Virgin in price-fixing inquiry as Cathay turns whistle-blower

Office of Fair Trading opens investigation into airline after rival confesses to four years of collusion

Virgin Atlantic and Cathay Pacific face allegations of illegal price-fixing on the London to Hong Kong route after the Hong Kong flag carrier shopped its British counterpart to the Office of Fair Trading (OFT).

The OFT said that at this stage "it should not be assumed that the parties involved have broken the law". But it issued a formal "statement of objections" to the two companies yesterday, alleging that a series of contacts between the airlines over a number of years "had the object of co-ordinating the parties' respective pricing strategies... through the exchange of commercially sensitive information".

Ali Nikpay, the OFT's senior director of Cartels and Criminal Enforcement, said: "For a market economy to work effectively it is vital that competing companies determine their pricing strategies independently of each other and do not seek to avoid the rigours of competition through unlawful co-ordination."

The investigation, which started when Cathay approached the OFT in March 2007, relates to activities alleged to have taken place between September 2002 and July 2006.

The OFT says that there is no reason to suspect that either Sir Richard Branson, the Virgin Atlantic chairman, or Steve Ridgway, the airline's chief executive, were either involved in or knew about the alleged illegal conduct.

Both airlines will now be able to respond to the allegations. Virgin Atlantic strongly denied all charges. "Virgin Atlantic intends to robustly defend itself against these allegations," it said. "The airline does not believe that it has acted in any way contrary to the interests of consumers."

The company stressed that "no definitive findings" have been made against the company thus far. It also emphasised that no decision on any "potential infringement" will be made by the OFT until the company has had a chance to submit a formal response.

There is no set timescale for the process, but responses are expected from both airlines within three months. Similar investigations in the past have run for around a year, from the first issuance of a statement of objections through to the watchdog's final ruling.

Regardless of the outcome in the price-fixing case, Cathay Pacific will not face any penalties under the investigation, assuming it continues to co-operate. It is protected by the OFT's leniency policy, which offers immunity to companies reporting their participation in cartel activities.

Ironically, Virgin Atlantic has itself benefited from the policy in the past. The company reported illegal discussions with British Airways to the OFT in 2006, kick-starting an investigation which resulted in BA being fined a whopping £270m in August 2007. BA admitted collusion with its arch-rival over fuel surcharging of long-haul passengers between August 2004 and January 2006, when surcharges rose from £5 to £60 on an average long-haul return ticket from both companies.

The OFT found that on at least six occasions, the two companies discussed proposed changes to surcharges. Under the leniency deal, Virgin Atlantic paid nothing at all. But BA was hit with a record £122m fine from the OFT, plus another £148m from the US Department of Justice's parallel investigation.

The case still has not finished. Although the OFT's civil case against the flag carrier was wrapped up in 2007, the related criminal case against four current and former BA executives started at Southwark Crown Court earlier this month.

Only one of the four – BA's head of sales, Andrew Crawley – still works for the company. The other three – the former commercial director Martin George, the former communications director Iain Burns, and the former head of UK and Ireland sales Alan Burnett – all left BA in 2006, before the conclusion of the civil investigation.

All four are pleading not guilty to charges of a "criminal cartel offence". If convicted under the Enterprise Act, they could face up to five years' imprisonment or an unlimited fine, according to the OFT.

Virgin Atlantic's Mr Ridgway is expected to act as a witness in the trial. His appearance will not improve the relationship between the two rivals, who are also engaged in a long-running public dispute over BA's proposed tie-up with American Airlines.

OFT: shop your friends

* The OFT set a new record this month, hitting two tobacco companies and 10 retailers with record £225m fines for price fixing. Imperial Tobacco, Gallaher, Asda, The Co-operative Group, First Quench, Morrisons, One Stop Stores, Safeway, Sainsbury's, Shell, Somerfield and TM Retail, were all caught up in the inquiry. Only Sainsbury's avoided a fine, protected by the OFT's leniency policy offering exemption to companies bringing malpractice to its attention.

* Last month, Royal Bank of Scotland was fined £28.6m after admitting individuals in its Professional Practices Coverage Team gave counterparts at Barclays confidential future pricing information between October 2007 and spring 2008. The original £33.6m levy was cut because RBS co-operated. Barclays was granted immunity.

* Six recruitment agencies were fined a total of £39.3m last September for collusion in supplying staff to the construction industry, and boycotting an intermediary, Parc UK. Another two agencies were granted immunity.

* Just weeks before the recruitment agencies were brought to book, the OFT imposed £129.2m of penalties on 103 construction groups for collusion on building contracts. The companies were engaged in illegal bid-rigging on 199 separate tenders over a six-year period, often using a "cover pricing" scam using inflated bids to distort the tender process. The inflaters were paid a "compensation payment" facilitated by the raising of false invoices.

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