The U.S. Department of Transportation last month tentatively approved an antitrust-immune joint venture proposed by American Airlines, British Airways and Iberia Airlines, through which the carriers will jointly plan services, set pricing and share revenues on their combined transatlantic network. Final approval, with a few slot restrictions at Heathrow Airport, is expected by early April. British Airways CEO Willie Walsh spoke with BTN senior editor Jay Boehmer about the growing cooperation with Oneworld partners on the Atlantic, as well as Japan Airlines, which last month reaffirmed its position in the alliance.
BTN: Is the joint venture model a surrogate for real merger and acquisition activity?
Willie Walsh: It is. Our view is that the industry would benefit from general consolidation but the ongoing restrictions on ownership and control restrict that. This is one way of pursuing consolidation, but on a light version. I think it's a very interesting development.
We've had a joint business with Qantas for over 10 years and with Iberia for five, going on six years. Now, we're doing the joint business with Iberia and American on the Atlantic. Our experience has been quite positive. I think these new Open Skies agreements facilitate more of these joint businesses. While we can't pursue real consolidation, we can get some of the way there.
BTN: Do you get the same benefits from a joint venture as you would from a real merger?
Walsh: One thing these joint ventures help to do is demonstrate that you can get revenue synergies. If you look at the Air France-KLM model, the success of that relationship has been built largely around revenue synergies, rather than cost synergies. Historically, people have looked at consolidation and joint businesses and challenged how much cost you could get out. The joint business doesn't really facilitate much in regards to cost synergies. It does facilitate some—collocation at airports is an obvious one—but it takes time to develop the relationship. Where you can coordinate the schedules in particular and look at better passenger flows over the hubs, you can generate additional traffic and generate synergies as a result. I think it's given people a lot more confidence to pursue these.
It was American Airlines CEO Gerard Arpey who first expressed the opinion to me that future consolidation would follow along the alliance lines. What we were doing in the development of these alliances was laying the foundation for consolidation of the industry at some stage in the future. I didn't fully buy into that when Gerard said it to me—that was probably four or five years ago. To be fair, I think he's proven to be correct.
BTN: Was that the case with Qantas and Iberia, where the joint venture relationship evolved to M&A considerations?
Walsh: With Qantas we've had discussions about a potential merger. We're pursuing the merger discussions with Iberia. We've gone on under the U.S.-EU Open Skies agreement to look at a joint business with American on the transatlantic. I've long held the view that the industry would benefit from consolidation, and in effect our industry needs consolidation. This is an exciting time. With Open Skies on the Pacific, you're beginning to see the potential for either a global alliance or, longer-term, the creation of a truly global airline—that's probably a long way away. If Gerard's vision of the future is accurate, maybe that's what you'll see 10 or 20 years from now.
BTN: Is there any benefit in the U.S.-EU Open Skies agreement as it stands for British Airways if you don't get final antitrust immunity?
Walsh: To be honest with you, if it doesn't facilitate ATI, then quite honestly I don't see what benefit there is in this first-stage Open Skies agreement. The people who negotiated that deal would have a very difficult job to convince people on the EU side—not necessarily on the U.S. side, where there was clear benefit to U.S. carriers getting access to Heathrow. I think officials in Europe would really struggle to show any benefit, particularly to U.K. consumers. Everybody sees that, and I'm sure DOT is conscious of that.
BTN: Your memorandum of understanding to merge with Iberia was expected to be ironed out and signed this quarter. What's the status of the agreement?
Walsh: We're continuing to do good work with Iberia. Very healthy discussions. A good atmosphere there and good rapport between the two management teams. The intention is to get to sign a full merger agreement by the end of this financial year, by the end of March.
BTN: There was a proposal on the table for a BA-JAL joint venture between Japan and the United Kingdom. Does JAL's decision to stick with Oneworld move that forward?
Walsh: I've met personally with the new chairman, Dr. Kazuo Inamori, and told him we were very much committed to building a stronger relationship with JAL. We are going to provide further access to our network in Europe, so you'll see more codesharing with JAL on our European routes, but we also felt there was an opportunity for us to pursue a joint business between Europe and Japan. That's the way alliances are developing now: More and more are going down the joint business route. That's an opportunity we'll continue to pursue jointly with JAL.