Australian Competition and Consumer Commission v British Airways PLC

THE COURT ORDERS BY CONSENT THAT: 2. The respondent be restrained, for a period of five years from the date of this order from making, arriving at, or giving effect to, any contract, arrangement or understanding with any of its competitors for the supply of the services of the carriage of international air cargo, containing provisions which have the effect of fixing, controlling or maintaining the price or any part of the price at which it or any of them will supply those services in competition with each other unless: 2.1 the said contract, arrangement or understanding does not involve or relate to the carriage of goods to or from Australia; 2.2 the said contract, arrangement or understanding is necessary for the purpose of interlining between two or more carriers in the course of supplying services of the carriage of international air cargo; or 2.3 the respondent is specifically authorised to do so under section 88 of the Act. 3. The respondent have liberty to apply on 7 days notice for a variation of this injunction. 4. The respondent pay the applicant within 14 days of this order $200,000 as a contribution towards its costs of and incidental to these proceedings. Note: Settlement and entry of orders is dealt with in Order 36 of the Federal Court Rules. The text of entered orders can be located using eSearch on the Court's website. IN THE FEDERAL COURT OF AUSTRALIA

NEW SOUTH WALES DISTRICT REGISTRY NSD 1695 of 2008

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

INTRODUCTION 1 The applicant, Australian Competition and Consumer Commission (Commission), seeks against the respondent, British Airways PLC (British Airways), the imposition of a pecuniary penalty pursuant to s 76 of the Trade Practices Act 1974 (the Act) and injunctive relief pursuant to s 80 of the Act. The application relates to a collusive understanding entered into between British Airways and its competitor Lufthansa Cargo Aktiengesellschaft (Lufthansa) in respect of an element in the price to be charged by them for the carriage of international air cargo between March 2002 and February 2006 (the relevant period). 2 British Airways and Lufthansa arrived at an understanding which had the purpose and likely effect of fixing fuel surcharges for their carriage of air cargo on certain international cargo routes including routes to and from Australia (the Fuel Surcharge Understanding). 3 The Commission and British Airways have put before the Court a "Statement of Agreed Facts and Admissions by [British Airways]", together with "Joint Submissions", in support of the imposition of a penalty of $5 million and the granting of particular injunctive relief. 4 The two documents entitled "Statement of Agreed Facts and Admissions by [British Airways]" and "Joint Submissions" were annexed to an affidavit. They should not have been. Apart from any other reason why they should not have been is that being part of an affidavit they could not be inspected without the leave of the Court or a Judge: see O 46 r 6(3)(a) of the Federal Court Rules. The rule applies even in respect of an affidavit that has been read in whole or in part on a hearing. Apparently the documents were annexed to the affidavit due to an oversight, and there was no opposition to my making an order on the hearing that leave was granted to any person to inspect the affidavit. 5 For the purpose of this proceeding only, British Airways has admitted that its conduct in arriving at and giving effect to the Fuel Surcharge Understanding constituted conduct in contravention of s 45 of the Act. 6 The parties acknowledge that it is for the Court to be satisfied that British Airways did contravene s 45 of the Act occurred and to determine the quantum of any pecuniary penalty and the nature of other relief that to be ordered.

BRITISH AIRWAYS' CONDUCT 7 What follows under this heading is paras 2-59 of the "Statement of Agreed Facts and Admissions by [British Airways]", my observations being shown in square brackets: Description of the Market 2. International air cargo is carried both on passenger aeroplanes, using available hold capacity, and on dedicated air freighters. Carriers issue a document known as an air waybill (or bill of lading) for the carriage of air cargo. The air waybill contains the terms and conditions for the carriage of international air cargo including the price of carriage from origin to destination, and serves as the receipt for the shipper, indicating that the carrier has accepted the cargo and is obliged to carry it to its destination. Fuel surcharges, the subject of the contravening conduct were included on the air waybill. 3. Air cargo services are provided "one way" from origin to destination, either directly or using an indirect route via one or more midpoints. Most carriers provide air cargo services on a network-wide basis using their own route networks that offer regular services in different directions. Through interline and other arrangements with other carriers they also offer air cargo services to or from airports which their own aircraft do not serve directly. The networks of carriers extensively overlap such that there are various carriers operating to and from any international airport. 4. Airlines predominantly provide international air cargo services to freight forwarders although individual shippers also acquire their services. Freight forwarders generally organise the integrated transport of goods on behalf of a range of shippers. In doing so, they purchase air cargo services from the carriers. ... 5. The Commission considers, and British Airways does not dispute for the purposes of these proceedings, that the most appropriate market for analysing the conduct the subject of these proceedings is and has been at all material times a worldwide market for air cargo services, hereinafter referred to as the Air Cargo Market, and international air cargo carriers, including British Airways and Lufthansa, are, and at all material times have been, actual or potential competitors in the supply of international air cargo services in the Air Cargo Market. The respondent 6. During the relevant period British Airways: 6.1 carried on business in Australia and elsewhere as a carrier of passengers and air cargo; 6.2 employed approximately 42,755 staff and operated flights to 147 destinations in 75 countries excluding code-sharing and franchise arrangements; 6.3 was the tenth largest carrier of air cargo in the world and accounted for slightly less than 3% of international air cargo carried to and from Australia; and 6.4 was a publicly listed company incorporated in the United Kingdom and a foreign corporation in Australia within the meaning of section 4 of the Act. 7. As at 31 March 2007, British Airways had total assets of ₤11,384 million. During the year ended 31 March 2007, British Airways reported total revenues of ₤8,492 million and net profits before tax of ₤611 million. Its half year net profit before tax to 30 September 2007 was ₤593 million. 8. British Airways reported, for the fiscal year ending 31 March 2007 revenues from the carriage of air cargo of ₤618 million. 9. In the fiscal years between 1 April 2002 and 31 March 2006, British Airways' gross revenue from the carriage of international air cargo, and carriage of air cargo to and from Australia, was as set out in the following table: Revenue from all international air cargo (₤) Revenue from international air cargo carried on routes to and from Australia (₤)

2002-2003 527,438,618 15,787,585 2003-2004 732,790,240 15,566,253 2004-2005 594,034,995 18,652,481 2005-2006 678,656,178 19,424,168

British Airways carried during the relevant period, and still does, slightly less than 3% of the aggregate of all air cargo to and from Australia. 10. In the same period, the revenue derived by British Airways from fuel surcharges applied on international air cargo was as set out in the following table: Revenue from fuel surcharges applied to all international air cargo (₤) Revenue from fuel surcharges applied to international air cargo on routes to and from Australia (₤) 2002-2003 18,857,142 468,654 2003-2004 31,998,489 794,587 2004-2005 75,326,531 1,826,569 2005-2006 134,865,007 2,631,397 [261,047,169] [5,721,207]

[The amount of $5,721,207 is some 2.19% of the amount of $261,047,169] 11. Cargo fuel surcharges were implemented by British Airways and Lufthansa in countries and regions, including Australia, New Zealand, Thailand, United Arab Emirates, Japan, Europe and the United Kingdom, Hong Kong, South Africa, India, the Americas and Singapore. IATA Background 12. It is not asserted in this statement of agreed facts that British Airways gave effect to the IATA resolution 116ss detailed in the paragraphs below. The information in paragraphs 13 to 27 is provided by way of background, but not as material facts giving rise to British Airways' admitted contravention. 13. In the second half of 1996, the price of aviation fuel globally rose substantially. 14. On or about 25 October 1996, Lufthansa announced that with effect from 1 November 1996 it would levy across its entire route network what it termed a "fuel surcharge" of USD0.10, or the equivalent in local currency, per kilogram of air cargo carried (the 1996 surcharge). Lufthansa stated that the 1996 surcharge would be dropped when the price of fuel returned to the level of July 1996. 15. On or about 1 November 1996, Lufthansa commenced to levy the 1996 surcharge. 16. On or shortly after 1 November 1996, a number of other airlines, including British Airways, commenced to levy an equivalent fuel surcharge on international air cargo. At this time, British Airways referred to this surcharge as an "operational surcharge". British Airways levied the operational surcharge in an attempt to recover some of its increasing fuel costs but did not apply it at all times across all routes. 17. In 1997, the members of the International Air Transport Association (IATA) passed a resolution (Resolution 116ss) that IATA prepare and publish a fuel price index for its members, and providing for the application of fuel surcharges in accordance with a methodology linked to the index. IATA was at the time (and remains) the peak airline industry body of which major international airlines (including British Airways and Lufthansa) are members. 18. The IATA fuel price index measured movements in the price of aviation fuel against a base of the average of prices in 5 ports in June 1996 (index = 100). The methodology provided that when the index reached 130 for two consecutive weeks, airlines would apply the local currency equivalent of USD0.10 per kilogram of air cargo as a "fuel surcharge", and also that this surcharge would be removed when the index fell below 110 for two consecutive weeks. The methodology provided details for applying the surcharge such as the means of including the surcharge on air waybills and the freight forwarders' eligibility for commission. 19. The surcharge generated by the index did not have a direct relationship to the fuel costs of any of the particular airlines which applied it. Each airline flew different types of aircraft, purchased fuel in different places and many had hedging arrangements in respect of their fuel costs. The surcharge was also charged by weight regardless of the distance carried and did not take any account of the degree to which movements in cargo rates had otherwise taken account of the changes in fuel costs. 20. IATA advised its members that the fuel surcharge should not be applied until Resolution 116ss had received regulatory approval, including from the United States Department of Transport (US DOT). No such approval was obtained. 21. In the period 1997 to 1999, IATA continued to publish its index. In November 1999, for the first time since its publication in 1997, the index exceeded 130, the trigger point for the application of a surcharge. 22. In January 2000, IATA sought regulatory approval of Resolution 116ss from the US DOT but this was refused in March 2000. As a consequence of regulatory rejection of Resolution 116ss, IATA ceased publishing its fuel price index. 23. On 7 April 2000, IATA sent a memorandum to the members of the Cargo Tariff Co-ordinating Conferences stating the following: "As previously advised, Resolution 116ss has not received the requisite government approvals and will not be declared effective. Accordingly, no purpose would be served by its continued circulation of this index and practice of doing so is being discontinued." 24. On 14 April 2000 IATA sent another memorandum to the members of the IATA Cargo Committee as follows (underlining added): "Dear Colleagues, We have had a significant number of appeals to maintain and continue to publish the IATA Fuel Index and have been examining how this could be done following the disapproval of Resolution 116ss by the US DoT. Our legal advisors' strong view is that IATA Members could be exposed to serious antitrust liability if we were to continue to publish the Index or to approach PLATTS or any other entity with a request to provide the Index, or if it was suggested to one or more carriers that they approach PLATTS in this regard. While it is recognised we cannot prevent carriers from doing so on their own initiative, we have to affirmatively advise against taking any such action, for the reasons stated below. The Index has now become tainted by the DoT order finding Resolution 116ss, to which the Index was linked, to be adverse to the public interest and in violation of the law. If the carriers were to co-ordinate pricing by reference to the Index, whether pursuant to this disapproved Resolution or simply through de facto parallel pricing actions, that could be regarded as an illegal conspiracy in violation of applicable Competition laws, whether the Index is published by IATA, PLATTS, or indeed, simply calculated by each of the carriers independently. Against that background, IATA has no choice but to discontinue all activity associated with the disapproved Resolution, including calculation and dissemination of the Fuel Price Index, and it has done so. Because any further pricing actions linked to the now tainted Index could expose the carriers engaging in such pricing actions to serious antitrust liability, we must advise that carriers not engage in any pricing actions tied to the Index. As there is no further legitimate or lawful use to be made of the Index, we also recommend that carriers refrain from approaching any third party requesting them to calculate and publish the Index. While we acknowledge the desire of many Members to have the Fuel Index published, we do believe the foregoing reflects a correct analysis of the situation. For the reasons expressed, the position being taken is designed to protect both Members and IATA from serious legal liability risk. This message is being sent to all the members of the Cargo Tariff Steering Group. A similar message is being sent to the Cargo Tariff Coordinating Conference. If anyone wishes to pursue this matter further they are advised to contact their Legal Department. Tom Murphy, Secretary, Cargo Committee" 25. This correspondence was sent to the heads of cargo operations (members of the IATA Cargo Committee) at over 60 airlines, including British Airways, along with their tariff co-ordinators (members of the Cargo Tariff Coordinating Conference). 26. Notwithstanding IATA's correspondence, either before or almost immediately following the cessation of the publication of the IATA Fuel Price Index, Lufthansa commenced publishing its own fuel price index on its website which mirrored the IATA Fuel Price Index (the Lufthansa Fuel Price Index). Lufthansa also commenced publishing a methodology which stated that the surcharge of 0.10 euros (or the equivalent in local currency) would be applied when the Lufthansa Fuel Price Index exceeded 130 for two consecutive weeks, and would be removed when the fuel price index fell below 110 for two consecutive weeks. Lufthansa's methodology was otherwise the same as the methodology of Resolution 116ss. 27. Lufthansa later added a further level to its methodology, stating that the surcharge would increase to 0.17 euros (or the equivalent in local currency) when the fuel price index exceeded 170 for two consecutive weeks, and would reduce to 0.10 euros when the fuel price index fell below 150 for two consecutive weeks. The Fuel Surcharge Understanding 28. On or about 9 November 2001, British Airways' World Cargo division (BAWC) Senior Manager for UK and Ireland Sales, Carina Fleischer (Fleischer), with the approval of BAWC's Senior Vice-President Commercial, Keith Packer (Packer), issued a media release announcing a reduction of British Airways' fuel surcharge, effective 18 November 2001, to 0.06 GBP / kg. This level of British Airways' fuel surcharge was equivalent to the surcharge level charged by Lufthansa at that time of 0.10 euros / kg. 29. From in or about late 2001, Fleischer of BAWC commenced exchanging information regarding the fuel surcharge with Axel Heitmann (Heitmann), the Pricing Manager of Lufthansa. For example, in or about 28 November 2001, Fleischer discussed with Heitmann the timing of the removal of the remaining fuel surcharge and whether it should occur on 20 December 2001 or 1 January 2002. During the exchanges, Fleischer provided Heitmann with contact details for Packer. 30. Fleischer also kept other British Airways employees, including Packer, informed of the substance of the discussions with Heitmann and the information obtained about Lufthansa's plans. 31. As a result of the communications between the representatives of British Airways and Lufthansa, each became aware that the other wished to have an index that led to the same surcharge being applied at or around the same time. 32. The information obtained by British Airways from Lufthansa in late 2001 and early 2002, prior to it being made public, included: 32.1 that Lufthansa would continue to apply its published methodology and that methodology provided for the surcharge to be removed 2 weeks after the fuel price index fell below 110 for 2 consecutive weeks; 32.2 that Lufthansa intended to implement a new methodology; 32.3 the index trigger levels and corresponding surcharge amounts that Lufthansa intended to use in its new methodology. 33. By late 2001, the price of aviation fuel had fallen. In December 2001, airlines who had, up to that time, applied a fuel surcharge announced the withdrawal of that surcharge with effect from December 2001 or January 2002. On or about 5 December 2001, Fleischer, with the approval of Packer, issued a media release announcing the worldwide removal of British Airways' remaining fuel surcharge, effective 23 December 2001. 34. In approximately December 2001, Matthew Kemp (Kemp), BAWC's Global Pricing and Distribution Manager, was instructed by the British Airways Cargo Commercial Group (CCG) of which Packer was a member, to produce a fuel surcharge index and associated methodology for British Airways (the British Airways Methodology). The CCG was a group which met weekly (including participation by telephone) and included various managers within BAWC, including Packer, the Regional Vice Presidents and Kemp. Kemp was instructed that the surcharge movements and amounts generated by the index must closely match the surcharge generated by the methodology used by Lufthansa, which was the market leader for international air cargo services. Kemp was also instructed to speak to Roy Hurley, the BAWC accredited representative to IATA (Hurley), because Hurley had been involved in the passage of Resolution 116ss. 35. Between January and March 2002, Kemp received a copy of Resolution 116ss from Hurley and was informed by him that it had been rejected by regulatory authorities. Hurley also informed Kemp that Lufthansa had started publishing the methodology of Resolution 116ss as their own, and that airlines could legitimately publish the methodology as their own and proceed to adopt it. 36. In about January 2002, Fleischer obtained from Heitmann Lufthansa's planned index trigger levels and corresponding surcharge amounts. Kemp used that information, which was subsequently available on the public record, in creating the British Airways fuel surcharge index and associated methodology. 37. In or about January 2002, Lufthansa publicly announced a new fuel surcharge methodology with smaller increments at more frequent intervals. The new methodology was as follows (the Lufthansa Methodology): Level Fuel Surcharge Imposition - index Removal - index

1 0.05 euro / kg 115 100 2 0.10 euro / kg 135 120 3 0.15 euro / kg 165 145 4 0.20 euro / kg 190 170

38. The British Airways Methodology differed from the Lufthansa Methodology in that the British Airways index was based on the averages of four spot fuel markets rather than five, and used a different index base. Although the index and methodology used by British Airways was not identical to that developed by Lufthansa, and was intended to look quite different from the Lufthansa Methodology, the British Airways Methodology was designed in such a way that it was intended and expected that British Airways' fuel surcharge would be substantially the same as Lufthansa's fuel surcharge in its amount and timing. 39. Similar to resolution 116ss, the Lufthansa Methodology and the British Airways Methodology calculated the fuel surcharges based on the actual per kilogram weight of international air cargo and used a two week period for an index threshold to trigger a fuel surcharge increase or decrease. The fuel surcharge was applied in euros or the equivalent in local currency. 40. In about March 2002, the CCG approved the British Airways Methodology proposed by Kemp. British Airways' expectation was that this index and associated methodology would generally match the surcharge amount and timing resulting from application of the Lufthansa Methodology. 41. On 15 March 2002, British Airways announced that it would apply the British Airways Methodology to its international air cargo services, converted where necessary to the local currency. 42. Several other airlines announced and charged fuel surcharges in accordance with the Lufthansa Methodology. A few airlines, including British Airways, adopted their own fuel surcharge methodology which led to substantially the same outcome as application of the Lufthansa Methodology. 43. In this Statement of Agreed Facts, a reference to the "Surcharge Methodology" is a reference to the Lufthansa Methodology, or to a methodology which led to substantially the same outcome as application of the Lufthansa Methodology. 44. At various times between January 2002 and October 2005, Lufthansa added additional levels to its methodology as the fuel index approached the highest level on the existing methodology (Additional Levels). [A table records the Lufthansa Methodology, incorporating the Additional Levels.] 45. British Airways also added additional levels to the British Airways Methodology such that the position was maintained whereby the British Airways Methodology would lead to the same or substantially the same outcome as the application of the Lufthansa Methodology including the Additional levels. Further, as set out below, British Airways discussed the Additional Levels with Lufthansa prior to each one being added. 46. British Airways admits that, by March 2002, it arrived at an understanding with Lufthansa containing a provision that they would each exchange information relating to the proposed application by each of them of a fuel surcharge on cargo carried internationally by air across their global networks in accordance with each carriers' Surcharge Methodology, except where local conditions in a particular port or in a particular geographic area prevented the application, or full application, of the fuel surcharge, which provision had the purpose and likely effect of confirming and coordinating the application of the fuel surcharge in accordance with each carriers' Surcharge Methodology (Fuel Surcharge Understanding). British Airways admits that the relevant provision of the Fuel Surcharge Understanding had the purpose and likely effect of fixing or maintaining a component of the price for the international air cargo services of British Airways and Lufthansa. 47. British Airways and Lufthansa extended the Fuel Surcharge Understanding to include each of the Additional Levels by: 47.1 discussing with each other the Additional levels prior to each one being added; and 47.2 continuing to give effect to the Fuel Surcharge Understanding with the Additional Levels. 48. British Airways by Kemp and Packer gave effect to the Fuel Surcharge Understanding by: 48.1 exchanging information as to the proposed application of fuel surcharges in accordance with the Surcharge Methodology, as further detailed in paragraphs 49 and 50 below; 48.2 increasing and decreasing its fuel surcharge levels in accordance with the Surcharge Methodology, in response to changes in the fuel price index; 48.3 applying surcharges in accordance with the Surcharge Methodology by including such surcharges in its air waybills on the carriage of air cargo; and 48.4 directing employees that fuel surcharges were to be charged by British Airways' staff globally. In 2005, a formal authorisation process was implemented requiring authorisation from nominated executives before departing from the specified surcharges. 49. Packer, and Kemp, at Packer's direction, frequently communicated by telephone with Heitmann to give and receive assurances that a relevant fuel surcharge increase or decrease in accordance with the Surcharge Methodology would be applied. These communications occurred before each airline made a formal decision to alter an existing fuel surcharge. In the case of Lufthansa, this decision was made on Mondays at the meeting of the Business Management Team. In the case of British Airways, this decision was made on Wednesdays at the CCG meeting. 50. Further details of the communications between Lufthansa and British Airways are as follows [Five instances are set out in sub-paras 50.1-50.5] 51. The purpose and effect of these communications between Packer, Kemp and Heitmann was to confirm and ensure that British Airways and Lufthansa applied fuel surcharges substantially in the same amount and substantially at the same time in accordance with the Surcharge Methodology. Packer and Kemp thereby gave effect to the Fuel Surcharge Understanding. 52. Further, the communications between Packer and Kemp on the one hand and Heitmann on the other amounted to the giving and receiving of assurances as to the imminent application of surcharges and therefore gave rise to further arrangements or understandings between British Airways and Lufthansa to apply fuel surcharges in accordance with the relevant level in the Surcharge Methodology on all carriage of air cargo, except where local conditions prevented the application, or full application, of a fuel surcharge from a particular port or in a particular geographic area. 53. At all times following the Fuel Surcharge Understanding being reached in early 2002, Kemp in his dealings with Lufthansa assumed that Lufthansa had arrived at similar understandings with other airlines but did not specifically inquire of Lufthansa to confirm that. 54. There were exceptions to the application by British Airways of fuel surcharges in accordance with the Surcharge Methodology in cases where local conditions prevented the application of a surcharge in accordance with the British Airways methodology (or the full and/or immediate application of that surcharge) from a particular port or in a particular geographic area. The following are examples of such exceptions: 54.1 Where a local law or regulation required fuel surcharges to be approved by a local government department, there were cases where airlines were unable to obtain approval for surcharges precisely in accordance with the Surcharge Methodology, although in most cases the departure from the Surcharge Methodology was merely a delay in moving to the next surcharge level. This occurred in Hong Kong and the United Arab Emirates, for example. 54.2 There were occasions in ports outside the United Kingdom where airlines with a significant share of cargo services from a particular port or in a particular region declined to apply a fuel surcharge, or a particular fuel surcharge level, causing British Airways to form a view that the application of a surcharge in accordance with the Surcharge Methodology would be commercially unworkable because it would lead to a significant decline in sales. 55. During the period from around March 2002 to February 2006, and pursuant to the Fuel Surcharge Understanding, British Airways applied surcharges globally in accordance with the Surcharge Methodology, except where local conditions prevented the application, or full application, of a fuel surcharge in a particular port or geographic area. 56. [Attached to the statement of agreed facts was a table recording the surcharges applied by British Airways and the corresponding trigger levels from the British Airways Methodology.] Implementation of changes in the fuel surcharge generally lagged behind the fuel price index reaching an index threshold by approximately 2 -3 weeks to give British Airways time to notify customers of the new charges. 57. The conduct ceased in February 2006, when allegations concerning the Fuel Surcharge Understanding were publicised following raids undertaken by competition regulators in the United States and Europe. 58. In these proceedings, British Airways only admits it gave effect to the Fuel Surcharge Understanding where it applied the full surcharge in accordance with the Surcharge Methodology. British Airways states that the full surcharge was not applied on its outbound cargo from Australia and accordingly, it does not admit a contravention in respect of such cargo. British Airways admits, for the purposes of these proceedings, that during the relevant period [between March 2002 and February 2006], British Airways implemented the Fuel Surcharge Understanding on certain international cargo routes involving Australia. Of the total of the amounts referred to in the last column at paragraph 10 above, ₤3,446,655 is referable to fuel surcharges being applied by British Airways on routes to Australia in the full amount of the fuel surcharge. 59. British Airways admits that arriving at, and giving effect to, the Fuel Surcharge Understanding in the manner set out above had the purpose and effect of fixing a component of the price for the supply of international air cargo services, including in competition with Lufthansa, within the meaning of section 45A(1) of the Act and is, therefore, deemed to have the purpose or effect of substantially lessening competition within the meaning of section 45(2)(a)(ii) and 45(2)(b)(ii) of the Act. 8 As paras 58-59 of the "Statement of Agreed Facts and Admissions by [British Airways]" demonstrate, for the purpose of this proceeding only, British Airways admits that it arrived at and gave effect to provisions of the Fuel Surcharge Understanding, which had the purpose, effect and likely effect of fixing and controlling the price of the fuel surcharge for the carriage of cargo by air supplied by the parties to the Fuel Surcharge Understanding to their customers. British Airways admits that s 45A of the Act applies to the conduct and that, as a result, the conduct occurred in contravention of s 45(2) of the Act. British Airways' admission is limited, however, to the situation where it applied the full surcharge in accordance with Surcharge Methodology. 9 The conduct ceased in February 2006, when allegations concerning the Fuel Surcharge Understanding were publicised following "raids" undertaken by regulatory bodies in the United States and Europe. 10 British Airways admits that by arriving at the Fuel Surcharge Understanding and giving effect to its provisions by: (a) exchanging information as to the proposed application of fuel surcharges in accordance with the British Airways and Lufthansa Methodologies, as described in the Statement of Agreed Facts and Admissions; (b) increasing and decreasing its fuel surcharge levels in accordance with the British Airways and Lufthansa Methodologies, in response to changes in the fuel price index; (c) applying surcharges in accordance with the British Airways and Lufthansa Methodologies by including such surcharges in its air waybills on the carriage of air cargo; and (d) directing employees that fuel surcharges were to be charged by British Airways' staff globally and in 2005 implementing a formal authorisation process requiring authorisation from nominated executives before departing from the specified surcharges, it contravened sections 45(2)(a)(ii) and (b)(ii) of the Act. 11 British Airways further admits that the communications between its staff and Heitmann amounted to the giving and receiving of assurances as to the imminent application of surcharges and therefore gave rise to further arrangements or understandings between British Airways and Lufthansa to apply fuel surcharges at the relevant level in the British Airways and Lufthansa Methodologies. 12 The parties accordingly submit that the Court can proceed to the fixing of penalty and the making of other orders against British Airways on the basis that in giving effect to the Fuel Surcharge Understanding from March 2002 to February 2006, British Airways contravened the Act. 13 A penalty can only be imposed for a contravention occurring within 6 years prior to institution of proceeding on 28 October 2008: see s 77(2) of the Act. That period began on 28 October 2002. 14 The Commission states that it regards the present contraventions as extremely serious because they derived from an understanding between multinational carriers which are two of the largest airlines in the world. 15 British Airways rightly accepts that its conduct, constituting as it does contraventions of per se provisions of the Act, namely s 45(2) read with s 45A, is "extremely serious". Such contraventions must be seen as amongst the most serious of the non-criminal contraventions of the Act, given that Parliament has deemed such conduct to substantially lessen competition. The Act's prohibitions against price fixing have been the subject of numerous proceedings brought by the Commission. Some of those proceedings have resulted in multi-million dollar penalties, which have been extensively and widely publicised.

Legal principles relevant to level of penalty 16 Contemporaneously with delivery of the present Reasons for Judgment, I am delivering Reasons for Judgment in Australian Competition and Consumer Commission v Qantas Airways Limited [2008] FCA 1976 (the Qantas Reasons for Judgment). At [16]-[27] of the Qantas Reasons for Judgment, under the heading "Legal Principles Relevant to Level of Penalty", I have summarised such principles and will not repeat them here.

The parties' submissions on facts relevant to level of penalty in the present case 17 What follows under this heading is paras 45-73 of the Joint Submissions: Nature and extent of the contravening conduct, including its deliberateness 45. The conduct subject to penalty was engaged in by British Airways throughout much of the world and continued for 4 years. The conduct by the responsible employees, the Global Pricing and Distribution Manager and a Senior Vice President of a division of British Airways, British Airways World Cargo (BAWC), was deliberate. 46. The Global Pricing and Distribution Manager assumed that Lufthansa had arrived at similar understandings with other airlines but did not specifically inquire of Lufthansa to confirm that. 47. The conduct of British Airways ceased in February 2006, when allegations concerning the understanding were publicised following "raids" undertaken by regulatory bodies in the United States and Europe. The amount of loss or damage caused 48. During the relevant period, the revenue generated by British Airways carrying cargo to Australia that it admits was produced by the Fuel Surcharge Understanding was approximately $£3.4 million. This was a subset of the wider revenue of British Airways generated by the Fuel Surcharge Understanding worldwide. 49. The revenue generated from fuel surcharges does not demonstrate the actual loss to shippers or their customers because, absent the Fuel Surcharge Understanding, some price increases would likely have occurred to cover the increased costs of fuel, which did increase substantially over the relevant period. It may have also been that some carriers would have elected to exit certain routes, allowing the remainder to impose other increases with less constraint. 50. The Fuel Surcharge Understanding did not reflect the parties' actual costs as both parties to the Fuel Surcharge Understanding had different arrangements for the acquisition of fuel and acquired it in different places. Further, the fuel surcharge was a flat charge regardless of distance travelled, and therefore did not reflect or seek to reflect actual fuel costs on any flight or route. British Airways also had hedging arrangements. Further, a surcharge increase could stay in place even after the price increase that triggered it had gone: different trigger steps were used in the Surcharge Methodology when it was reducing from when it was increasing. 51. Neither the Commission nor British Airways are aware as to what proportion of the surcharge was ultimately borne by any particular consumer or business in Australia. The surcharge was charged, in the main, to freight forwarders who passed it on to their customers directly and without commission. As a general rule, the ultimate consumer will bear most if not all of the transport cost, in the price paid for the cargo: others in the supply chain, such as a wholesaler or retailer will absorb some part of the cost some part of the time. These others involve persons both in Australia or overseas. They will be more likely to absorb the loss if the goods comprising the cargo have been sold prior to the transport cost increase but may also have to do so if their competitors do not have the same costs. The size of the contravener 52. As noted in the statement of agreed facts, British Airways has assets of £11 billion and during the relevant period was the 10th largest airline in the world in terms of freight carried. Over the relevant period Qantas Airways Limited (Qantas) carried approximately 24% of the air freight to and from Australia and its nearest competitor carried about 14%. British Airways represented about 3%. Its profits before tax for the half year ended 30 September 2007 was £593 million. It derived revenue of £618 million from the carriage of air freight for the fiscal year ending 31 March 2007. The period over which the contravening conduct extended 53. British Airways' contravening conduct for which penalties can be imposed extended over a four year period from 2002 to 2006 inclusive. Degree of power it has, as evidenced by its market share and ease of entry into the market 54. British Airways does not know, and does not have access to any reliable information to allow it to assess, its share of the Air Cargo Market. 55. In the segment to and from Australia, British Airways holds about 3%. There are at least ten significant competitors which are major international carriers and which have market shares to and from Australia of between about 2% and 10%. British Airways was unable to act in the Australian segment of the Air Cargo Market without being constrained by its competitors. The circumstances in which the conduct took place 56. Whilst the volatility of jet fuel prices certainly sparked the conduct, and some price adjustment would have been implemented by participants unilaterally to reflect this, the fuel surcharge timing and amount did not reflect actual cost changes of each airline or the degree to which general price rises already included movements in fuel costs. 57. British Airways was aware that the US Department of Transport had comprehensively rejected the conduct as anticompetitive. Moreover, a number of airlines, including British Airways, were specifically warned by IATA that if they coordinated pricing by reference to a common index, they were at serious risk of violating antitrust laws. Participation of senior management 58. British Airways' participation in the Fuel Surcharge Understanding was arranged by Kemp, the BAWC Global Pricing and Distribution Manager and Packer, BAWC Senior Vice President and implemented by regional managers in offices around the world. British Airways asserts, and the Commission does not dispute for the purposes of these proceedings, that the conduct was not known to the British Airways Board or its most senior managers. Culture of compliance with the Trade Practices Act 59. British Airways did have a program of trade practices compliance in place during the period of the contravening conduct. However, persons responsible for monitoring and preventing such conduct only became aware of it after raids of airlines' premises overseas were conducted by regulatory agencies. 60. British Airways has upgraded the program and its new program is presently being implemented throughout the world. Co-operation and Contrition 61. British Airways has co-operated with the Commission's investigations since British Airways contacted the Commission in mid 2006. British Airways promptly provided the Commission with information about collusive understandings, including admissions of its own participation in those understandings. British Airways did so aware that immunity was not available to it in relation to its fuel surcharge conduct and knowing that it was highly likely to face substantial penalties. 62. To this end British Airways made staff and former staff available for interview by the Commission, and voluntarily searched for and produced documents from its operations throughout the world relevant to its and other airlines involvement in the contraventions. It brought to Australia at its own expense staff willing to be interviewed by the Commission even though those staff could not have been compelled under section 155 of the Act. It has undertaken to bring such staff and former staff to Australia as the Commission requires. The Commission has not needed to serve any section 155 notices on British Airways. 63. British Airways' efforts have made available to the Commission information and documents identifying the involvement of other participants which have not been produced or made available as yet by these persons. 64. Whilst British Airways was not able to secure the co-operation of some of its former staff, the Commission is satisfied it has used, and will continue to use, its reasonable endeavours to do so. British Airways has offered to the Commission, and undertakes to the Court, to continue to provide this high level of assistance with the investigation, and possible prosecution, of cases against other participants. 65. British Airways through its solicitors willingly participated in a series of discussions with the Commission to bring an agreed resolution of the matter before the Court. As a result of those discussions British Airways and the Commission have reached agreement as to the appropriate penalty to be suggested to the Court. British Airways has also assisted the Commission in the preparation of the relevant settlement documents including the admissions. 66. As already mentioned, British Airways has reviewed and upgraded its current trade practices compliance program. 67. The Commission considers that British Airways is entitled to substantial credit for having admitted contravening the Act, assisting the Commission in its investigations, upgrading its compliance program and agreeing with the Commission on the appropriate penalty to put to the Court (see Trade Practices Commission v TNT Australia Pty Ltd (1995) ATPR 41 - 375). British Airways' co-operation with the Commission has saved the Commission and the Court (and ultimately the community) the cost and burden of litigating an extremely lengthy and expensive case. 68. This investigation is likely to be one of the largest and most expensive ever conducted by the Commission, in view of: 68.1the number of possible participants; 68.2the number of witnesses and documents not within the jurisdiction; 68.3the number of airlines which have elected not to assist the Commission's investigations or indeed sought to restrain them; 68.4the need for translations; and 68.5the sheer scope and duration of the conduct. 69. It is obviously of benefit to the Commission's investigations that respondents are encouraged to co-operate in appropriate cases. In these circumstances the parties submit British Airways is entitled to a substantial discount of approximately 40% on the penalty that otherwise would have been appropriate. Given the regularity of the contravening conduct over the four year period and the maximum applicable penalty per contravention of $10 million, that penalty absent the cooperation discount would have been much higher. This discount should reflect not only its assistance in locating witnesses and material, which has been second only to that of British Airways, but also in making certain admissions and in using its reasonable endeavours to assist in the investigation and possible prosecution of other participants. 70. Considering British Airways' high level of cooperation in relation to its own case and as against other parties, the Commission has accepted a substantial reduction in agreeing on an appropriate penalty to recommend to the Court. Similar conduct in the past 71. The Court has not previously found contraventions against British Airways in relation to the Act. Other regulators 72. The Commission notes that British Airways was fined US$300 million in proceedings brought by the United States Department of Justice, in respect of fuel surcharges applied on the carriage of both cargo and passengers, including fuel surcharges on cargo shipments from the United States to Australia. British Airways is also the subject of proceedings in the European Union. The penalty in the United States was substantially discounted as a result of British Airways' co-operation with authorities there. Conclusion on appropriate penalty 73. The Commission and British Airways submit that, when all the factors and circumstances referred to above are taken fully into account, a pecuniary penalty of $5 million is appropriate, in that the parties consider that the suggested amount falls within the range that the Court, unaided by the parties' agreement, would have considered appropriate.

Consideration 18 At [29] and [30] of the Qantas Reasons, I referred to certain questions on which I sought, and was supplied with, further submissions. Those submissions were also made by the Commission in this present proceeding as well as in the Qantas proceeding, and, subject to one matter not presently relevant, were supported by British Airways. 19 I will not repeat what I have said in the Qantas Reasons for Judgment but will indicate by reference to the headings that I used in them, matters of special relevance to the present proceeding.

Relevant territorial connection with Australia 20 I adopt, mutatis mutandis, what I said at [31]-[42] of the Qantas Reasons for Judgment. 21 With reference to [31] of the Qantas Reasons for Judgment, it is to be noted that British Airways carries on business within Australia. 22 Although the Fuel Surcharge Understanding in the present case was only between British Airways and Lufthansa and was therefore different from the Fuel Surcharge Understanding in the Qantas case, the Air Cargo Market was the same in both cases, that is to say, a worldwide market for the international carriage of cargo by air, which, or part of which, was within Australia within the meaning of s 4E of the Act.

The relationship between British Airways' fuel costs and the surcharges it imposed: To what extent was British Airways' fuel surcharge revenue attributable to the Fuel Surcharge Understanding? 23 I adopt, mutatis mutandis,what I said at [43]-[48] of the Qantas Reasons for Judgment. 24 British Airways produced its own methodology, but that methodology was designed in such a way that it was intended and expected that the fuel surcharge imposed under it by British Airways would be substantially the same as that imposed by Lufthansa, both in amount and timing.

Parity of penalty 25 I adopt, mutatis mutandis, what I said at [49]-[56] of the Qantas Reasons for Judgment. 26 At [49] I set out in a table the global fuel surcharge revenue, the fuel surcharge revenue on routes to and from Australia, and the penalty proposed in respect of each of Qantas and British Airways. 27 From time to time British Airways did not impose a surcharge on particular routes or for particular customers, including in circumstances in which Qantas did impose a surcharge, so that a simple comparison of the surcharge revenues of Qantas and British Airways may give a false picture. As noted at [54] of the Qantas Reasons for Judgment and at [8] above, British Airways admits only that it gave effect to the Fuel Surcharge Understanding where it applied the full surcharge in accordance with the Surcharge Methodology in its case.

Approach to penalty 28 I adopt, mutatis mutandis, what I said at [57]-[62] of the Qantas Reasons for Judgment. 29 British Airways holds approximately 3% of the market share in the segment to and from Australia. It had the smallest share of all airlines that lay above 2% (see [62] of the Qantas Reasons for Judgment). 30 The Commission considered that British Airways merited a slightly higher base penalty than $7 million by reason of its market share. The final penalty arrived at by the Commission, including a 40% discount, was $5 million. The initial figure prior to discount must have been approximately $8.33 million. I think that this figure lies within the range of penalties that I would have imposed, leaving to one side any discount (see below).

Discount for early admission of liability and cooperation 31 I adopt, mutatis mutandis,what I said at [65]-[69] of the Qantas Reasons for Judgment. 32 The Commissioner considered that British Airways merited a higher discount than 30%. 33 British Airways made available 11 witnesses to the Commission. The Commission assures the Court that it would not have obtained the information that it has obtained without the cooperation of British Airways in providing it. 34 I accept that a 40% discount is appropriate. Left to myself, I would have allowed a substantial discount of that general order in the light of the supplementary open submission and the confidential submission provided by the Commission (see [18] above and [29], [30] and [68] of the Qantas Reasons for Judgment.

Limited duration of the injunction sought 35 I adopt, mutatis mutandis, what I said at [70]-[80] of the Qantas Reasons for Judgment. For the reasons I gave at those paragraphs mentioned, an injunction against British Airways limited to five years in duration is appropriate.

CONCLUSION 36 It was for the above reasons that I imposed the proposed penalty of $5 million and granted an injunction limited to five years in duration. 37 As requested by the parties, I also ordered British Airways pay the Commission a contribution towards its costs of this proceeding in an agreed sum of $200,000.

I certify that the preceding thirty-seven (37) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Lindgren.

Solicitor for the Applicant: Australian Government Solicitor

Solicitor for the Respondent: Mallesons Stephen Jaques

Date of Hearing: 5 November, 2 and 11 December 2008