BA pays the price for Virgin chief’s train of thought

Date: 08/05/1997

By Tim Jones

THE train ride Tony Blair took a fortnight ago from London to Manchester may turn out to have been a key moment in the battle to create the world's biggest airline alliance.

When Richard Branson, the charismatic head of Virgin Group, invited the man he expected to be the new British prime minister on to one of his privatised trains, he did not charge him a fare.

The bearded billionaire does not grant his political largesse easily. The Labour Party leader had been courting his endorsement ever since he assumed the mantle three years ago, but had always failed to win Branson over. With one week to go until election day, and Blair 20 points ahead in the opinion polls, Branson took the plunge.

To paraphrase Milton Friedman, there is no such thing as a free train ticket. With Blair safely installed in 10 Downing Street (the UK's prime minister's official residence) since his party's election victory last

week, Branson will soon start reminding him of the importance of his last-minute conversion.

Branson has a series of commercial interests - his newly acquired train franchises, radio and television channels - which depend crucially on a continuation of the free-market reforms pursued under the Conservative regimes of Margaret Thatcher and John Major.

Where he parted company with the Tories was over their love affair with British Airways; the UK's dominant carrier which has been transformed within a decade from the sick man of Europe into one of the world's leading airlines.

BA, under the chairmanship of Lord King, had become the Tory Party in the air and donated millions of ecu to the party's coffers over the years. He expected little in return except the continuation of the firm's dominance at the world's largest international airport - London's Heathrow.

BA successfully kept the leading US airlines away from Heathrow. His failure to keep Branson's Virgin Atlantic off some of the airport's prime take-off and landing 'slots' made King so angry that he threatened to halt payments to the Tories.

Yet BA remained by far the most significant player at this crucial intersection between long-haul transatlantic routes and feeder flights into continental Europe and the Middle East.

Only American Airlines (AA) and United Airlines (UAL) had slots at the over-crowded airport in west London, while Delta had to go to the less important Gatwick to the south of the city.

Through a mixture of relentless legal pursuit of BA, a propaganda war and a quiet programme of acquisition of available slots, Virgin became a player at Heathrow.

But the upstart airline was far from happy. Branson and his hands-on managers felt, and continue to feel, that the traditions of slot 'grandfathering' - whereby a slot can be held by an airline in perpetuity simply because it has always held it - were killing off competition at this biggest of all international hubs.

The link-up announced last year between BA and AA was the last straw, not only for the competitor airlines but also for a long-silent European Commission.

In July last year, Competition Commissioner Karel van Miert and his transport policy counterpart Neil Kinnock announced that they were looking into six alliances between American and European airlines for evidence of anti-competitive practices.

Signed in 1990, the deal between KLM and Northwest is the oldest of the alliances.

The Commission is also looking at link-ups between SAS and Lufthansa which, in turn, is a partner of UAL, as well as three separate agreements between Delta and Swissair, Sabena and Austrian Airlines. Nevertheless, it was BA/AA which made all the difference.

“This alliance was the element needed to convince everyone at the level of the Commission,” said Van Miert as he launched an investigation. “We felt we had to go for it now.”

After the alliance was announced, the UK and US competition authorities began inquiries into the concentration, which will allow the two airlines to coordinate capacity, pricing and scheduling and behave - if they are cleared to do so - as a single group.

While the US side will not consider clearing the alliance until it has seen the details of an 'open skies' liberalisation deal between the two governments, the UK Office of Fair Trading came up with a ruling in the autumn.

Following this decision, former UK Trade Minister Ian Lang proposed to approve the deal in return for the sale of 168 weekly slots at Heathrow. Van Miert, who is taking the lead in the Commission's inquiry, was furious.

The airlines argue that, with the advent of the single aviation market in April this year, the Commission should consider as one the transatlantic market from Europe to the US - and on this, they have only 24&percent; of the market.

The two carriers would appear not to be dominant since UAL-Lufthansa would be a colossal presence, with Air France not too far behind in this more general European market.

Commission investigators were not convinced, despite their pride in the single market. Since business passengers are by far the most lucrative element of the Europe-US market and they are, more than any leisure traveller, sensitive to time constraints, then this market cannot be considered as a whole, argues the Directorate-General for competition policy (DGIV).

Business passengers will only use indirect flights if there is no direct flight available to them. This means that a London-New York flight cannot be substituted for a London-Lisbon-New York flight, so the relevant markets are separate.

Threatening to take his case to the European Court of Justice if necessary, Van Miert claimed that the deal would be “an abuse of a dominant position” unless major changes were made to encourage competition.

Not only should as many as 400 slots be freed up, he said, but they should be given away rather than sold.

Anti-EU politicians in the UK complained that Van Miert was grossly over-stepping his powers, while BA chief executive Bob Ayling claimed that the Commission move missed the point since the deal could only be cleared in the US if it was accompanied by a UK-US open skies agreement which would remove any anti-competitive effects.

In a statement of objections to Lang, Van Miert claimed that the agreement would restrict competition on all the routes between the UK and US and, on 13 of these, the new alliance would have a monopoly. On many other routes, the group would be abusing its dominant position, contrary to Article 86 of the Treaty of Rome.

But the story is not over. The Commission is now looking into allegations from Virgin that Heathrow's owner, BAA, is trying to buy off opposition to the alliance from UAL-Lufthansa by favouring it when a new fifth terminal is built at the airport in 2004.

Although Heathrow handled 56 million passengers last year, BAA argues that a new terminal is needed despite the fierce opposition of environmentalists and some local municipal authorities.

As BA leaves terminal one for the new facility, UAL's alliance would be at the head of the queue to get into the vacated facilities, claims Virgin.

Late last month, Virgin promised to challenge a decision giving BA and AA pride of place at the new terminal.

“The idea of giving a brand new facility to one dominant monopolist, when all the airlines are paying for it (in airport charges), is ridiculous,” said Branson.

“In any other industry, such an agreement would be considered outrageous and we intend to pursue this issue during the continuing investigation by [the UK's] Office of Fair Trading and their counterparts in Europe and the US.”

With the election out of the way, Branson will be hoping that Blair and his trade minister see the merits of his position and listen to the advice of their fellow Socialist across the water in Brussels.