Kevin O'Toole and Max Kingsley-Jones/LONDON
RARELY CAN AN AIRLINE alliance have whipped up such controversy. Since it was announced, the proposed tie-up between British Airways and American Airlines has been drawing unprecedented levels of attention.
It risks being the most scrutinised alliance in airline history. Investigations have been opened by the US Justice Department and its UK counterpart, the Office of Fair Trading, while hearings have also begun before the UK's Parliamentary Transport Committee. Last, but not least, the deal has prompted the European Commission to open its first investigation into transatlantic alliances.
It is not difficult to fathom the reasons for all this attention. If the deal goes ahead, BA and American will dominate the busiest transatlantic market and, in particular, the lucrative London-New York route.
They will also keep a commanding presence at London Heathrow - a hub from which all but two US airlines have been excluded by the US-UK air bilateral, and an airport where heavy congestion has made it difficult to find slots.
True, the price for going through with the deal and having it blessed with US anti-trust immunity will be for the UK to accede to pressure for an open-skies agreement, but that has done little to soothe the fears of competitors. The major US airlines have demanded that, at the very least, open skies should be a precondition before even beginning to consider anti-trust immunity, and that Heathrow slots should be made available to competitors.
As the investigations begin, it is now the turn of BA and American to put up a defence. They had a chance to rehearse some of their arguments in public on 10 July as the Transport Select Committee held its first hearing. "We want to dispel some myths which have been generated about this alliance, and bring some reality to the light of day," says BA chief executive Bob Ayling, setting the tone for a robust defence.
The starting point for BA lies in redefining the market in which it competes. BA concedes that the partners will emerge with a dominant 61% share on UK-US routes, but it argues that the true test should be the alliance's presence on the whole European-US market. While it will still have the largest share with 24%, that hardly ranks as dominance, claims BA.
The argument is underlined by the fact that over half the passengers travelling between London and the USA come from transfer traffic, either from elsewhere in the UK or other European cities. For this crucial traffic, the new alliance will continue to be in competition with all the other transatlantic partnerships such as Northwest/KLM, United/Lufthansa/Scandinavian Airline Systems and Delta/Sabena/Swissair.
He maintains that the future of increased European competition lies in the contest between global groupings, not in the traditional market for city pairs, even if it is London-New York.
Surprisingly, he argues that BA, in this battle of the hubs, is "uniquely disadvantaged" by the weakness of its position at Heathrow. He says that BA controls only 38% of slots there, against Air France's 44% at Paris Charles de Gaulle or Lufthansa's 59% at Frankfurt.
Such concerns will not impress competitors hungry for slots at Heathrow, but Ayling believes room will be found for new services without BA having to see its position slip further. He points out that 46 new airlines have entered the airport since the UK dropped its distribution rules in 1992, including Virgin Atlantic.
Whether these arguments, backed by appeals about the impact on UK industry and employment, play better at home than abroad remains to be seen. American appears quietly confident that the US anti-trust battle can be won.
The worst condition, to date, that the USA has imposed has been "carve outs", under which certain services are not included under the anti-trust immunity. Approval for the United/Lufthansa tie-up, for example, excluded certain non-stop business-class services between Frankfurt and Chicago and Washington DC.
The goal of open-skies agreements with the UK, and eventually Europe, may prove decisive even for the most aggrieved of the US carriers. US/UK open-skies talks start on 18 July.
As BA opens its offensive for alliance approval, its rivals, most notably Virgin Atlantic - the third largest carrier on the North Atlantic, and the airline with the most to lose - are stepping up efforts to make sure the tie-up is stillborn. Virgin chairman Richard Branson followed Ayling in giving evidence at the Select Committee hearing.
Branson, who aired his views to the Clinton Administration in Washington DC last week, says that rebuttal of the alliance centres around four key issues:
Monopoly. Virgin claims that BA already has a monopoly on the North Atlantic and, along with American Airlines, will "-simply kill competition". The alliance would give the two airlines twice the market share of any other European rival, he says.
Anti-trust immunity. Permitting the merger to go ahead with anti-trust immunity is like allowing Pepsi Cola and Coca Cola to merge, he says.
Slot availability. Branson doubts that the slot issue can be resolved easily. He touches on the secondary issue of Heathrow's restricted terminal capacity which, he says, will not be resolved for at least 12 years.
Removal of cabotage from US/ UK bilateral talks. UK airlines' cabotage rights were now off the agenda, with the planned liberalisation of the Bermuda II bilateral being dropped in favour of a US/UK open-skies agreement.
Source: Flight International
