ALEXANDER CAMPBELL / LONDON
Carriers are told to surrender 224 slots at London Heathrow to US carriers, which they reject is unacceptable
British Airways is once again pondering its future without a full-scale transatlantic partnership following the collapse of its second attempt at securing an alliance with American Airlines.
In the end, the price American and BA would have to pay for their partnership was too high. Their bid for immunity from US anti-trust law resulted in an announcement by the US Department of Transportation (DoT) on 25 January, granting "tentative approval". However, it would only grant full approval if the USA and the UK signed an open skies deal, and if American and BA agreed to surrender 224 weekly landing and take-off slots at London Heathrow airport.
The DoT's decision shattered a transatlantic alliance vision that dates back to 1996 when then BA chief executive Bob Ayling and American's president Don Carty revealed plans for a codesharing deal intended to strengthen the partners on transatlantic routes and beyond. The deal became the most scrutinised in airline alliance history, with the first attempt collapsing three years ago when the European Commission (EC) called for the prospective partners to give up 260-plus slots at Heathrow.
The DoT's proposal this time round was far more severe than an advisory opinion, issued last month by the US Department of Justice (DoJ), which recommended that BA and American should give up 126 Heathrow slots (Flight International, 1-7 January). BA now describes as "unacceptable" any deal that would involve giving up any of its treasured slots at its Heathrow hub. However, airline analyst Damian Horth at ABNAMRO suspects that this was hyperbole - "BA might have accepted a deal with a lesser number of slots," he believes.
At the time, BA reacted fairly well to the DoJ proposal, describing the justice department as a traditionally hard-line agency and the 126-slot level as an "outer limit" - an initial bargaining stance which might be softened in negotiations between the airlines and the DoT.
However, the DoT's final proposal was too much. Airline analyst Chris Tarry at Commerzbank describes it as "a fairly blatant attempt to swing the balance of power...in favour of the US airline industry". The DoT recommended that the 224 slots should be given up to various US carriers to open up competition at BA's home base.
Analysts speculate that either the DoT had misjudged the amount BA was willing to pay - estimated at almost £400 million ($560 million) in lost revenue from slots given up - to get immunity for its alliance, or it was deliberately trying to scupper the BA/American talks. Without the American Airlines alliance, Tarry estimates, BA will give up £200 million in future profits.
Opposition to the deal had already come from the US General Accounting Office (GAO) last month, which said that, in its opinion, the alliance would bring only limited benefits to consumers and would dominate the transatlantic market unless "some regulatory remedy"(giving up slots) was imposed. The GAO noted that, while in its opinion the UK would benefit from a rapid deal, the USA would gain little from it, and recommended that a delay could be a better tactic. The DoT seems to have followed this advice.
Almost as soon as the airlines announced that they considered the price of anti-trust immunity too high to pay, UK transport minister John Spellar announced the cancellation of open skies negotiations between the UK and the USA, with no resumption planned. Unless talks resume soon, this move could effectively cede negotiating power to the EC.
The cancellation means that, for the time being, transatlantic air travel will continue to be covered by the Bermuda II UK-US bilateral agreement, one of the most restrictive in the industry. However, the UK may not have negotiating powers for much longer. The European Advocate General reported on 31 January that, in his opinion, bilateral agreements infringed EU law. This makes it probable that the European Court of Justice will decide this summer that power to negotiate open skies agreements belongs to the European Union (EU) and not to the individual member states.
This could mean a freeze on new bilateral agreements while the EU negotiates a Europe-wide agreement with the US. Industry sources suggest that the EU-US negotiations could take as long as a decade, during which BA would be at a severe disadvantage to rivals such as Air France, which has already obtained anti-trust immunity in the train of a US-France open skies deal. Unless the UK can sign a bilateral deal with the USA by summer, BA will be left in its current position for up to 10 years, while its rivals in Europe have already entrenched their own US alliances behind anti-trust immunity awards.
In this case, with its relationship with American limited by US anti-trust law, BA must change tack if it wants to compete in the global market. The airline's Future Size and Shape exercise, due to be announced on 13 February, may now be delayed as BA tries to readjust its plans to survive without a US partner.
Speculation is rife that an alliance or even a merger with KLM may be imminent. Given KLM's links with US carrier Northwest Airlines, this would also raise regulatory issues, but these would probably be less acute. A tie-up with Continental Airlines could also be on the cards.
BA will now focus on cutting costs to compensate for reduced revenues in the near future, but is still forecast to make heavy pre-tax losses - £545 million and £295 million in 2002 and 2003 respectively - as its traffic falls by around 15% each year.
Source: Flight International
