Moore on Pricing: Changing the ethics of the air cargo business
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Over 300 air cargo shippers recently surveyed by the International Air Cargo Association (IATA) expressed continued reticence to use air cargo because of eight factors. According to the IATA, the persistent issues included the mode being too complex; having a lack of transparency; bad past experiences; a weak value proposition; poor customer service; carriers maintaining an old-fashion culture; no real-time information on tracking; and overall inefficient processes.
Of course, IATA suggests that carrier management should focus on these areas for improvement. While I certainly agree, I would suggest that shippers measure carriers around these eight factors and add an ninth—ethics. Shippers should be aware that many airlines have been colluding on price for years and recently began settling litigated claims from the U.S. and EU governments.
Multiple price-fixing class action lawsuits have been filed since 2007. The first case was filed after an investigation from the U.S. Department of Justice (DOJ) and the European Commission found that the airlines regularly communicated with each other during meetings in order to fix the airline rates for various routes. The governments further alleged that airline executives then enforced the rates they agreed upon in subsequent dealings within the U.S. and other countries, according to papers filed in the US District Court of Eastern New York.
Settlements to date include British Airways ($89 million), while Deutsche Lufthansa AG, Lufthansa Cargo AG and Swiss International Air Lines Ltd. agreed to pay a total of $85 million. Recently, there was a $115 million pay out from Korean Air Lines; more than $90 million from both Singapore Airlines and China Airlines; and a $60 million settlement from Cathay Pacific Airways.
Just this past month, Polar Air agreed to pay $100 million and Air China agreed to pay $50 million to settle litigation against them. As an update, the EU courts stayed some of the awards due to a technicality in the use of the term “cartel” versus individual airline defendants. The court seemed to think that there can’t be both a cartel and individuals named in the cases; however, this will likely get ironed out and there are still more cases pending.
This level of litigation is nothing new. In 2012, British Airways was issued a £58.5 million fine by the Office of Fair Trading for colluding with rival Virgin Atlantic on fuel surcharges on long-haul flights between August 2004 and January 2006.
And the collusion goes beyond cargo. Four major U.S. air carriers were named in recent weeks in 11 lawsuits following a DOJ investigation regarding passenger capacity constraint collusion that resulted in higher prices for travelers.
So, let’s go back to the eight expressed frustrations of shippers listed above. While lack of ethics is not specifically listed, it’s perhaps covered by lack of transparency, poor shipper experiences, high complexity and being old-fashioned.
To the unseasoned transportation executive, the international transportation world is particularly daunting. So, it’s not surprising that a large number of carriers were tempted to take advantage through collusion on pricing and accessorials.
It’s quite disappointing that after centuries of technological innovation and improved relations between cultures, we still have those who feel it’s okay to game the system. With that in mind, shippers need to be vigilant and go beyond just engaging a broker to handle international cargo.
Smart international shippers need to dig in and understand the business and check on all the players in the air cargo game. Insist on a regular review of metrics that deal with the nine weaknesses in the business, particularly ethics.
About the AuthorPeter Moore Peter Moore is Adjunct Professor of Supply Chain at Georgia College EMBA Program, Program Faculty at the Center for Executive Education at the University of Tennessee, and Adjunct Professor at the University of South Carolina Beaufort. Peter writes from his home in Hilton Head Island, S.C., and can be reached at [email protected]
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