Assignment on

Cartel and its characteristics: IATA

Submitted to

Mr. S M A Moudud Ahmed

Assistant Professor
Institute of Business Administration
Jahangirnagar University

Submitted by

2006 Faizah Mahmud Aurthy

2008 Tahmida Sultana Sakia
2012 Mumtahana Rashid
2017 Shamaila Rahman Shreya
2023 Rezwana Anjum
BBA Batch-31st

Course:

BUS106
Microeconomics

Date of Submission:

1st December 2023

Introduction:
The International Air Transport Association (IATA) serves as a global trade association
for the airline industry, a cartel of all the worlds' air carriers. Cartels often emerge in
industries with few major players, fostering an environment conducive to collusion.
Carrying 83% of the world's air traffic, IATA members include the world's leading
passenger and cargo airlines. IATA supports many areas of aviation activity and helps
formulate industry policy on critical aviation issues. Established in 1945, IATA
represents the interests of airlines worldwide, facilitating collaboration on safety
standards, operational efficiency, and market regulations. This international cartel plays
a crucial role in harmonizing practices and policies to ensure the sustainable growth of
the aviation sector. However, cartels have a notorious reputation in economic circles as
their control often leads to increased profits for the members but the consumers can
have negative consequences also.

Cartel:

A cartel is a group of independent market participants who collude with each other in
order to improve their profits and dominate the market. A cartel is an organization
formed by producers to limit competition and increase prices by creating artificial
shortages through low production quotas, stockpiling, and marketing quotas. Cartels
can be vertical or horizontal but are inherently unstable due to the temptation to defect
and falling prices for all members. Additionally, advancements in technology or the
emergence of substitutes may undermine cartel pricing power, leading to the
breakdown of the cooperation needed to sustain the cartel. Cartels are usually
associations in the same sphere of business, and thus an alliance of rivals. Most
jurisdictions consider it anti-competitive behavior and have outlawed such practices.
Cartel behavior includes price fixing, bid rigging, and reductions in output.
Activity:

A cartel is formed when two or more rivals concur on:

 Fix prices: When rivals reach a price agreement rather than going up against one
another
 Market share: When rivals agree to split a market among themselves.
 Control output: When rivals consent to restrict the variety or quantity of products
and services offered
 Rig bids: This is the process by which vendors confer and determine among
themselves who will win a tender and at what cost.

IATA:
The International Air Transport Association (IATA), previously labeled as a cartel,
functioned as a trade association for airlines. It proposed a draft resolution intending to
connect a fuel surcharge with a fuel price index. However, the cartel status ceased in
February 2006 when competition authorities in the US and EU conducted simultaneous
raids on major airline offices. Despite this history, IATA now operates as the global
trade association for airlines, shaping industry policies, encouraging collaboration
among airlines, and offering various services and programs to enhance safety,
efficiency, and sustainability in air travel.

History:
IATA, founded in Havana, Cuba in 1945, serves as a key entity promoting safe, reliable,
and cost-effective air services worldwide. The organization played a crucial role in the
exponential growth of international air transport post-1945 by driving technical
innovations like turbo-propeller aircraft, transatlantic jets, wide-bodied planes, and
advanced avionics. These innovations led to increased speeds, larger capacities, better
cost control, and reduced fares, fueling a surge in air travel demand.

During this growth, IATA anticipated the impact of new technology, aiding the industry in
advising on aircraft, systems, data processing, and sales techniques. Additionally,
IATA's involvement in standardizing message formats for data exchange and its legal
efforts, including conventions to counter hijacking and sabotage, were instrumental.
Automation in airline operations became prevalent in the 1960s, with IATA actively
contributing to perfecting standard message formats for data exchange.
IATA's initiatives extended to establishing Clearing House, Billing and Settlement Plans,
Cargo Accounts Settlement Systems, and professional accreditation for Sales Agents,
shaping the airline-agent relationship with the introduction of the Standard Agency
Agreement in 1952. The organization also addressed taxation concerns and user
charges, striving to minimize their impact on airlines by ensuring cost-related charges
and advocating for productivity improvements.

Furthermore, IATA contributed significantly to developing technical specifications for

containers, creating Unit Load Device (ULD) control centers, and formulating safety
regulations for transporting dangerous goods and ensuring the welfare of live animals
during flights. Throughout its history, IATA has been dedicated to enhancing airline
services while saving costs for the industry.

Many airlines found the IATA's price-fixing regime to be unappealing by the late 1970s.
Major airlines decided to forgo IATA, including Singapore Airlines and Pan-American
Airlines.
Sociologist John Hannigan referred to IATA as "the world aviation cartel" in 1982.
IATA tariff conferences' antitrust immunity was terminated by an order issued by the US
Department of Justice in 2006.

Members:
Biman Bangladesh Airlines, Singapore Airlines, US-Bangla Airlines, American Airlines,
United Airlines, Emirates, Qatar Airways, Lufthansa, Turkish Airlines are some of the
notorious airlines among the members of IATA. IATA today represents 321 airlines in
more than 120 countries, up from its founding membership of 57 in 1945. The top
passenger and cargo airlines in the world are among IATA's members, accounting for
83% of global air traffic.

Structure:
Our writing is structured by initially introducing and categorizing the international air
cargo cartel as a price-fixing entity, delineating its fundamental characteristics such as
agreements on pricing, competition restriction, and coordinated pricing activities with
repercussions for consumers. Subsequently, it delves into the unique attributes of the
air cargo cartel, accentuating its emphasis on surcharges, exploitation of local sales
office incentives, and its protracted existence from 1999 to 2006. The passage
elucidates the factors contributing to the cartel's endurance, notably the absence of
authority and incentives for local offices to mitigate surcharges. Following this, it
recounts the disbandment of the cartel in 2006 prompted by interventions from
competition authorities in the US and EU who conducted raids on major airline offices,
resulting in widespread fines. The conclusion underscores the air cargo cartel as an
intriguing case study, illustrating the collaboration on a specific pricing element amidst
competition on other fronts, highlighting the role of a straightforward pricing mechanism
in fostering collusion. In summary, the passage follows a logical progression,
commencing with general traits, progressing to specific characteristics and operations,
and concluding with the intervention and global consequences faced by the cartel.
Objective:

Our aim is to explain the international air cargo cartel, calling it a price-fixing group. It
describes how cartels agree on prices, limit competition, and coordinate pricing actions,
affecting consumers. The focus is on the air cargo cartel's unique aspects, like
concentrating on surcharges and exploiting local office incentives. The cartel operated
for an unusually long time from 1999 to 2006 by manipulating surcharges, as local
offices lacked the power to reduce them. Eventually, competition authorities in the US
and EU broke it up in 2006, imposing fines globally. The passage concludes by
highlighting the cartel as a case study showing how companies collude on prices while
still competing in other areas, aided by a simple pricing system. In simple terms, it
reveals the cartel's goals, tactics, and how authorities intervened to stop its harmful
practices.

Function:

IATA was referred to as a cartel when it was founded in 1945 since it sets technical
standards for airlines and organizes tariff conferences that serve as a forum for price
fixing. Some have criticized IATA’s cartel-like behavior, claiming it stifles competition
and raises consumer prices. However, IATA also offers its member a host of other
beneficial services, like creating industry standards and promoting collaboration on
matters like security and safety.

Here are some of the ways in which we can say IATA has been acting like a cartel:

 Setting minimum fares: The IATA has a long history of determining minimum
rates for international flights. This means that, even if they are willing to do so,
airlines are not permitted to charge less for a ticket than a specific sum. Price
increases for customers may result from this.

 Limiting competition: IATA has restricted competition by impeding the entry of

new airlines into the industry. For instance, in order for new airlines to become
members of IATA, they must meet specific requirements related to experience
and funding.
 Lobbying against government regulation: IATA has been charged with
lobbying against government regulations that would boost airline industry
competitiveness. To enable airlines to offer more flights at lower costs, IATA, for
instance, has lobbied against government proposals to permit code-sharing.

Though IATA has faced some criticism for its cartel-like behavior it continues to play
an important role in the global airline industry. In addition to offering its members a
multitude of beneficial services, the association contributes to the effective and safe
operation of the aircraft sector.
Limitation:

Businesses that agree to work together to restrict competition are said to be in cartels.
This can involve agreeing not to compete in particular markets, setting prices, or
splitting up markets. Most nations forbid cartels, which can have grave consequences
for firms, consumers, and the economy at large.

Cartels have a number of drawbacks that make them hard to sustain and ultimately
spell their doom, such as- Despite the fact that cartel involvement can be punishable by
harsh fines, governments all over the world have made significant investments in
antitrust enforcement. Cartels are frequently covert and challenging to identify, because
there are incentives for individual members to cheat, cartels are inherently unstable and
members of the cartel can boost their earnings and obtain a competitive edge by
reducing prices or raising output.

The IATA regulations show the inter- dependence of air routes and fares to different
regions and countries, the labyrinthine procedures for resolving carrier differences, and
the difficulties such an institution encounters when competitive strategies of one sort
flare up because competitive actions of an- other kind are institutionally constrained.
Competition authorities raided the offices of major airlines, including British Airways, Air
France-KLM, Cargolux, SAS, Cathay Pacific Airways, Japan Airlines International, LAN
Airlines, and Singapore Airlines, concurrently in February 2006 in the US and the EU.
The cartel was overthrown by this incident.
Conclusion:

For a long time, the International Air Transport Association (IATA) has been charged
with cartel behavior. They are accused of establishing minimum prices, restricting
competition, and advocating against laws and regulations. Although IATA offers its
members certain beneficial services, it is evident that the association's cartel-like
actions have hurt customers.

A significant campaign to reform IATA and increase its accountability and transparency
has emerged in recent years. Customers and a few airlines have spearheaded this
effort, demanding an end to IATA's cartel-like practices.

It remains to be seen if government regulators will force IATA to change its practices, or
if the organization will be able to reform itself. However, it is clear that the status quo is
not sustainable and that IATA must make changes in order to survive.

Today, IATA is no longer a cartel it has become a more transparent and accountable
organization. It does, nevertheless, still have a significant impact on the airline sector,
establishing guidelines for operations, security, and safety. Additionally, IATA offers a
platform for airlines to work together on matters of shared concern, like passenger
experience and environmental sustainability.
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