Australian Competition and Consumer Commission v Singapore Airlines Cargo Pte Ltd

IN THE FEDERAL COURT OF AUSTRALIA NEW SOUTH WALES DISTRICT REGISTRY GENERAL DIVISION NSD 1980 of 2008

BETWEEN: AUSTRALIAN COMPETITION AND CONSUMER COMMISSION

JUDGE: KATZMANN J DATE: 7 december 2012 PLACE: SYDNEY

REASONS FOR JUDGMENT 1 This proceeding is concerned with anti-competitive behaviour by a major international airline in contravention of Trade Practices Act 1974 (Cth) (now the Competition and Consumer Act 2010 (Cth)) ("the Act"). It is one of several actions brought by the Australian Competition and Consumer Commission against international airlines alleged to be part of a cartel engaged in fixing prices for the carriage of freight contrary to the Act. 2 The respondent, Singapore Airlines Cargo Pte Ltd ("SAC"), is a wholly owned subsidiary of Singapore Airlines Limited. It was incorporated in August 2000 in Singapore and started business on 1 July 2001 when Singapore Airlines Limited transferred to it all of the assets, liabilities, cargo-related contracts, operations and business activities of its cargo division. It is registered in Australia as a foreign corporation. It is the second largest carrier by weight of air freight to and from this country, second only to the national carrier, Qantas, carrying approximately 12% to 14% of all air cargo to and from Australia throughout the relevant period. 3 This action commenced on 22 December 2008. At the time, 143 contraventions of the Act were alleged. But on 8 November 2012, the third day of the hearing, the parties reached an agreement in which SAC admitted to six contraventions and one attempted contravention of s 45 (in Part IV) of the Act and agreed to pay penalties totalling $11.75 million and to submit to injunctive and other relief. The admissions are supported by a statement of agreed facts. They are made, I should add, pursuant to s 191 of the Evidence Act 1995 (Cth) only for the purpose of this proceeding. 4 Section 76 of the Act gives the Court power to order that a person whom it is satisfied has (amongst other things) contravened Part IV (or who has attempted to do so or to induce another person to do so) pay to the Commonwealth "such pecuniary penalty, in respect of each act or omission by the person to which this section applies, as the Court determines to be appropriate" having regard to certain matters to which I will return later. As the power involves the exercise of a public function and is contingent for its exercise on the Court's satisfaction, the Court is bound to satisfy itself that the contraventions have, indeed, occurred and that the penalties proposed are appropriate: Australian Competition and Consumer Commission v Real Estate Institute of Western Australia Inc (1999) 161 ALR 79 at [18] per French J; NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 ("NW Frozen Foods"); Minister for Industry, Tourism & Resources v Mobil Oil Australia Pty Ltd (2004) ATPR ¶41-993; [2004] FCAFC 72 at [51]. 5 On the basis of the agreed facts and admissions I was satisfied that SAC did in fact contravene and attempt to contravene (and induce another to do so) Part IV in the respects to which the admissions relate. Consequently, I made the orders to which the parties consented for the payment of two pecuniary penalties of $8 million and $3.75 million. I also made orders by consent restraining SAC from engaging in the same or similar conduct for a period of five years. These are my reasons for so doing. 6 Section 45(2)(a)(ii) of the Act prohibits a corporation (defined in s 4 to include a foreign corporation) from making a contract or arrangement or arriving at an understanding which includes a provision the purpose or likely effect of which is to substantially lessen competition and s 45(2)(b)(ii) prohibits giving effect to such a provision. At the relevant time, s 45A of the Act deemed a provision in a contract, arrangement or understanding made with the purpose or likely effect of fixing, controlling or maintaining a price for services to have the purpose or likely effect of substantially lessening competition. 7 "Competition" is defined in s 45(3) for the purposes of the section (and s 45A) as competition in any market in which a company party to the contract, arrangement or understanding supplies or acquires or is likely to supply or acquire goods or services or would be likely to do so but for the provision. "Market" is defined in s 4E for relevant purposes as a market in Australia and includes a market for goods or services and other goods or services that may be substituted for, or are otherwise competitive with, them. For the purpose of this proceeding the parties accept that during the relevant period the relevant market or markets included outbound freight from Indonesia to Australia, inbound freight to Indonesia from Australia and freight from Australia to the Middle East. They also accept that each of these markets is a "market" within the meaning of s 4E. 8 SAC admits that its participation in certain meetings and discussions culminating in understandings to fix surcharges and fees on the carriage of cargo out of Indonesia amounted to contraventions of s 45(2)(a)(ii) and that by giving effect to those understandings it contravened s 45(2)(b)(ii). It also admits by attempting to persuade Malaysia Airlines to come to a similar understanding about the carriage of particular produce to the Middle East that it attempted to contravene s 45(2)(a)(ii) and attempted to induce Malaysia Airlines to do so, too. 9 The conduct in question began in October 2001, more precisely on 4 October 2001, when SAC came to an understanding with a number of other international airlines, with effect from 16 October 2001, that they would each impose a fuel surcharge from Indonesia to all destinations (including within Australia) of USD 0.05 per kg or no less than that amount. The understanding also involved an agreement to establish a working group of international airlines on which it would serve to determine minimum prices and avoid undercutting by airlines especially in the outbound Indonesia market. 10 The understanding was reached at a meeting of the Air Cargo Representative Board - Indonesia ("ACRB - Indonesia"), of which all major international airlines that carried freight from Indonesia (including SAC) were members. At the same meeting, a similar understanding was reached about minimum security surcharges on the supply of air freight services from Indonesia. A representative of SAC was present at the meeting. Meetings of the ACRB - Indonesia were held periodically thereafter. At those meetings the surcharges and fees were discussed. SAC's cargo sales managers in Indonesia communicated with employees in the freight divisions of other airlines at all the meetings. The purpose of the communications was to ensure that the airlines would move to the same, or substantially the same amount at around the same time. 11 SAC admits to arriving at 10 fuel surcharge understandings with competitors who were also members of the ACRB - Indonesia between October 2001 and September 2005 and to giving effect to seven of them between September 2002 and October 2005. The minimum surcharge figure remained static at USD 0.05 per kg until an understanding was reached by ACRB - Indonesia in September 2005 to double it. 12 SAC also admits to arriving at five security surcharge understandings with competitors who were members of the ACRB - Indonesia between October 2001 and October 2005 and to giving effect to each of them between October 2001 and January 2007. The initial surcharges were agreed upon in October 2001 at USD 0.50 and USD 0.10 per kg (depending on destination) and then periodically reviewed in January and May 2003, September 2004 and July 2005 when it was agreed that the amounts be maintained. 13 The understanding as to customs fees was first reached in May 2004 when SAC and its competitors on the ACRB - Indonesia decided to charge a fee on all air waybills issued after 16 May 2004 on outbound and inbound freight between Indonesia and Australia. The fee agreed upon was to be a minimum of USD 5 per air waybill for both exported and imported goods. SAC gave effect to this understanding between May 2004 and October 2005. Air waybills, I should explain, are documents issued by freight forwarders to whom airlines mainly provide international air freight services. The freight forwarders generally organise the integrated transport of goods on behalf of a range of shippers. 14 SAC also admits to arriving at an understanding about prices for the supply of air freight services out of Jakarta. The admission relates to a meeting that took place on 29 October 2001 where members of the ACRB - Indonesia, including SAC, reached an understanding that included a provision, with effect from 1 December 2001, that each of the airlines would impose prices no lower than specified prices for the supply of those services at USD 1 per kg for general freight to various destinations including Sydney and USD 0.50 per kg for general freight to Perth. 15 As the Act provides that the ACCC may only institute a proceeding for the recovery of a pecuniary penalty for a contravention (or attempted contravention) of Part IV within six years of the contravention, for the purpose of fixing penalty (see s 77(2)), the contravening conduct took place between December 2002 to October 2005 in the case of the fuel surcharge understanding, from December 2002 to January 2007 with respect to the security surcharge understanding and from May 2004 to October 2005 with respect to the customs fee understanding. The admission with respect to the understanding about prices reached on 29 October 2001 is therefore not relevant to the question of penalty. 16 The final attempted contravention concerns an attempt to enter into an arrangement with Malaysia Airlines about the price for the carriage of meat to the Middle East. The relevant agreed facts are as follows. 17 In the 2002 calendar year the total air freight carried by SAC from Australia to the Middle East was valued at approximately AUD 12.7 million, of which approximately AUD 1 million was earned from the carriage of meat. 18 By January of the following year the United States of America had announced that it would be deploying some 35,000 troops to the Middle East. 19 The Regional Vice-President of SAC for the South West Pacific, its most senior representative in Australia, anticipated that the build up of US troops would lead to increased demand for Australian meat in the Middle East. On or about 23 January 2003 he spoke to a representative of Malaysia Airlines and found out that they were charging AUD 1.80 per kilogram for the transport of meat from Australia to the Middle East and told him that SAC would increase its price by about AUD 0.20 if Malaysia Airlines would do the same. Apart from SAC, the only other significant carriers from Australia to the Middle East were Emirates and Malaysia Airlines. Later that day the Regional Vice-President sent an internal email to a subordinate SAC sales employee in Australia detailing these matters. The arrangement, however, was (for some unexplained reason) never entered into. 20 I now turn to the question of penalties. 21 Section 76 directs the Court to have regard to all relevant matters in determining penalty including the nature and extent of the act or omission and of any loss or damage suffered as a result of it, the circumstances in which it took place, and whether the respondent has previously been found by the Court in proceedings under Parts VI or XIB of the Act to have engaged in similar conduct. Various other considerations are also relevant, not least the need to deter companies from engaging in this kind of behaviour. The importance given to the need for deterrence in relation to anti-competitive conduct is not to be underestimated. Finkelstein J thought it was the principal object of imposing a penalty: Australian Competition and Consumer Commission v ABB Transmission and Distribution Limited (2001) ATPR ¶41-815; [2001] FCA 383 at 42938 [13]. French J thought it was probably the only object: Trade Practices Commission v CSR Limited (1991) ATPR ¶41-076 at 52152. It is well established that the sum should be sufficiently high to deter the contravener from engaging in anti-competitive conduct in the future and also to deter others who might otherwise be tempted to do the same. The other considerations include: whether the conduct was intentional, deliberate, systematic or covert; whether senior management were involved; the period over which the conduct took place; the degree of power that the contravening company has in the relevant market, as evidenced by its market share and ease of entry into the market; the economic effects of the conduct including its effects on the operation of the relevant market; the size and financial position of the contravening company; whether the company has a corporate culture conducive to compliance with the Act; and whether the company has shown disposition to cooperate with the regulator. See NW Frozen Foods 71 FCR 285 at 292 and J McPhee & Son (Australia) Pty Ltd v Australian Competition and Consumer Commission (2000) 172 ALR 532. 22 It is apparent from the joint submissions and the agreed facts that these considerations have informed the parties' agreement. 23 SAC's conduct was deliberate and senior officers of the company took part in it. In the case of the Indonesia understandings it took place over several years. It occurred against a background of collusive behaviour in the airline industry that appears to have begun in 1997, after the Cargo Tariff Coordinating Conference of the International Air Transport Association ("IATA"), the peak airline industry body to which the major international airlines belong, decided to publish a fuel price index. That decision was taken after Lufthansa started levying a surcharge on the price of aviation fuel following a substantial increase in the global price. The index provided a mechanism for the levying of fuel surcharges by several international airlines calculated on the weight of the cargo and regardless of the carrier's actual costs. SAC, of course, had not then been formed and Singapore Airlines Limited was not one of those companies, but these events provided what the parties referred to as "a trigger or catalyst" for the meetings and discussions that led to the Indonesia understandings. 24 The IATA fuel price index was published for about three years until about March 2000 when IATA was informed that approval from the US regulatory authorities would not be forthcoming. IATA wrote to the members of the Cargo Committee in April 2000 informing them that it would cease publication of the index, that if the carriers were to coordinate pricing by reference to the index that could be seen as "an illegal conspiracy in violation of applicable Competition laws", and that it and they would be exposing themselves to "serious antitrust liability" if they continued to do so. Neither SAC nor Singapore Airlines Limited was a member of the Cargo Tariff Coordinating Committee or the Coordinating Conference and there is no evidence that the letter from IATA ever came to their attention. 25 SAC had a relatively large share of the Australian market. As I mentioned earlier, it was the second largest player after Qantas. 26 It is also a substantial company. As at 31 March 2007 its operating fleet comprised 14 B747-400 freighters and it had an exclusive contract with Singapore Airlines Limited for the use of the belly space available for air cargo transport on all passenger flights operated by them. Its total assets at that time were SGD 3.81 billion. In the year ending 31 March 2007 it carried approximately 1.284 billion kilograms of freight worldwide. During 2003 to 2006 its global revenue from air freight services totalled in excess of USD 6.68 billion. The revenue from routes to and from Australia in the same period exceeded AUD 1.11 billion. Revenue from the supply of air freight services from Indonesia to Australia in the relevant period was approximately USD 3.5 million. The revenue generated by SAC as a result of the supply of air freight services from Australia to the Middle East for the 2002 calendar year was approximately AUD 12.7 million. As at 2010 it employed approximately 944 staff worldwide in its cargo business, operated cargo stations in about 72 cities in 37 countries including all Australian State capitals except for Hobart. 27 Revenue from surcharges on air freight services from Indonesia to Australia and elsewhere at the relevant period were about USD 12 million with respect to fuel surcharges and USD 10 million with respect to security surcharges. Revenue generated by SAC from fuel and security surcharges it imposed on freight from Indonesia to Australia in the relevant period was approximately USD 150,000 or AUD 210,000. This was described in submissions as "not relatively substantial" in comparison with other participants in the Indonesia understandings. The total security surcharges charged by all airlines on air freight carried from Indonesia to Australia between December 2002 to January 2007 (the period for which penalty is to be assessed) is estimated to be between USD 700,000 to 800,000 (AUD 900,000 to 1 million). The total fuel surcharges charged by all airlines on freight carried from Indonesia to Australia between December 2002 to October 2005 (the period for which penalty is to be assessed) is estimated to be between USD 500,000 to 600,000 (AUD 700,000 to 800,000). I was informed that revenue from the imposition of customs fees could not be determined. 28 There is a great deal of uncertainty and speculation surrounding the amount of loss or damage caused by the conduct in question and there is a dearth of evidence about the actual economic effects, including any loss to shippers or their customers from the imposition of the fuel surcharges. That is not surprising. It is, however, likely that there would have been some increase in the cost to consumers and others in the supply chain both in Australia and overseas. There was also a risk that the behaviour of SAC would force other airlines out of certain routes, allowing the remaining carriers to operate with fewer constraints. 29 All these matters point to the need for substantial penalties. It is obvious that SAC accepts as much. 30 On the other hand, SAC has not previously been found to have contravened the Act. It has participated in discussions with the ACCC to bring about a resolution of the proceeding and assisted the ACCC in preparing the documents that have been presented to the Court. It is entitled to credit for doing so, although the amount is tempered by the fact that the critical admissions were not made until the hearing was into its third day. Nevertheless, the settlement has relieved both the regulator of the burden of litigating a long and complex dispute and the great expense that that entails, which also benefits the Court and the community. 31 The penalties should also reflect the fact that SAC has taken steps to prevent conduct of this kind recurring. Before the main substantive provisions of the Singapore Competition Act came into force in 2006, SAC's efforts concerning compliance with competition policy were described by the parties as sporadic. Since 2005, however, I was informed that SAC has adopted a global competition compliance policy and in-person training has been afforded to employees in Singapore. It has also updated its policy and instituted extra training, both in person and over the worldwide web, which is revised from time to time. In addition, it has provided an ethics hotline, accessible to staff, to report any suspected violations. 32 The process of fixing civil penalties, like sentencing, is not a mathematical exercise. Instinctive or intuitive synthesis is required. At the time of the contraventions the maximum penalty for each contravention was $10 million (s 76(1A)(b)). It is obvious that, but for SAC's cooperation, they could be facing considerably higher penalties. The ACCC submitted that an overall penalty of $8.5 million for the six contraventions arising out of the Indonesia understandings was an appropriate starting point to which a discount of about 5% should be applied. In considering whether this approach is reasonable I have had regard to the principles of totality (cf R v Holder (1983) 3 NSWLR 245) and parity (see NW Frozen Foods 71 FCR 285 at 295). I discussed the penalties ordered in the airline cartel cases in my judgment in Australian Competition and Consumer Commission v Emirates [2012] FCA 1108 ("Emirates") and a useful list of the earlier decisions appears in a schedule attached to the judgment of Emmett J in Australian Competition and Consumer Commission v Malaysian Airline System Berhad (No 2) (2012) ATPR ¶42-409; [2012] FCA 767 ("Malaysian Airlines"). Yesterday I ordered Cathay Pacific to pay $7.25 million with respect to four contraventions of a similar kind. 33 But the most relevant comparisons must be with the orders made against Emirates and Malaysia and also against Korean Air Lines (see Australian Competition and Consumer Commission v Korean Air Lines Co Ltd [2011] FCA 1360 ("Korean Air Lines")), as all three cases concerned the Indonesia understandings and all three involved six contraventions of the same kind. There were some differences relating to the periods involved but I gather these differences were at least partly attributable to the time proceedings were commenced. In Emirates the conduct attracted a penalty of $7 million, in Malaysian Airlines $6 million and in Korean Air Lines $5.5 million. In large part the differences are due to the times the agreements were reached and to that extent reflected what in a sentencing case would be referred to as their utilitarian value. They are also due to the differences in market share. SAC's share of the Australian market was substantially higher than the shares held by all these companies but I accept the submission made by the ACCC that both Emirates and SAC are extremely large international airlines and very important competitors in the carriage of air cargo. The agreed amount of $8 million in this case takes into account the differences between the two cases. 34 In Emirates an attempted contravention attracted a penalty of $3 million, in Cathay $4 million. In this case the parties agreed on $3.75 million. That sum is plainly within the range. 35 It is, of course, immaterial that I might have fixed upon a different figure if the parties had not come to an agreement. The sums proposed are sufficiently large to serve the objects of general and specific deterrence while not being oppressively high, having regard to SAC's financial position. They also give appropriate weight to the steps SAC has taken to guard against such conduct in the future and to spare the community the costs necessarily involved in prosecuting a case of this complexity. I certify that the preceding thirty-five (35) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Katzmann.