FEDERAL COURT OF AUSTRALIA

Australian Competition and Consumer Commission v Korean Air Lines Co Ltd [2011] FCA 1360

THE COURT ORDERS THAT:

1.    The respondent pay the Commonwealth of Australia within 28 days of the date this order is made a pecuniary penalty in the total sum of $5.5 million in respect of contraventions of section 45(2)(a)(ii) and (b)(ii) of the Trade Practices Act 1974, now the Competition and Consumer Act 2010 (the Act) occurring after March 2004, in that:

1.1.    the respondent:

1.1.1.    between about May 2003 and February 2006, reached understandings with certain of its competitors for the supply of services, from Indonesia to destinations throughout the world including Australia, for the carriage of air cargo containing a provision that they would each impose a charge of a specified amount, described as a fuel surcharge, in respect of those services; and

1.1.2.    between about May 2003 and February 2006, reached understandings with certain of its competitors for the supply of services from Indonesia to destinations throughout the world including Australia for the carriage of air cargo containing a provision that they would each impose a charge of a specified amount described as a security surcharge, in respect of those services; and

1.1.3.    between about May 2004 and October 2005, reached an understanding with certain of its competitors for the supply of services, between Indonesia and destinations throughout the world including Australia, and from origin ports throughout the world including Australia to Indonesia, for the carriage of air cargo containing a provision that each would impose a charge of a specified amount, described as a customs fee, in respect of those services.

1.2.    the provisions of the said understandings had the effect of fixing, maintaining or controlling prices for the said services within the meaning of section 45A of the Act and are therefore deemed to substantially lessen competition within the meaning of section 45(2)(a)(ii) and (b)(ii) of the Act; and

1.3.    the respondent gave effect to those provisions:

1.3.1.    of the understandings referred to in 1.1.1 in the period from May 2003 to February 2006 inclusive;

1.3.2.    of the understanding referred to in 1.1.2 from May 2003 to February 2006 inclusive; and

1.3.3.    of the understanding referred to in 1.1.3 from May 2004 until October 2005 inclusive.

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 services for 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 or any other Australian statute in accordance with section 51 of the Act.

3.    The respondent be restrained for a period of five years from the date of this order, from entering into, or giving effect to, any contract, arrangement or understanding with any of its competitors for the supply of services for the carriage of air cargo containing provisions to the effect that any of them will propose, develop, prepare, follow, implement, adopt or otherwise use any index, model, methodology or formula for the change of prices or any part of prices to be charged by any of them for services provided or which would otherwise likely be provided in competition with any other of them unless:

3.1.    the said contract, arrangement or understanding does not involve or relate to the carriage of goods to or from Australia;

3.2.    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

3.3.    the respondent is specifically authorised to do so under section 88 of the Act or any other Australian statute in accordance with section 51 of the Act.

4.    The respondent pay the applicant within 28 days of the date this order is made a contribution towards its costs of and incidental to these proceedings in the sum of $200,000.

Note:    Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules

REASONS FOR JUDGMENT

1        In its amended application and further amended statement of claim filed on 22 November 2010 the Australian Competition and Consumer Commission (ACCC) sought injunctions, declarations and penalties against Korean Air Lines Co Limited (Korean Air). The application alleged that Korean Airlines had engaged in price fixing, market sharing and other anti-competitive conduct in contravention of s 45 of the Trade Practices Act 1974 (Cth) (TPA). The conduct in question related to the price charged by Korean Air and other international airlines for international freight services to and from Indonesia, a customs fee on freight carried internationally by air from Indonesia as well as surcharges imposed in relation to fuel and security.

2        The parties have now settled the proceeding on the basis of agreed facts which are set out in a Statement of Agreed Facts which is Annexure A to these reasons. They have reached agreement on the terms of proposed injunctions and other orders as well as an appropriate amount of the proposed pecuniary penalty and provided short minutes of the orders that they requested the Court to make. At the end of the hearing on 18 November 2011 I was satisfied on the basis of the evidence and submissions of the parties that the orders sought should be made. Accordingly I made those orders and undertook to give reasons at a later date. These are my reasons.

Evidence

3        The Statement of Agreed Facts is signed by the solicitor for the ACCC and for Korean Air and states that it is made pursuant to s 191 of the Evidence Act 1995 (Cth). The statement contains a detailed account of Korean Air’s conduct and incorporates by reference additional details contained in the further amended statement of claim. By its agreement with the statement Korean Air admits that it engaged in conduct that is detailed in the statement. It also concedes that the conduct contravened s 45(2)(a)(ii) and (b)(ii) by reason of s 45A of the TPA.

4        As the Statement of Agreed Facts complies with s 191(3)(a), evidence is not required to prove the agreed facts and evidence may not be adduced to contradict or qualify those facts without the leave of the court. While s 191 does not require the court to accept that the facts as stated are true, in this case they provided coherent and cogent evidence of Korean Air’s conduct and I accept that the facts as stated are true: see generally Minister for the Environment, Heritage and the Arts v PGP Developments Pty Limited (2010) 183 FCR 10 at [35].

5        The facts referred to in these reasons are drawn from the Statement of Agreed Facts. The parties have also filed joint submissions in which, among other things, they jointly request the Court to impose a pecuniary penalty pursuant to s 76 of the TPA in the amount of $5.5 million. They also request the Court to impose injunctions and make other orders that were set out in short minutes of order provided to the Court.

Legislation

6        The parties’ submissions recognise, correctly, that under s 76 of the TPA it is for the Court to determine whether the alleged contravention of s 45 occurred, the quantum of any pecuniary penalty and whether the injunctions and other orders sought are appropriate. Nevertheless Korean Air’s concession that it contravened s 45 is clearly relevant to the Court’s determination. Section 45(2) of the TPA provides:

(2)    A corporation shall not:

(a)    make a contract or arrangement, or arrive at an understanding, if:

(i)    the proposed contract, arrangement or understanding contains an exclusionary provision; or

(ii)    a provision of the proposed contract, arrangement or understanding has the purpose, or would have or be likely to have the effect, of substantially lessening competition; or

(b)    give effect to a provision of a contract, arrangement or understanding, whether the contract or arrangement was made, or the understanding was arrived at, before or after the commencement of this section, if that provision:

(i)    is an exclusionary provision; or

(ii)    has the purpose, or has or is likely to have the effect, of substantially lessening competition.

7        Section 45A was repealed in 2009 and replaced by Part IV Division 1 dealing with cartel conduct: Trade Practices Amendment (Cartel Conduct and Other Measures) Act 2009. Schedule 2, items 50 and 51 of that Act commenced on 27 June 2009 and the remainder of the Act on 24 July 2009. As the conduct in question in this proceeding predates the Amendment Act s 45A applied to it. As its heading indicated s 45A concerned “Contracts, arrangements or understandings in relation to prices”. Section 45A(1) deemed, inter alia, a provision of, a contract arrangement or understanding “to have or to be likely to have the effect of substantially lessening competition” if it,

has the purpose, or has or is likely to have the effect, as the case may be, of fixing, controlling or maintaining, or providing for the fixing, controlling or maintaining of, the price for … goods or services supplied or acquired or to be supplied or acquired by the parties to the contract, arrangement or understanding … or by any of them, or by any bodies corporate that are related to any of them, in competition with each other.

8        Section 45A effectively outlaws price fixing arrangements by deeming, per se, such conduct to substantially lessen competition. Consequently it is not necessary to prove this factor to establish a breach of s 45.

Background

9        Korean Air is an international airline operating flights to 116 countries in 39 countries. During the period relevant to this proceeding it carried approximately 2% of all air cargo to and from Australia. This was similar to the amount of air freight carried by British Airways and may be compared to the 14% carried by Singapore Airlines and the 24% carried by Qantas.

10        In the period from the financial year ending on 31 December 2003 to the financial year ending on 31 December 2006 the revenue received by Korean Air from air freight services from routes to and from Australia rose from AU$12 million to AU$80 million. During this period the revenue generated by the surcharges it imposed on air freight from Indonesia to destinations throughout the world, including Australia was approximately AU$3 million per annum for fuel surcharges and AU$1.3 million per annum for security surcharges. Revenue from the customs fee was approximately AU$0.15 million per annum.

Contravening Conduct

11        The Statement of Agreed Facts establishes that Korean Air arrived at and gave effect to a number of understandings (Understandings) with its competitors who were members of the Air Cargo Representative Board – Indonesia. The Understandings are described in paragraphs 52 to 66 of the Statement of Agreed Facts and are set out in detail in paragraphs 95 – 118, and 270 – 278 of the Further Amended Statement of Claim. In brief they were:

(a)    an understanding as to the minimum rate per kilogram to be charged as a fuel surcharge on freight from Indonesia to the rest of the world (fuel surcharge understanding);

(b)    a minimum security surcharge on all goods exported from Indonesia, including to Australia (security surcharge understanding); and

(c)    a customs charge processing fee to be charged on all air waybills issued after 16 May 2004 (customs fee understanding).

12        The significance of the Understandings in terms of the conduct prohibited under s 45A can be better appreciated in the context of Korean Air’s business which is described in more detail in the Statement of Agreed Facts. In particular the background to the Understandings in paragraphs 21 to 50 of the Statement is illuminating.

13        I am satisfied on the evidence provided by way of the Statement of Agreed Facts that Korean Air has contravened s 45 of the TPA in the manner described in the Statement. That leads me to a consideration of the penalty proposed by the parties.

Imposition of penalties under s 76 of the TPA.

14        Section 76 empowers the Court to impose pecuniary penalties in respect of the contravening conduct of Korean Air in such amount, “as the Court determines to be appropriate having regard to all relevant matters”.

15        It is accepted that in imposing a penalty pursuant to s 76, an objective is the specific and general deterrence of contravening conduct. Indeed there is some support for the proposition that deterrence is the only object: see Trade Practices Commission v Stihl Chain Saws (Aust) Pty Limited (1978) 2 ATPR 40-091 at 17,896 per Smithers J; Trade Practices Commission v Mobil Oil Australia Ltd (1984) 4 FCR 296 at 297-298 per Toohey J; Trade Practices Commission v CSR Limited (1991) 13 ATPR 41-076, at 52,152 per French J and NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 at 292 per Burchett and Kiefel JJ. In the last case, Carr J preferred to leave open the question of whether s 76 also had a punitive purpose. On this point see also Australian Competition and Consumer Commission v Australian Safeway Stores Pty Ltd (1997) 145 ALR 36 where Goldberg J said at 45:

[I]n my view, a court in an appropriate case where there has been a flagrant and wilful contravention might take the view that a severe penalty was warranted having regard to the deliberateness and wilfulness of the contravention.

16        Justice Goldberg noted however that he was bound by the decision of the Full Court in NW Frozen Foods Pty Ltd. I am inclined to the view that the distinction may not rest on any actual difference. A severe penalty for “a flagrant and wilful contravention” might as well be directed to deterring similarly flagrant and wilful conduct as to punishing the specific conduct. In any event in the absence of any Full Court or High Court authority contrary to the view expressed by the majority in NW Frozen Foods Pty Ltd, it is not for a single judge to take punishment of conduct into consideration in imposing a penalty under s76.

General deterrence

17        In their joint submissions the parties emphasised the importance of general deterrence noting judicial concern that the penalties imposed in the past may not have been sufficient to achieve this aim: Trade Practices Commission v Sony (Australia) Pty Limited (1990) 12 ATPR 41-053 at 52,691 per Pincus J and Australian Competition and Consumer Commission v ABB Transmission and Distribution Limited (2001) 23 ATPR 41-815 at [13] per Finkelstein J. In Australian Competition and Consumer Commission v McMahon Services Pty Ltd (2004) 26 ATPR 42-031, echoing views expressed by Heerey J in Australian Competition and Consumer Commission v J McPhee & Son (Australia) Pty Ltd (1998) 20 ATPR 41-628 at 40,891-40,892, Selway J observed at [15]:

Once it is understood that deterrence, and particularly general deterrence, is the primary principle in the imposition of penalty for price fixing, then at least two conclusions flow from that. First, it means that penalties for collusive price fixing will need to be substantial and significant. This is, of course, reflected in the size of the maximum penalty upon corporations of $10 million. However, it also follows logically from the principle. Collusive price fixing, particularly between tenderers is difficult to detect. Public enforcement often only occurs with “a tip from an affected party or an insider” (see Marshall & Meurer, “Bidder Collusion and Antitrust Law: Refining the Analysis of Price Fixing to Account for the Special Features of Auction Markets” (2004) 72 AntiTrust Law Journal 83 at 101). Given these difficulties and the potential for large profits from such practices there is a chance that those in the market place might be prepared to factor the risk of a low penalty into its pricing structure as a ‘business cost’. That would be inimical to the statutory purpose of ensuring that the practices do not occur. The penalty must be sufficiently high that a business, acting rationally and in its own best interest, will not be prepared to treat the risk of such a penalty as a business cost.

18        Similar views to those of Selway J have been expressed in a number of cases including Australian Competition and Consumer Commission v Midland Brick Company Pty Ltd (2004) 207 ALR 329 at [22] per Lee J and Australian Competition and Consumer Commission v Leahy Petroleum Pty Ltd (No 3) (2005) 215 ALR 301 at [39] per Goldberg J.

19        The joint written submissions of the parties described general deterrence in the present case as being “of paramount importance”. The global nature of the arrangements that were reflected in the Understandings were said to warrant a severe penalty:

There is a need for a significant level of penalty in the highest ranges …available at the time in respect of cartel arrangements to deter multinational corporate groups carrying on business in Australia from engaging in cartel arrangements affecting Australia in the future. A high level of penalty is also required for general deterrence of price fixing conduct affecting Australia by other large multinational corporate groups.

20        I am conscious that a penalty must not be so high as to be oppressive. It is trite law that a penalty that is no greater than necessary to achieve the object of general deterrence is not appropriate; however, where Korean Air and the ACCC, assisted by experienced legal advisors, have agreed that a pecuniary penalty in the amount of $5.5 million is, in all the circumstances, within an appropriate range the likelihood of oppression is slight.

Relevant matters

21        The relevant matters to which s 76 refers include those mentioned in the section and elaborated by judicial decisions including Trade Practices Commission v CSR Limited (1991) 13 ATPR 41-076, NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 and J McPhee & Son (Australia) Pty Ltd v Australian Competition and Consumer Commission (2000) 172 ALR 532. Together s 76 and these judgments yield the following list of relevant matters:

1.    the nature and extent of the contravening conduct;

2.    the economic effect of the contravening conduct including on the functioning of the market and the loss or damage caused;

3.    the circumstances in which the conduct occurred;

4.    the size and financial position of the contravening company;

5.    the degree of market power of the contravening company as evidenced by its market share and ease of entry into the market;

6.    whether the contravening conduct was systematic, deliberate or covert and the period over which it extended;

7.    whether the contravention arose from the conduct of senior management or at a lower level;

8.    whether the company has previously engaged in similar conduct and whether it had a corporate culture conducive to compliance with the Act as evidenced by educational programs and disciplinary or other corrective measures in response to an acknowledged contravention; and

9.    the extent to which the company has cooperated in relation to the contravention with the authorities responsible for the enforcement of the Act.

I would add a tenth matter to this list, namely whether the regulatory authority, the ACCC and the contravening party have agreed on an appropriate amount of the penalty to be imposed.

22        Not all of these factors will loom large in every case and I do not propose to consider each individually. The joint submissions have done so and those submissions have informed my consideration of the proposed penalty and other orders put forward by the parties.

Recognition of terms of settlement

23        It is well known, indeed notorious, that litigation to establish anti-competitive conduct can be very complex, time consuming and expensive for all parties as well as for the Court. Settlement of such proceedings relieves the Court and the parties of much of that time and expense. This is, as the parties submitted, a matter of public interest:

“It is in the public interest for litigation under Part IV of the Act (as with other litigation) to be concluded in the shortest time frame that is consistent with justice being done between the parties, freeing the Court and the regulator to deal with other matters.

24        Provided that it can be satisfied that there has been contravention of the Act and that the terms of the orders including the proposed penalty are appropriate, the Court is generally willing to make orders in terms agreed by the parties. It is also accepted that recognition of the terms of settlement agreed between the parties can also be an important element in encouraging other parties to cooperate with the regulator and negotiate settlements. In NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 at 291 Burchett and Kiefel JJ commented that there was an important issue of public policy involved in the Court recognising settlements agreed by the parties. Their Honours observed:

When corporations acknowledge contraventions, very lengthy and complex litigation is frequently avoided, freeing the courts to deal with other matters, and investigating officers of the Australian Competition and Consumer Commission to turn to other areas of the economy that await their attention. At the same time, a negotiated resolution in the instant case may be expected to include measures designed to promote, for the future, vigorous competition in the particular market concerned. These beneficial consequences would be jeopardised if corporations were to conclude that proper settlements were clouded by unpredictable risks. A proper figure is one within the permissible range in all the circumstances. The Court will not depart from an agreed figure merely because it might otherwise have been disposed to select some other figure, or except in a clear case.

25        It is worth noting that encouraging parties to come forward and assist the ACCC in its enforcement activities is a formal ACCC policy. The joint submissions state:

The ACCC’s position is contained in its Cooperation Policy for Enforcement Matters, July 2002. Whilst the Court is not bound by the Policy nor required to take it into account in any given case, it has recognised (in relation to a previous edition of the policy) that the matters which the Policy takes into consideration are matters relevant to a determination of the appropriate penalties to be imposed for contravention of Part IV of the Act.

26        The judicial statements quoted above do not suggest in any way that the Court is bound to accept as appropriate the amount agreed between the ACCC and the contravening party but they recognise it as a factor to be taken into account. In Australian Competition and Consumer Commission v Real Estate Institute of Western Australia Inc (1999) 161 ALR 79 at [18] French J was explicit on the point:

The question whether an undertaking is to be accepted or a consent order made is not concluded by a finding that it is within the power of the court to do so. The power of the court to make the orders sought is “defined and conferred by public law not by private agreement”: Fiss, “Against Settlement” (1984) 93 Yale Law Journal 1073. In the exercise of that power the court is not merely giving effect to the wishes of the parties, it is exercising a public function and must have regard to the public interest in doing so. This principle applies to the resolution of private litigation by consent orders or undertakings. A fortiori it applies to proceedings brought by the Crown or public or statutory authorities to enforce the law in the public interest. The court has a responsibility to be satisfied that what is proposed is not contrary to the public interest and is at least consistent with it … Consideration of the public interest, however, must also weigh the desirability of non-litigious resolution of enforcement proceedings.

27        It is more common than not for the Court to approve the amount of an agreed penalty. The joint submissions cited only three cases where the Court had substituted another amount, in one of which the judgment was reversed on appeal. In contrast, an annexure to the joint submissions listed a large number (56) of cases in which the agreed amount had been accepted. This information is only of marginal relevance. Ultimately whether the proposed penalty is acceptable depends on the issues relevant to this matter and not whether agreed penalties have been accepted in other cases.

28        A prime consideration is whether the proposed penalty of $5.5 million is within the permissible range. The proposed amount embraces the entirety of the conduct in relation to the Understandings during the period subject to penalty. At the time of the contraventions the maximum penalty for each act of arriving at or giving effect to collusive understandings was $10 million: s 76(1A)(b) of the TPA.

29        The conduct involved in arriving at and giving effect to the Understandings was deliberate and extended over many years. It is, however difficult to be precise about the extent of loss or damage caused. Relevantly, the per annum revenue generated was: from the fuel surcharge, approximately AU$3 million; from the security surcharge, approximately AU$1.13 million; and from the customs fee, approximately AU$0.15 million. The parties submitted that, at least in relation to the fuel surcharge the revenue derived does not demonstrate actual loss to the shippers or their customers:

Absent the understandings as to fuel surcharges, some price increases would have occurred to cover the increased costs of fuel, which did increase over the relevant period. It may have also been that some airlines would have been forced to exit certain routes, allowing the remainder to impose other increases with less constraint. These competitive outcomes cannot be known.

30        As indicated above the Statement of Agreed Facts establishes that Korean Air was a comparatively small player in the carriage of air cargo to and from Australia. In the relevant period it had about 2% of the business, British Airways had about 3% and Qantas had 24%. Major international carriers were significant competitors. That being so the ACCC does not contend that it was able to act in the Australian segment or elsewhere without being constrained by those competitors. Nevertheless to be successful the contravening conduct required the participation of all major carriers and, it was submitted that for this reason alone Korean Air’s participation calls for the penalty proposed by the parties.

31        The fact that the contravening conduct occurred, and that the Understandings were reached and implemented by senior cargo staff, is sufficient indication that Korean Air’s trade practices compliance polices were not adequate. The joint submissions state that these policies “are being fully revised, with education and managerial responsibilities being introduced in order to instil a culture of compliance at an institutional level”. The revision of its policies and its considerable cooperation with the ACCC in reaching an agreed resolution of the matter is indicative that Korean Air has changed its approach and gives grounds for optimism about its future compliance with the TPA. The joint submissions state:

The ACCC accepts that Korean Air Lines is entitled to real credit for having admitted contravening the Act, and agreeing with the ACCC on the appropriate penalty to put to the Court … Korean Air Lines’ co-operation with the ACCC has saved the ACCC and the Court (and ultimately the community) the cost and burden of litigating a complex, lengthy and expensive case.

It is obviously of benefit to the ACCC’s investigations that respondents are encouraged to co-operate in appropriate cases. In these circumstances the parties submit Korean Air Lines is entitled to a discount on the penalty that otherwise would have been appropriate, which, given the regularity of the contravening conduct over the relevant period and the maximum applicable penalty per contravention of $10 million, could have been very much higher. This discount reflects the appropriate admissions and the substantial savings from full litigation.

Korean Air Lines has conducted extensive searches of documents throughout the world at considerable burden. It has produced to the ACCC a considerable quantity of documents in response to compulsory notices issued under section 155 of the Act and as discovery in these proceedings. Korean Air Lines does not, because of the searches it has conducted and its production to date, expect that it is likely to have a substantial quantity of additional relevant or probative documents to provide to the ACCC as evidence in these proceedings. Notwithstanding this, Korean Air Lines has agreed to conduct further searches and provide additional discovery of documents of assistance which have been specifically requested by the ACCC in the proceedings in this Court which remain on foot between the ACCC and other airlines.

The discount for Korean Air Lines’ co-operation and acknowledgment of liability should be meaningful so that it can be seen that, was it not for its admissions now and co-operation, the Court would impose a significantly increased penalty if liability was established following a contested trial.

32        The proposed penalty of $5.5 million can be compared with the penalties imposed on other airlines who participated with Korean Air in the contravention of s 45. The joint submissions give details of the penalties imposed on Qantas, British Airways, Japan Airlines, Cargolux, Martinair and the merged Air France/KLM. The discounts allowed to each of those participants are, given the individual circumstances, on a par with the proposed penalty and the discount incorporated in it.

33        Having taken into account the relevant matters as outlined above at [21], I am satisfied that the proposed penalty of $5.5 million is appropriate as are the other orders sought by the parties.

Associate:

Dated:    30 November 2011

ANNEXURE A

STATEMENT OF AGREED FACTS AND ADMISSIONS BY THE RESPONDENT PURSUANT TO SECTION 191 OF THE EVIDENCE ACT 1995

FEDERAL COURT OF AUSTRALIA

DISTRICT REGISTRY: NEW SOUTH WALES

DIVISION: GENERAL    NO NSD 220 OF 2010

INTRODUCTION

1.    The anticompetitive conduct that is the subject of this proceeding related to the price charged by international airlines, including the respondent (Korean Air Lines), for the supply of international air freight services from Indonesia to destinations throughout the world, including Australia, and to Indonesia from places throughout the world, including Australia.

2.    Korean Air Lines admits that it engaged in conduct in contravention of section 45 of the Trade Practices Act 1974, now the Competition and Consumer Act 2010 (the Act), by reason of section 45A, by arriving at and giving effect to understandings in relation to (i) a fuel surcharge, (ii) a security surcharge and (iii) a customs fee on freight carried internationally by air from Indonesia (the Understandings). The terms of the Understandings and their implementation are set out in further detail below and in paragraphs 95 to 118 and 270 to 278 of the Further Amended Statement of Claim filed 22 November 2010.

3.    For the purpose of this proceeding only, Korean Air Lines admits that its conduct in arriving at and giving effect to the Understandings constituted conduct in contravention of section 45 of the Act, by reason of section 45A, as follows:

3.1.    in relation to a fuel surcharge, from in or about May 2003 to February 2006;

3.2.    in relation to a security surcharge, from in or about May 2003 to February 2006; and

3.3.    in relation to the customs fee, from in or about May 2004 to no later than October 2005.

4.    Unless otherwise stated, the facts and matters in this Statement of Agreed Facts and Admissions apply to the above periods of time (the relevant period).

5.    For the purposes of this proceeding only, the ACCC and Korean Air Lines accept that during the relevant period the relevant market or markets in which the contravening conduct occurred included outbound freight from Indonesia to destinations throughout the world including Australia, and inbound freight from origin ports around the world to Indonesia, including from Australia (the Relevant Market/s). Furthermore, for the purposes of this proceeding only, the parties accept that the Relevant Market/s is a market or are markets in Australia within the meaning of section 4E of the Act.

6.    The facts agreed to, and the admissions made herein, are agreed to and made for the purpose of this proceeding only. Similarly, matters accepted or not objected to are accepted or not objected to for the purposes of this proceeding only.

THE RESPONDENT

7.    Korean Air Lines:

7.1.    carried on business in Australia and elsewhere as an international airline;

7.2.    flew to Australia and carried approximately 2% of all air cargo to and from Australia (based on weight) throughout the relevant period;

7.3.    as at January 2010 employed approximately 980 staff in its cargo business division (551 cargo staff in Korea and 429 cargo staff in other locations around the world);

7.4.    currently operates flights to 116 cities in 39 countries, excluding code-sharing and franchise arrangements;

7.5.    employed approximately 7 cargo staff in Australia between 2000 and 2006;

7.6.    was (and remains) a company incorporated in the Republic of South Korea; and

7.7.    was (and remains) a registered foreign corporation in Australia within the meaning of section 4 of the Act.

8.    Korean Air Lines carried approximately 2% of the air freight to and from Australia and in that respect carried a similar amount of air freight to British Airways, Cargolux and Martinair. The largest airline, Qantas, carried about 24% of air freight to and from Australia and Singapore Airlines carried about 14%.

9.    For the year ended 31 December 2005, Korean Air Lines had total assets of KRW 13,568,644 million (US$13,395million), total operating revenue of KRW 7,584,221 million (US$7,487 million) and net income after tax for that year of KRW 200,376 million (US$198 million). For the year ended 31 December 2004, Korean Air Lines had total assets of KRW 13,738,959 million (US$13,162 million), total operating revenue of KRW 7,210,859 million (US$6,908 million) and net income after tax for that year of KRW 519,492 million (US$498 million).1

10.    The following table sets out Korean Air Lines’ gross revenue from the global carriage of air freight and from international air freight services supplied to and from Australia in the years ending 31 December 2003, 2004, 2005 and 2006:

11.    In the same period, the revenue derived by Korean Air Lines from fuel and customs fees imposed by it was as set out in the following table:

12.    The revenue generated by Korean Air Lines as a result of the surcharges it imposed on freight from Indonesia to destinations throughout the world, including Australia, was approximately AU$3 million per annum for fuel surcharges and AU$1.13 million per annum for security surcharges. Its revenue from the customs fee was approximately AU$0.15 million per annum.

13.    The annual tonnage of air freight originating in Indonesia and carried to Australia during the relevant period by all airlines is estimated by the parties to be between 3,000 and 4,000 tonnes per annum with an approximate annual value of the goods between AU$500 to 700 million. The total fuel surcharges imposed on this freight is estimated to be between approximately US$400,000 to 500,000 (AU$600,000 to 700,000) during the period March 2004 to February 2006 (the period for which penalty is to be assessed). The total security surcharges charged on air freight carried from Indonesia to Australia during the period March 2004 to February 2006 (the period for which penalty is to be assessed) is estimated to be US$300,000 to 400,000 (AU$450,000 to 550,000).The total customs fees charged on air freight carried from Indonesia to Australia during the period since March 2004 is unknown as the parties are unable to ascertain or estimate the total number of air waybills (AWBs).

14.    Korean Air Lines rarely carried air freight from Indonesia to Australia in the relevant period and the revenue it derived from fuel surcharges, security surcharges and customs fees from Indonesia to Australia, and customs fees from Australia to Indonesia, was negligible. The direct benefit to Korean Air Lines of entering into and in giving effect to the Understandings was derived from fuel surcharges, security surcharges and customs fees on freight carried to other destinations, and on customs fees to Indonesia from other origin ports.

15.    Fuel surcharges, security surcharges and customs fees were implemented by Korean Air Lines pursuant to the Understandings, on air freight services supplied in the Relevant Market/s.

DESCRIPTION OF THE MARKET/S

16.    International air freight is carried both on passenger aircraft, using available belly space capacity, and on dedicated air freighters. Air freight services are provided “one way” from origin to destination, either directly or using an indirect route via one or more midpoints. Most international airlines provide air freight services on a network-wide basis. Through interline and other arrangements with other international airlines they also offer air freight services to or from airports which their own aircraft do not serve directly. The networks of international airlines extensively overlap such that there are various international airlines operating to and from any international airport.

17.    Airlines predominantly provide international air freight services to freight forwarders which generally organise the integrated transport of goods on behalf of a range of shippers. Freight forwarders issue a document known as an air waybill on behalf of international airlines for the carriage of air freight.

18.    Apart from freight forwarders, individual shippers also acquire air freight services from airlines, albeit rarely. Shippers may be the purchasers or the sellers of goods or the owners of goods that need to be moved over relatively long distances.

19.    There are different ways in which the geographic scope of the market or markets in relation to international air freight services relevant to the Understandings can be defined. The ACCC considers that the most appropriate market for analysing the conduct the subject of this proceeding is a worldwide market for the supply by international airlines and the acquisition by customers of air freight services. As stated in the introduction above, for the purposes of this proceeding only, the ACCC and Korean Air Lines accept that during the relevant period the relevant market or markets included outbound freight from Indonesia to destinations throughout the world including Australia, and inbound freight from origin ports throughout the world including Australia, to Indonesia. The parties agree in any event that, given the conduct admitted in this proceeding, the Court need not determine the precise market definition.

20.    In the Relevant Market/s, Korean Air Lines in the relevant period competed with airlines including Singapore Airlines, British Airways, Emirates, Cathay Pacific, Qantas, Garuda, Thai Airways, Cargolux and Malaysian Airlines, for the supply of international air freight services, including to and from Australia.

1996/97: RESOLUTION 116SS

21.    The information in paragraphs 21 to 50 is provided by way of background, but not as material facts giving rise to Korean Air Lines’ admitted contraventions.

22.    In the second half of 1996, the price of aviation fuel globally rose substantially.

23.    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 US$0.10, or the equivalent in local currency, per kilogram of air freight 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.

24.    On or about 1 November 1996, Lufthansa commenced to levy the 1996 surcharge.

25.    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 imposition 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 are members.

26.    Korean Air Lines is a member of IATA and was a member at all material times. Resolution 116ss was passed by mail vote.

27.    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 impose the local currency equivalent of US$0.10 per kilogram of air freight 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 imposing the surcharge such as the means of including the surcharge on air waybills and the freight forwarders’ eligibility for commission.

28.    The surcharge generated by the index rose and fell with movements in the price of fuel but did not necessarily reflect changes in the actual fuel costs of any of the particular airlines which applied it.

29.    In the period 1997 to 1999, the IATA fuel price index remained below 130, being the trigger point for the first level of the fuel surcharge under Resolution 116ss. Nevertheless, IATA advised its members that the fuel surcharge should not be imposed until Resolution 116ss had received regulatory approval, including from the United States Department of Transportation (US DoT). No such approval was obtained.

30.    In the period 1997 to 1999, IATA continued to publish its index.

1999/2000: IMPLEMENTING THE IATA FUEL PRICE INDEX

31.    In November 1999, for the first time since its publication in 1997, the index exceeded 130, the trigger point for the imposition of a surcharge.

32.    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.

33.    On 7 April 2000, IATA sent a memorandum to the members of the Cargo Tariff Co-ordinating Conferences including Korean Air Lines 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.”

34.    On 14 April 2000, IATA sent another memorandum to the members of the IATA Cargo Committee including Korean Air Lines as follows:

“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”

35.    This correspondence was sent to the heads of cargo operations (members of the IATA Cargo Committee) at over 60 IATA member airlines, along with their tariff co-ordinators (members of the Cargo Tariff Coordinating Conference).

2000: THE LUFTHANSA FUEL PRICE INDEX

36.    The ACCC asserts and Korean Air Lines accepts that 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 effectively replicated the IATA fuel price index (the Lufthansa Fuel Price Index). Lufthansa also commenced publishing a methodology which stated that the surcharge of €0.10 (or the equivalent in local currency) would be imposed 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.

37.    During 2000 and 2001, Lufthansa implemented increases and decreases to its fuel surcharge in accordance with the Lufthansa Fuel Price Index.

38.    By late 2001, the price of aviation fuel had fallen. In December 2001, Lufthansa and other airlines which had imposed a fuel surcharge announced the withdrawal of that surcharge with effect from December 2001 or January 2002.

2002: NEW LUFTHANSA METHODOLOGY

39.    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):

40.    Similar to Resolution 116ss, the Lufthansa Methodology calculated the fuel surcharges based on the actual per kilogram weight of international air freight and used a two week period for an index threshold to trigger a fuel surcharge increase or decrease. The fuel surcharge was imposed in euros or the equivalent in local currency.

41.    Several other airlines announced and charged fuel surcharges based on the Lufthansa Methodology. KLM (and a few other airlines) adopted their own fuel surcharge methodology.

42.    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). The following table records the Lufthansa Methodology, incorporating the Additional Levels:

43.    In this Statement of Agreed Facts and Admissions, a reference to the “Surcharge Methodology” is a reference to the Lufthansa Methodology including Additional Levels, or to a methodology which led to substantially the same outcome as application of the Lufthansa Methodology.

44.    During the period in which Lufthansa was publishing its index, senior cargo staff of Korean Air Lines in Indonesia had discussions with their competitors, including Lufthansa, concerning the application of surcharges in accordance with the Surcharge Methodology in relation to the carriage of freight in the Relevant Market/s.

45.    The relevance of this background to the admitted conduct is twofold.

46.    First, there was a consensus among IATA members, including Korean Air Lines, that a fixed surcharge in relation to the carriage of freight in the Relevant Market/s that could not be competed away was favoured by all of them if a way could be found to give effect to it.

47.    Secondly, Resolution 116 ss created a precise mechanism for the setting and applying of fuel surcharges in relation to the carriage of freight in the Relevant Market/s which did not require the parties to understandings, such as those admitted here, to agree anew on such complex and detailed matters across a number of locations. The mechanism provided the following features:

47.1.    a single fuel surcharge would be levied on the supply of air services;

47.2.    the fuel surcharge would be calculated on the weight of the cargo but would not be directly dependent on the distance the cargo was actually carried or the route used by the airlines concerned;

47.3.    the fuel surcharge would be levied at the origin of the cargo;

47.4.    the amount of the fuel surcharge would be fixed regardless of a particular carrier’s actual costs; and

47.5.    where the goods were to be carried by a number of carriers, the entire fuel surcharge would be kept by the first carrier on a “swings and roundabouts” basis.

48.    The uniform system for charging and applying fuel surcharges also assisted international airlines to reach agreements on fuel surcharges in diverse places as there was a common system with which they were all familiar.

49.    The effect of this was that if a fuel surcharge was to be jointly imposed, as is admitted in relation to the carriage of freight in the Relevant Market/s, the parties simply had to agree to the amount and the timing of implementation.

50.    Movements in the Lufthansa Price Index were monitored by airlines and served as a trigger for the holding of the meetings and discussions that led to the Understandings.

THE UNDERSTANDINGS

Background

51.    From at least 2001, Korean Air Lines and other major international airlines operating in Indonesia were members of the Air Cargo Representative Board-Indonesia (ACRB-Indonesia).

52.    Between October 2001 and September 2005, a representative of Korean Air Lines often attended meetings of the ACRB-Indonesia with its competitors including Singapore Airlines, Garuda, Cargolux, Emirates, Lufthansa, Cathay Pacific Malaysian Airlines and Thai Airways. At those meetings, from about May 2003, the airlines discussed, in addition to other matters, the fuel surcharges, security surcharges and customs fees they intended to impose on the carriage of freight from Indonesia to the rest of the world, including Australia.

53.    Korean Air Lines’ cargo sales manager employees in Indonesia communicated with employees in the freight divisions of other airlines at ACRB-Indonesia meetings to reach the Understandings.

54.    The purpose of these communications was to ensure, and their effect was, that in respect of the carriage of air freight the airlines would move to the same amount or substantially the same amount at around the same time.

Indonesia Fuel Surcharge Understandings

55.    Korean Air Lines and competitors who were members of the ACRB-Indonesia arrived at understandings concerning the minimum rate per kilogram to be charged as a fuel surcharge on freight from Indonesia to the rest of the world. The rates agreed broadly took into account the destination of the freight by separately considering minimum charges to international airports located in 3 areas known as TC1 (North and South America), TC2 (Europe, Middle East and Africa) and TC3 (Asia, South Pacific and South West Pacific including Australia).

56.    Korean Air arrived at, and gave effect to, five fuel surcharge understandings with competitors who were ACRB-Indonesia members between May 2003 and February 2006.

57.    By about May 2003, a minimum fuel surcharge of US$0.10/kg for TC1 and TC2, and US$0.05/kg for TC3 had been agreed. In September 2004, the parties agreed to raise the minimum fuel surcharges to TC1 and TC2 to US$0.20/kg but to continue the TC3 minimum fuel surcharge at US$0.05/kg. In April 2005, the parties agreed to raise the minimum fuel surcharge for TC1 and TC2 to US$0.30/kg and retained the US$0.05/kg minimum fuel surcharge for TC3. In July 2005, it was agreed to raise the TC1 and TC2 minimum fuel surcharge amounts to US$0.40/kg without changing the minimum TC3 amount, but excluding Singapore and Kuala Lumpur.

58.    In September 2005, the parties agreed to charge a minimum fuel surcharge of US$0.45/kg to TC1 and TC2. The parties agreed to raise the TC3 minimum fuel surcharge to US$0.10/kg for all destinations, including Australia, but excluding Singapore and Kuala Lumpur, in relation to which they agreed to impose minimum fuel surcharges of not less than US$0.05/kg.

59.    Korean Air Lines gave effect to these understandings from May 2003. It ceased giving effect to these understandings after February 2006.

60.    Korean Air Lines admits for the purposes of this proceeding only that it made and gave effect to fuel surcharge understandings in the period from May 2003 to February 2006. The conduct relevant to penalty under sections 76 and 77 of the Act for the supply of air freight services in the Relevant Market/s is making and giving effect to those understandings from March 2004 to February 2006.

Indonesia Security Surcharge Understandings

61.    Korean Air Lines arrived at, and gave effect to, three security surcharge understandings with competitors who were ACRB-Indonesia members between May 2003 and February 2006.

62.    From about May 2003, Korean Air Lines and its competitors arrived at an understanding that each of them would charge a minimum fee, to be called a security surcharge, on all goods exported from Indonesia, including to Australia. The minimum surcharge imposed was US$0.10/kg to TC1 and TC2 and US$0.05/kg to TC3 including Australia. The surcharge was subsequently reviewed by the parties in September 2004 and July 2005 but agreed it be left at the same amounts. Korean Air Lines gave effect to these understandings from May 2003 until February 2006.

63.    Korean Air Lines admits for the purposes of this proceeding only that it made and gave effect to these understandings in the period from May 2003 until February 2006. The conduct relevant to penalty under sections 76 and 77 of the Act for the supply of air freight services in the Relevant Market/s is making and giving effect to these understandings from March 2004 to February 2006.

Indonesia Customs Fee Understanding

64.    In May 2004, Korean Air Lines and its competitors who were ACRB-Indonesia members arrived at an understanding to charge a fee on all air waybills issued after 16 May 2004. The fee was variously known as a “customs” fee, a “customs charge processing” fee, a “CGC” fee or a “manifest” fee.

65.    The customs fee was charged on all freight carried from Indonesia to Australia, and from Australia to Indonesia. In respect of all goods exported from Indonesia, including to Australia, the fee was agreed to be a minimum of US$5.00 per air waybill. In respect of all goods imported to Indonesia, including from Australia, the agreed fee was US$5.00 per air waybill. Korean Air Lines gave effect to this understanding from 16 May 2004. It had ceased giving effect to the understanding by October 2005.

66.    Korean Air Lines admits for the purposes of this proceeding only that it made and gave effect to this understanding in the period from May 2004 up until October 2005. The conduct relevant to penalty under sections 76 and 77 of the Act for the supply of air freight services in the Relevant Market/s is making and giving effect to that understanding from May 2004 to October 2005.

OTHER FACTS AND ADMISSIONS RELEVANT TO THE CONDUCT

67.    For the purposes of this proceeding only, Korean Air Lines admits that during the relevant period and, pursuant to the Understandings, it imposed fuel surcharges, security surcharges and customs fees on routes in the Relevant Market/s.

68.    For the purposes of this proceeding only, Korean Air Lines admits that arriving at the Understandings and giving effect to their provisions constituted the arriving at and giving effect to an understanding containing provisions to which section 45A of the Act applies in that it had the purpose, effect and likely effect of fixing, controlling or maintaining the price charged by competitors for the carriage of freight by air, and that such conduct is therefore deemed to have the purpose, effect and likely effect of substantially lessening competition between the respondent and its competitors for the carriage of freight by air, in the Relevant Market/s.

69.    For the purposes of this proceeding only, Korean Air Lines admits that by arriving at the Understandings and by giving effect to its provisions by charging on air waybills fuel surcharges, security surcharges and a customs fee in accordance with the Understandings, it has contravened sections 45(2)(a)(ii) and (b)(ii) of the Act, by reason of section 45A.

Date: 2011

Glenn Owbridge

A solicitor employed by

Australian Government Solicitor

Solicitor for the Applicant

Date: 2011

Nicholas Mavrakis

Partner Clayton Utz

Solicitor for the Respondent

Date: 2011

1.     Korean Air Lines’ Non-Consolidated Balance Sheets report in USD. These figures have been converted from USD to KRW using the accumulated exchange rate announced by the Korea Foreign Exchange Bank.

2.     Lufthansa announced additional trigger points for levels 5 and 6 on 14 May 2004.

3.     Lufthansa announced additional trigger points for levels 7 and 8 on 20 September 2004.

4.     Lufthansa announced additional trigger points for levels 9 and 10 on 21 March 2005.

5.     Lufthansa announced additional trigger points for levels 11 and 12 on 22 August 2005.

6.     Lufthansa announced additional trigger points for levels 13 and 14 on 4 October 2005.