BA, American and Iberia sign deal

American Airlines and British Airways — twice rebuffed in efforts to effectively merge their trans-Atlantic operations under a grant of antitrust immunity — formally requested immunity again Thursday, this time along with partners Iberia, Finnair and Royal Jordanian.

The difference this time, says American CEO Gerard Arpey, is that trans-Atlantic service between the USA and London's Heathrow Airport, Europe's busiest and most lucrative hub, is no longer limited to just American, United, BA and Virgin Atlantic. Those restrictions disappeared in March when the new "Open Skies" agreement between the USA and British Airways took effect.

Since then, at least 20 new flights a day have been launched between Heathrow and the USA, most by carriers who are members of the Star and SkyTeam global airline alliances which compete with the BA- and American-led oneworld alliance. Star members including United, US Airways and Lufthansa have launched six new USA-Heathrow flights a day. Delta, Northwest, Air France and KLM, all members of the SkyTeam grouping, have launched or announced seven new USA-Heathrow flights since March. In most cases, the carriers offering those new flights operate them under the kind of antitrust immunity that BA and American are seeking.

Arpey said in an interview Thursday that he believes the chances of American and British Airways getting antitrust immunity from the U.S. Department of Transportation are "very good" this time around.

In 2002, the Department of Transportation ruled that the pair could get immunity for trans-Atlantic operations only if they agreed to give up 224 time-specific landing and takeoff rights, called slots, which is enough to operate 16 flights a day. At the time, that equaled the total number of slots held by American. In the mid-1990s American and BA withdrew an immunity application when talks between the USA and the United Kingdom failed to produce a deal. Those talks broke down primarily over BA's unwillingness to give up hundreds of Heathrow slots for free that competitors could pick up.

"I don't think there's any longer any logical or rational reasons for preventing American and British Airways and Iberia from competing on a level playing field with Star and SkyTeam," Arpey said.

American and its partners had telegraphed months ago that they intended to seek antitrust immunity once again. Arpey, however, said they held off on doing so for about six months to ensure they could obtain the necessary number of slots at Heathrow to be significant competitors in the USA-Heathrow market.

Prior to the implementation of the Open Skies agreement, there were concerns that British Airways, by the far the biggest slot holder at Heathrow, and American would control the market in slots — which can be bought and sold, or traded among carriers — enabling rival airlines to gain a meaningful market presence there.

Antitrust immunity allows airlines to effectively merge parts of their operations, share sensitive market data and jointly schedule and set their prices on routes covered by the grant of immunity. For example, because Air France and Delta have immunity, they can decide to fly an Air France flight from New York's John F. Kennedy Airport to Paris at, say, 4 p.m. each day, while Delta flies the same route at 5:30 p.m., instead of both flying at 4:30 p.m. They operate the service jointly, share the costs and revenues from the two flights based on a formula reflecting each carrier's investment in the joint operation.

That arrangement eliminates competition between the two allied carriers and allows them to reduce operating costs and, in theory, increase revenues through market efficiency. Thus, to assure continued market competition, regulators in both Europe and the USA have shifted in recent years to fostering competition between airline alliances rather than between individual carriers. That's another reason why Arpey says he expects regulators to approve American and BA's third request for antitrust immunity.

"Foreign ownership laws prevent true international consolidation, and you've got labor concerns impacting the argument for cross-border mergers, as well," he says. "So the regulators have recognized that inter-alliance competition is good for consumers. That's where the industry is evolving. So, I think for competitive reasons, they're going to want to put us on a competitive service level with Star and SkyTeam."

American and BA currently compete with each other on most routes between the USA and Britain, despite having immunity for some trans-Atlantic operations on routes where there is no competition.

Even after receiving antitrust immunity, American and BA's share of the USA-Heathrow market (based on the scheduled number of seats) "will be less than Star's seat share in the US-Frankfurt market by a wide margin, and less than SkyTeam's US-Paris and US-Amsterdam markets," Arpey says. In the USA-Heathrow market, oneworld carriers including American and BA would have about a 52% seat share.

But Heathrow is a significantly busier airport than any of the other major European hubs, and it is preferred by high-fare paying business travelers, primarily because of London's status as global financial center. So BA and American are certain to face stiff opposition from at least some rival carriers, and from politicians aligned with those other carriers.

One opponent, Sir Richard Branson, chairman of BA's arch-rival Virgin Atlantic, launched a pre-emptive attack last week with public statements opposing the American and BA's expected request for immunity. Branson also wrote both U.S. presidential candidates to complain about a potential BA-American immunized linkup presuming that the matter ultimately will be in effect next spring, when one or the other is in the White House.