by the European Commission and other cartel offices show.”
Lufthansa may also wind up paying the majority of the legal costs and could pay €1.76 billion, in the worst case.
“Under German cartel law, as co-debtor, a carrier can be made liable for damages also caused by other airlines,” said Daniela Seeliger, a cartel law specialist working for the law firm Linklaters. This would mean Lufthansa would have to pay all the damages and then claim money back from the other cartel participants separately.
Deutsche Bahn is wholly government owned. It faces financial difficulties on multiple fronts: calls for increased investment in infrastructure; ongoing strikes exacerbated by a complex trade union structure; and increasingly, stiff competition on the road. Ever since the German market for long-distance bus travel was liberalized in 2012, the country’s roads have been blocked by a mass of long-distance bus companies, which offer passengers far cheaper tickets than the train service.
The bus market is hotly contested, few participants are making money and there is a shortage of drivers. Rail service Deutsche Bahn responded this year by freezing prices, an unusual step as the seasonal annual increase is as predictable as the coming of winter. But the exodus to the bus seems likely to stay as market research shows one in every two Germans would be willing to take the bus for a long distance journey or have done so already. This is three times higher than one year ago, according to the Allensbach Institute which tests public opinion on issues.
There’s no quick relief in sight for the rail carrier. The cartel case is likely to take a long time to resolve, according to observers. Still, this is just the start of a new strategy to go after cartels that have harmed the company, Mr. Becht said. No longer will Deutsche Bahn let established relations with suppliers stand in the way of recouping lost funds.
“We want to continue to work well with each other,” Mr. Becht added. “But one thing has to be clear: We cannot accept that resulting losses of wealth are not compensated.”
Deutsche Bahn’s actions could potentially open the floodgates for other companies that feel burned by cartels. Many others have accepted penalties imposed by federal cartel authorities, but these cases could now be re-opened in the form of civil lawsuits.
“There is so much money to be made that we can expect victims to sue more often and harder. The high legal costs and strife will no longer scare them away,” said one cartel lawyer who declined to be named.
To cite just one example: Cartel lawsuits against auto suppliers in Europe have been running for years. Sources said that one German carmaker has already approached Deutsche Bahn for advice.
German retailer Metro and the French tire giant Michelin have already created cartel divisions within their companies. Deutsche Post meanwhile has also sued two airlines.
Rail and fly. Source: DPA
For Lufthansa, this could potentially mean the loss of far more than its €313 million in net earnings last year. Until now, the airline had been spared the fines imposed on its fellow cartel members – because it turned star witness for cartel authorities instead.
Luthansa firmly denies it owes Deutsche Bahn anything. It argued a ruling by the European Commission had no legal standing and noted its own legal review found that none of its customers suffered actual damages due to the cartel. The company would not give further details as the legal cases are pending.
A look at the cases that have been decided so far would suggest otherwise. Australia’s highest court in 2008 ruled that British Airways made an additional 20 percent from price fixing. Documents from other court cases show that Lufthansa managers played a central role – and knew exactly what they were doing. E-mails would include lines like “delete immediately” or “do not forward.”
Deutsche Bahn’s own lawsuit in New York and Cologne stem from a long series of legal decisions and cases brought against airlines across the globe – from Brazil to the European Union to New Zealand. The cases have all affected one or more of 33 airlines that are accused of agreeing cargo rates. The alleged culprits include American Airlines, Korean Air and Cathay Pacific in Hong Kong.
For airlines, price fixing had long been a matter of course. Until 1995, it was done officially and legally. Airlines regularly regulated prices under the global airline association IATA, which even had a “Cargo Steering Group” for the purpose.
Only after 1995 did IATA decide this was illegal and begin warning its members that cartel authorities would crack down on any ongoing practices. This didn’t scare everyone away: Lufthansa, SAS and Cargolux were among the first to meet under the guise of a “competition analysis,” according to emails that were cited by Deutsche Bahn in its case in New York.
For customers, the deals were hard to recognize. That’s because each airline still had a base price that moved based on supply and demand. What customers didn’t know is that the airline cartel had agreed surcharges for things such as higher fuel prices or security costs.
The cartel revelations have already been costly for airlines. Courts from Australia to the United States to Switzerland have ordered prison sentences for a dozen plane managers and imposed fines of nearly €2.5 billion.
But damages in the billions have yet to be demanded by a single company – until Deutsche Bahn showed up.
Rüdiger Kiani-Kress and Christian Schlesiger write for German weekly news magazine Wirtschaftswoche. Handelsblatt Global Edition editors Allison Williams and Christopher Cermak also contributed to this article. To contact the authors: [email protected], [email protected].