2nd UPDATE: UK Alleges Cathay, Virgin Colluded On Airfares

The U.K.'s Office of Fair Trading Thursday issued a statement of objections alleging that Cathay Pacific Airways Ltd. (0293.HK) and Virgin Atlantic colluded to set airfares on the London to Hong Kong route in breach of competition law.

In a statement, the OFT alleged that through contacts between employees over a number of years, the two companies coordinated strategies on passenger fares through the exchange of commercially sensitive information on pricing and other commercial matters.

The route between the U.K. and Hong Kong is one of the busiest long-haul routes in the world.

The OFT said the matter was brought to its attention by Cathay Pacific under the OFT's leniency policy, where a company that is the first to report its participation in cartel conduct may qualify for immunity from penalties.

Provided it continues to cooperate, the Hong Kong carrier will be immune from any penalty imposed in this case, the OFT added.

"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 rigors of competition through unlawful coordination," said Ali Nikpay, the OFT's senior director of cartels and criminal enforcement. "The parties will now have an opportunity to respond to our proposed findings before we decide whether competition law has in fact been infringed."

Virgin Atlantic vigorously denied the allegations.

"Virgin Atlantic intends to robustly defend itself against these allegations," which allegedly occurred between 2002 and 2006, it said in a statement. "The airline does not believe that it has acted in any way contrary to the interests of consumers."

It added that it was important to note that no definitive findings have been made against Virgin Atlantic by the OFT at this time. No decision on any potential infringement has or will be made by the OFT until Virgin Atlantic has an opportunity to formally respond, the airline said.

Cathay Pacific said it "has a policy of full compliance on competition law issues and will fully cooperate with any authorities if required to."

Virgin Atlantic in the past has acted as a whistle blower in alleged cartel activity. In 2007, it escaped a fine from regulators for colluding with competitors to fix the prices on certain flights between the U.S. and the U.K. In that case, British Airways PLC (BAY.LN) was fined about GBP269 million. Both companies faced claims under class-action lawsuits.

-By Jonathan Buck, Dow Jones Newswires; [phone]; [e-mail]