Collusion: It’s a complex field with many traps for the unwary

Magazine Stories August Issue 2008

Saturday, 21 June 2008

WHERE there are only a limited number of providers of goods and services in any market, there are associated concerns that those providers may be using their market position for an unfair advantage.  The benefits of economies of scale can be rapidly outweighed by acts of collusion.

Of recent time, there have been regular high profile cases brought by regulatory authorities in the US, the EU and Australia against alleged collusion conduct.  Many of these cases have involved the airline and air cargo industries.  Recent Australian corporate history includes significant penalties for price fixing in the market for cardboard boxes.  Further, such actions by regulatory authorities are then followed by civil class actions on behalf of the consumers of the goods and services who suffer losses or additional expenses through such alleged collusion.

The regulation

• The nature of the regulation takes a variety of different names.  Overseas it generally adopts the US term “anti-trust”.  In Australia it is regulated by the Trade Practices Act 1974 (“TPA”) and is often described as “restrictive trade practices”.  Interestingly, our TPA is based on US anti-trust law rather than originating from the UK like much of our law.

• A variety of “naughty conduct” is proscribed by the TPA including:

- general agreements to decrease competition;

- actions by competitors or those with control of the market to fix prices;

- acquisitions of companies or shares which have the impact of lessening  competition in the market;

- refusal to supply goods or services to a party;

- refusal to supply good or services to a customer unless that customer also acquires related goods and services from a third party (known as “third line forcing”).

• A number of different terms are used including “monopoly” “oligopoly” and “cartel” (such as the OPEC cartel in relation to petroleum production).

• This is an area where the law and economics meet regularly.  Some of the offences are “per se” illegal so that the offending act itself is illegal regardless of the effect on competition or prices.  Other conduct is illegal to the extent that it reduces competition in a market to unacceptable level.  This is where the economists work with lawyers to prove or defend allegations.

• Not all “collusive” conduct is necessarily illegal.  For example:

- There are some situations in which the law accepts that competitors may act together as the benefits of having those services provided outweigh any disadvantages from the collective action.  For example, Pt X of the TPA provides specific (and limited) exemption from the TPA for international shipping companies to act together on the premise that if they were not allowed to behave in this way they would not be providing vital services to Australia.

- There are some other arrangements which are acceptable.  For example, “recommended retail prices” can be acceptable in limited circumstances pursuant to section 45A(6) of the TPA.

- The TPA does allow for conduct which would otherwise be offending to be approved in advance.  In those cases, the conduct is “authorised” on the basis that the public benefit exceeds the disadvantage from the conduct.
Impacts for Industry

The structure for the market for international airfreight is such that concerns regularly arise that there has been collusion.  The existence of a small number of providers who regularly exchange commercial information and carry one another’s freight leads to some association as to collusion.

Some relevant issues are as follows:

• Keep in mind that regulatory authorities have some impressive powers to secure evidence .  Further, regulatory authorities around the world regularly work together on these issues.

• Offending agreements need not be in writing.  They can be evidenced by discussions and records of unspoken behaviour.  The recent cardboard box litigation included discussions in a beer garden in a Melbourne hotel as evidence of collusive practices.

• In any investigation, there is usually one person who is willing to take advantage of the “whistle blower” provisions.  Corporate secrets of this type rarely last forever.

• Courts are unlikely to accept an excuse based on “I didn’t realise it was illegal behaviour”.  There has been enough public discussion regarding offending practices so that we are all well and truly on notice.

• The “recommended price” arrangements will not always constitute a safe haven.  The relevant section says that a recommended price arrangement is acceptable if it does not have the purpose or likely effect of fixing controlling or maintaining prices. But if those forbidden outcomes are the likely or actual effect, then it is not acceptable.

• Trade associations regularly consider the “recommended price” arrangements.  However, whether that will work depends upon a number of factors.  For example, if there are a relatively small number of providers of the goods or services; if there are significant barriers to entry for new providers of goods and services and/or if the relevant service providers have radically different price structures, there would seem to be real doubts that one recommended price arrangement could be seen as appropriate for all parties.  Those who currently use such “recommended” price arrangements need to seriously review their work.

• Parties have had mixed success in securing authorisation from the ACCC when seeking approval for their recommended price arrangements.

• The open exchange of commercial information between parties who collectively provide freight services to a consignor and a consignee can be of real concern.  Not only does it leave parties open to the suggestion that they work together to “align” their prices and practices, the exchange of commercial information may contravene relevant privacy legislation.

•  Industry does not assist itself when their members collectively and simultaneously increase prices or talk of the prospective need to increase prices.

• This issue works against those service providers who require the assistance of others to provide ‘point to point’ service for airfreight.  The necessary exchanges of information can be misconstrued or expose pricing practices that could tempt parties towards ‘standardisation’.  Those providers able to manage all freight on their own have an advantage.

Ultimately, as with all regulation, the key is to understand the regulation and to exercise real care to get things right “in advance”.  Yes, it’s boring, it’s conservative and it does involve lawyers.  However, all the “front end” work more than pays for itself.  Appropriate education needs to be provided to those dealing with the issues and proper programs and documentation established.  If nothing else, that will enable companies to isolate offending behaviour as having been the individual actions of an employee rather than being the product of the company.

Finally, if you need further inducement, remember that the Federal Government is considering legislation to include jail terms for people who breach competition laws!

Comment: Air cargo taken for granted?

Magazine Stories August Issue 2008

Saturday, 21 June 2008

WHILE we worry about the ongoing impact of collusion allegations by regulatory authorities and the longer term erosion of air cargo’s benefits by those who see us as carbon-vomiting destroyers of the earth, there might be something even worse we should be coming to terms with. Quickly.

This is public apathy and the near-total lack of awareness about the role air freight plays not just in the national and global economy but also in our individual lives.

Earlier this year, I was driving from Switzerland to Trier in Germany. Those of you who know the area will be aware that this takes you close to Hahn and to Findel in Luxembourg, both of them key cargo ports.

As a Cargolux B744 passed over us on finals, I mentioned something about freighters to my companions.

Freighters?” said the driver, an intelligent young German woman who has travelled extensively (spending a fair bit of time in our part of the world) and who seems destined for a stellar career in the regional or national tourism industry once she has finished university.

“Where are the ships?” My explanations about air freighters and air cargo were complete news to her and, while she was polite about it, I don’t think she really believed what I had to say.

By the end of the day — in a wine cellar amidst the marvellous, snow-flecked Roman ruins of central Trier, heart of a winemaking region (the other reason I was there!) — we talked about air cargo again.

She’d been thinking about it and realised she didn’t know how commodities got to the shops fresh from far-flung parts of the world.

“I just hadn’t thought about it,” she said.

Great, we had a convert to air cargo’s importance. But even she couldn’t comprehend my description of just how much cargo traffic moved daily by air worldwide, or how varied the consignments were.

Our companions, more familiar with the subject, seemed surprised, too.

If we as an industry could do more to make consumers aware of the significance of air cargo to our everyday lives, the benefits could be substantial. Less ill-informed comment, a better appreciation of the supply chain, an awareness of why some things cost a little more at the end of this chain, the need for an efficient and environmentally-friendly logistics system ... it might sound a bit PC but we’re going to be up against increasing criticism and millions of informed, understanding supporters wouldn’t go amiss.

They don’t even need to be active supporters. But the current lack of awareness means they are potentially negative, at the very best neutral.

Most organisations involved with air cargo in this part of the world, and even more so in the US and Europe, would like to think they are doing something towards educating the consumer. Some even have such goals in their mission statements.

From time to time this brings a short burst of positive publicity.

Indications are, however, that while people seeing such a report on TV or reading it in the morning newspaper will nod appreciatively, that’s about as good as it gets.

Question them a few hours later and they’re unlikely to have a clear recall of what was presented to them, other than some vague notion of a ‘big aircraft’ or perhaps something like all the gear needed for a headlining rock concert being disgorged from a nose-up freighter.

Having been involved in aviation and the air cargo sector as a journalist and editor for 35-plus years (yes, yes, I have seen lots of changes, thanks ... almost everyone asks that), I’ve always sort of hoped that people knew how important air cargo was to them.

Not in waffly general terms but to them personally. Every day, whether directly or at one or two steps removed.
Sadly, I think there was more interest in air cargo and aviation overall back in the 1970s and early 1980s. Maybe it was because moving freight by air was something of a novelty to most people then — although, as we well know, the pioneer work had been done many years previously and the industry was already maturing by the mid-1970s.

Nowadays it all seems to be taken for granted. When you can buy a ticket cheaply on an LCC, air travel seems as normal and maybe as unexciting as taking a bus. More normal, perhaps - most of us don’t do public transport in a big way, especially in our home towns.

‘Taken for granted’ would at least imply we could build on this foundation quite easily.

But is it worse than that? Do people simply not know what air cargo is, let alone the part it plays in their lives?
Unlikely as that may seem to us in the industry, in whatever role, I fear it is the truth.

And maybe it’s past time to accentuate the positive.

Customs moves IT processing system to new provider

Magazine Stories August Issue 2008

Saturday, 21 June 2008

 AUSTRALIAN Customs has begun moving its controversial ICS main IT processing services to a new service provider with completion scheduled for the end of March. Launched in late 2005 and hailed at the time as state-of-the-art technology, the multi-million dollar IT system has been beset with problems blamed on flaws in its initial design.

The move means the existing infrastructure that supports Customs Cargo Business Systems will be replaced and relocated with the temporary loss of its Industry Test capability. Customs estimates that all processes will be completed and that general use access will be available again from 05 March. 

Commenting on the move, Paul Zalai, manager freight and business operations for the Customs Brokers and Forwarders Council of Australia (CBFCA) said Customs sold the ICS concept to industry as providing state-of-the-art technology. “It is puzzling why two and half years later Customs’ rationale for this move in technology platform is to provide a more ‘modern, flexible and adaptable’ system,” said Zalai. “It is assumed that the move will improve systems performance and reliability as well as allowing Customs the flexibility to improve many of the underlying flaws in the initial systems design. If this is the ultimate outcome, then this would translate to real benefits to industry by relieving pressure on continued ‘work around’ procedures.”

Australian Federation of International Forwarders (AFIF) chief executive, Brian Lovell, said he believed the project management for the transition appeared to be aimed at minimum disruption to services. “However, the Federation will continue to monitor the situation to ensure this was the case and the new platform, when implemented, delivered on its original promise of best practice technology and service,” said Lovell.

International cargo growth slows again and outlook is ‘challenging’

Magazine Stories August Issue 2008

Saturday, 21 June 2008

INTERNATIONAL freight traffic rose by 4.3 per cent last year — down slightly from growth of 4.6 per cent in 2006 — and much lower than the 7 to 8 per cent growth trend of recent years.

In December, air freight demand grew 4.7 per cent — up from 3.5 per cent the previous month — largely due to temporary, year-end related factors.

According to IATA, the air freight demand environment will remain challenging. Growth is expected to slow in the first half of this year before picking up with overall growth of 4 to 4.5 per cent projected for 2008.

Middle East carriers led all regions in 2007, with a 10.1 per cent rise in freight demand, but still down sharply from 16.1 per cent in the previous year. Airlines in Asia-Pacific — which account for 45 per cent of the international total — saw freight demand rise 6.5 per cent last year, driven by strong growth in several economies in the region.

“Strong passenger traffic growth of 7.4 per cent was a key component of the industry’s US$5.6 billion profit in 2007 — the first black number since 2000,” said Giovanni Bisignani, IATA’s director general and chief executive officer.
 “But it wasn’t all good news. Freight slowed to 4.3 per cent, below the 7.5 per cent at which global trade expanded, highlighting a competitiveness issue with shipping.

“Despite the ambiguity of strong passenger growth accompanied by weaker freight demand, we can say clearly that 2007 was the best in recent memory.

“We can state equally clearly that there will be no encore performance in 2008. Oil prices are higher than ever. Economic uncertainty accompanying the US credit crunch is broadening. And the slower growth for passenger demand in December sets the trend for the coming months. In a tough business environment the mantra remains the same; efficiency everywhere is everything,” added Bisignani.