Simon Calder: The Man Who Pays His Way

A brief history of price-fixing

A "Section 28 visit" can really mess up a day at the office. This term refers to the part of the Competition Act that allows inspectors to raid a company's premises, to copy documents and even to remove computer hard drives. Eleven days ago, the reception staff at British Airways' handsome headquarters near Heathrow received just such a call. And two days ago, the UK's leading airline released possibly the tersest press release in its history.

Shortly before 8am on Thursday morning, BA explained that the Office of Fair Trading (OFT) and its American counterpart, the Department of Justice, were investigating alleged cartel activity involving BA and other airlines "in relation to pricing of passenger air transportation" - in other words, fixing fares. It ended with the news that the airline's commercial director (and second-in-command), Martin George, and the head of communications, Iain Burns, had been given "leave of absence" during the investigation. When the stock market opened a few minutes later, the value of the firm had slumped by millions of pounds. And millions of passengers were left wondering if they had paid too much for their tickets.

"No assumption should be made that there has been an infringement of competition law", says the OFT, pointing out that no charges had been made and no conclusions could be drawn. Fat chance. This is an industry (aviation, not journalism) that sets new standards in tittle-tattle, hearsay and gossip.

In the news vacuum created by the story, rumour and speculation flourished. BA's case was not helped by the fact that the airline's chief spin doctor was on leave of absence and unavailable for comment. Rather than adding to the conjecture on this case, I shall instead rifle back through the boarding passes to bring you a brief history of price-fixing.

IN THE bad old days when airlines were run by, and for the benefit of, governments and civil servants, colluding on fares was not illegal - it was compulsory. National airlines cosily agreed fares between themselves. Indeed, when the inspectors called on airlines, it was to uncover evidence of cutting fares, rather than artificially inflating them. Airlines from Laker Airways to British Caledonian were fined for the heinous practice of lowering their prices to allow more people to fly. Indeed, it was one such raid at Gatwick that prompted the late, great Sir Freddie Laker to start his Skytrain enterprise.

One day in 1970, Laker was summoned to the airport because Civil Aviation Authority staff were interrogating his passengers. His airline was involved in "affinity group charters", which at the time represented the only way for an ordinary working man or woman to travel the Atlantic. The big airlines had the scheduled business sewn up, and governments had imposed such a stranglehold on charters that only genuine clubs and societies were allowed on board transatlantic flights at reasonable rates. You can guess the result: all sorts of spurious associations were created to circumvent the stifling regulations. Everyone knew somebody who knew a dodgy agency that dabbled in cheap transatlantic air fares, and issued specious membership cards to the "Left Hand Club" to go with the tickets. Which made these flights prime targets for government inspectors seeking to stop people travelling - as happened to a Laker Airways departure from Gatwick to New York in 1970.

Sir Freddie later told me he was more appalled by the fact that they were "chucking old women off the aeroplanes" than by the hefty fine that he had to pay for the temerity of trying to take people across the Atlantic at an affordable price.

That episode led directly to the creation of the Laker Skytrain, which was allowed to cut prices and transform travellers' lives. But within five years, the airline was dead - amid allegations that price-fixing between the existing airlines had forced Skytrain out of business. This time, British Airways, Pan Am and TWA were accused of colluding to force fares down on destinations served by Skytrain to unsustainable levels, using earnings from other routes, and then raise them once the thorn in their corporate sides had been eliminated. In settlement of the case, they stumped up for a £30m fund to reimburse passengers who, it was said, had paid over the odds as a result of Laker's demise - and Sir Freddie took home £8m.

THE NEXT episode in this everyday story of aviation folk saw another underdog enter the market. He was Richard Branson, better known for selling cheap records and unleashing Mike Oldfield's Tubular Bells on an unsuspecting world than as an airline entrepreneur. British Airways' response has been well documented: the so-called "dirty tricks" campaign involved BA staff delving into the Virgin reservations computer and diverting prospective passengers with tall stories about cancelled or overbooked flights.

FOR PASSENGERS, the big question arising from all these rumours of corporate shenanigans is: have we been paying over the odds for flights across the Atlantic? The answer is "yes", though the prime cause has nothing to do with illegal price-fixing. It is the competition-suppressing Bermuda II agreement between the UK and US. This arcane treaty is designed to protect vested interests. It decrees that only two British and two American airlines are allowed to fly from Heathrow - the most popular airport in Europe - to the US. British Airways, Virgin Atlantic, American Airlines and United are the beneficiaries. All four chorus that they favour competition, yet they remain comfortably protected from the market.

The cosy arrangement excludes the likes of BMI, Delta and Continental. The effect is to restrict supply and keep fares artificially high. As a demonstration, just check out a couple of flexible fares in BA's excellent Club World cabin. Services to Boston and Singapore use the same planes and passengers pay roughly the same business-class fare, around £4,300 return. But the Asian city is more than twice as far as the US destination. This shows that supply and demand are behaving very strangely - and, for BA, very profitably. Which, at the moment, is just what the airline needs.