BA-American dream nearer to take-off

Date: 07/06/01

A planned joint venture between American Airlines and British Airways needs a bilateral 'open skies' deal as well as a green light from the EU. Both now look closer. Laurence Frost reports

The reason for a seemingly innocuous visit by the senior American Airlines executive becomes all too clear within 72 hours, with reports that the airline has launched preliminary discussions to win anti-trust clearance for a transatlantic venture with British Airways (BA), its partner in the OneWorld Alliance.

Doke is keen to downplay the speculation: "We're not really here having any formal discussions at this point," he says.

However, his response appears guarded with hindsight after it emerges that Don Carty and Rod Eddington, chief executives of American and BA, are to meet US Transport Secretary Norman Mineta on Monday (11 June).

But Doke gives European Voice a strong indication of the arguments they will raise with regulators in Brussels, London and the US. "Clearly, five years ago, when we initially proposed AA-BA [as a joint venture], the notion was that big is bad. I'm not sure that the data will bear that out."

The data referred to show double-digit increases in transatlantic market share for two rival alliances - KLM-Northwest and Lufthansa-United - while American's partnership with Europe's largest airline has lost around 5% over the same five-year period. "We've made no secret of the fact that we feel rather disadvantaged because our competitors enjoy anti-trust immunity," says Doke, "in the case of the [KLM-Northwest] Wings alliance, for going on 10 years now."

Under the kind of exemption from EU competition rules granted to Wings, and expected in coming weeks by Star Alliance partners Lufthansa and United - who already have anti-trust immunity in the US - carriers can pool their revenues and cooperate on pricing and scheduling. "Those are all things that we're currently unable to do with British Airways and it has put us at a distinct disadvantage in the marketplace," says Doke.

American and BA are barred from code-sharing, or carrying each other's passengers on stages of their journeys, even though the practice does not normally require special exemptions.

Code-sharing by the carriers was blocked by Washington over competition concerns exacerbated by the Bermuda II framework deal governing US-UK aviation. Under the 1977 agreement, only four carriers, among them American and BA, are allowed access to transatlantic routes out of London's Heathrow - the world's busiest airport.

A successful joint venture will depend on the replacement of the outmoded treaty by an 'open skies' deal giving free access to US and UK airspace for all carriers from the two countries.

When the collapse of BA's merger discussions with KLM scuppered open skies talks last October, Washington and London agreed in a statement that "the opportunity to make real progress...will come when the current uncertainty surrounding BA's alliance strategy is resolved".

Since then, pressure has increased on EU countries to give up bilateral agreements, as hearings begin at the European Court of Justice over the Commission's bid to establish its authority to negotiate a new deal for the Union. Despite this, the UK government has confirmed it that it will hold talks with the US on a new open skies deal by the end of this year.

Doke is cautiously optimistic that an agreement will be reached before the EU executive can wrest the negotiating mandate from member states. "We're still planning as though we're going to operate in a bilateral environment for some time," he insists. "If we are able to achieve things in the bilateral environment prior to a single sky regime I think we'll have accomplished a lot of our objectives."

But behind the scenes there is greater confidence than the vice president for corporate communications is letting on. "The US doesn't want to let the EU get in the way or slow this down," says another industry source. "I think the Bush administration would very much like an open skies deal with the UK, and they're going to work to get that as soon as possible."

There are even suggestions that the EU executive is willing to work around a new bilateral air deal, if it is acknowledged to be temporary. "I think the Commission realises that open skies [for the EU] are on a different timetable," says the source.

American and BA hope their talks with regulatory officials will pave the way for the announcement of a commercial tie-up by this autumn. But they will be hoping it does not run into the same regulatory quicksand as their last bid in 1996, which was blocked after a three-year process described as "Chinese water torture" by some of those involved.

Concerns over the dominance of the new entity eventually resulted in demands, led by London, for a massive divestment of take-off and landing slots at Heathrow, to allow competitors into the market.

Rejecting the commercial viability of a deal based on such major concessions, the two partners abandoned plans for revenue- and code-sharing, settling instead for a publicity partnership in advertising and marketing, with joint lounges and frequent flyer programmes - a cosmetic alliance generating savings described by Doke as "negligible".

The new deal being assembled by BA and AA would keep all the main features of the old 'virtual' venture. In would come revenue pooling, full code-sharing, joint route scheduling and the sharing of resources, including Concorde. But equity transfers would be out.

What reason is there to expect the regulators will take a different view this time around? Doke is clear: "If you look at the immunised alliances versus the non-immunised alliances you'll actually see that the average ticket price has gone down 20% in the immunised alliances and only 10% in the non-immunised alliances. "The notion five years ago that if you grant immunity to carriers they'll control and limit capacity leading to price increases for consumers is absolutely refuted by the data."

Other factors that could weigh in OneWorld's favour include BMI British Midland's new membership of the rival Star Alliance, establishing it as a transatlantic competitor with serious connections from the moment an open skies deal gives it access to US destinations.

The superior growth of other hubs will also be alluded to by OneWorld lawyers, as will the market shares of their respective alliances. Star controls 70% of transatlantic flights at Frankfurt and Wings 55% at Schipol. OneWorld's 40% share of US flights at Heathrow pales in comparison.

The Commission itself admits that things have changed since the last BA-American bid was assessed according to the route-by-route doctrine that prevailed at the time. "We have refined our approach towards airline competition," says

Amelia Torres, spokeswoman for EU competition chief Mario Monti. "Previously, if we concluded there was a dominant position on a given route we had to address the problem. Now the Commission accepts it might be more appropriate to look at network competition [between alliances], especially for longer flights where even business passengers can choose between routes."

As far as Doke is concerned, it is time for BA and American to reap the rewards of their fidelity. "We've never been able to consummate the marriage," he says. "We've snuggled up and held hands and dated, and done everything we can do without a marriage licence - and we've remained partners all along."

Major feature. A planned joint venture between American Airlines and British Airways needs a bilateral 'open skies' deal as well as a green light from the EU. Both now look closer.