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Exclusive: Justice Department cuts recession deals with airlines

An aircraft is silhouetted by the sun
An aircraft is silhouetted by the sun

By Aruna Viswanatha

WASHINGTON (Reuters) - Some of the world's biggest airlines engaged in massive price-fixing about a decade ago as their profits were undermined by an economic downturn, according to federal prosecutors.

And now these carriers have used the latest financial crisis - coupled with high fuels prices and the recession - to argue that payment schedules for fines imposed on them by the authorities could push them into bankruptcy.

The authorities have responded positively and airlines are finding surprising wiggle room in renegotiating multimillion-dollar fines with the U.S. Justice Department. Some fines have been deferred or the interest charges on them scrapped.

"There is a sensitivity to the consequences for the market of what is in essence a death penalty for a company," said a former official in the Justice Department's antitrust division, who declined to be named.

According to antitrust lawyers and court records, among those to benefit have been Korean Air Lines Co Ltd, Japan Airlines Co Ltd, Asiana Airlines Inc and Cargolux Airlines International SA.

While the DOJ has refused to renegotiate the total amount of the fines, it has essentially refinanced them by extending the original five-year payment plans, or by cutting interest.

Renegotiations are so rare the government is reluctant to even discuss them for fear of opening the door to a flood of requests.

In instances where a deferral was granted, the DOJ brought in an outside auditor to assess the financial condition of the company and whether it could afford to pay the installments.

Korean Air Lines, for example, resolved charges in 2007 that it fixed prices on passenger and cargo flights and agreed to pay a $300 million fine in installments, but has revisited its agreement at least four times since then.

In 2009 and 2010, the DOJ petitioned a federal judge on behalf of Korean Air for two, one-year deferrals, according to court records. It also asked earlier this year to cancel the interest on the outstanding balance and in August deferred half of the $50 million payment that was due.

Payment plans for criminal fines are themselves unusual, since most penalties are generally paid up front when a company settles. But when companies face the prospect of going out of business, the government does sometimes reduce or spread them out.

"The global economy went south, fuel prices were going up and airlines were hit," said Mark Rosman, a former DOJ lawyer who worked on the air cargo cases and is now a partner at Wilson Sonsini Goodrich & Rosati.

"If they can't make an installment payment without disrupting ongoing operations, DOJ does go to court and ask for a deferral."

Another carrier, Japan Airlines, one of Asia's biggest, agreed to a $110 million fine in 2008, but filed for bankruptcy less than two years later. It then negotiated a one-year deferral of the four annual payments it had left.

Asiana Airlines, which agreed to a $50 million fine in 2009, sought a one-year deferment the following year.

And Cargolux, which agreed in 2009 to a $119 million fine spread over five years without interest, asked the following year to reduce and defer the next installment.

Lawyers for the airlines either declined or did not respond to requests for comment. A spokeswoman for the Justice Department also declined to comment.

LENIENCY DEFERRED

While the renegotiations have mainly focused on how hard the recession hit the airline industry, it has also thrown a wrench into the DOJ's leniency program.

The department generally offers incentives to companies that come in early and expose a cartel, and the first in the door usually get more lenient treatment. The earliest companies to settle the air cargo cases, Korean Air and British Airways, each paid a $300 million fine in 2007.

But as the rest of the more than a dozen companies allegedly involved in the price-fixing ring stepped forward in 2008 and 2009, the industry was already struggling with the financial crisis. Some carriers received reduced fines, skewing the data expected to show that fines were getting harsher.

The unusual sanctions in the air cargo cases illustrate how outside factors can substantially reshape what a company actually ends up paying, but it does not necessarily change their settlement strategies.

"The early companies get a perceived discount, but at the end of the day, they are shooting in the dark," said one antitrust criminal defense attorney who declined to be named. "They do it so early on, they don't know where the investigation is going."

(Reporting by Aruna Viswanatha; editing by Andre Grenon)

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