BA-AA Pact Still Faces A Web Of Regulatory Hurdles

Almost a year after American Airlines and British Airways announced their planned alliance last June, industry observers continue to predict the partnership will pass government scrutiny.

But when the United States, European Commission and United Kingdom actually will approve the pact is a much tougher question, as development on the issue has been at a standstill for weeks. Several decisions are imminent.

"I still expect it to go through, but there are some major complications now," said Dan Kasper, co-chairman of the Boston-based Coopers & Lybrand transportation industry program. "The EU appears to view this as an opportunity for it to leverage its way into a major role in negotiations and to get EU-U.S. talks going. The pace of U.S.-U.K. talks hasn't helped either."

According to Steven Schoen, CEO of The Global Group consultancy in Burke, Va., "There's no single factor holding it up. In the end there will be a deal, but I don't know if it will be as pervasive as BA and AA want it to be."

A number of government bodies, including the Departments of Justice and Transportation, and their counterparts in the United Kingdom and European Union, are considering the implications of the alliance, partly in response to concerns expressed by consumer advocates who feel the tie-up is anticompetitive (BTN, Feb. 24).

Airline officials and regulators who had been awaiting the outcome of British Parliamentary elections are now waiting for the newly elected Labour government in Britain to formulate its transport policies and its position on AA-BA. Additionally, the new government must resume bilateral talks with the United States, which has long insisted that an open skies agreement be reached before AA-BA is approved. BA chairman Robert Ayling reportedly already has met with the new deputy prime minister and head of transport, John Prescott.

Although there is no indication of Labour's exact position, a spokesman warned in February that the party opposes moves by BA to free up Heathrow slots for transatlantic use by switching some flights to Gatwick. Among those will be all of BA's flights to Latin America, an area where AA is particularly strong and one that would be a major benefit to both carriers.

The U.K. Office of Fair Trading had recommended that AA and BA give up 168 Heathrow slots to competitors as a condition of approval for the alliance (BTN, Jan. 13). BA is in discussions with the OFT about those recommendations, but AA's managing director of international affairs, David Schwarte, said at the Senate Judiciary Committee's Subcommittee on Antitrust hearing last month that those conditions are "something we can live with."

Complicating matters, European Union commissioners said in February their decision on the alliance was "weeks, not months" away, but they seem to have put things on hold while attempting to gain additional authority over such deals. The EU said it wanted jurisdiction over alliances between EU and non-EU carriers.

Officials from the U.S. DOJ and DOT in recent weeks have expressed serious concern over the alliance and indicated that it will undergo additional and thorough examination. The U.S. General Accounting Office, acting upon a request by the Senate Commerce Committee to assess whether potential competitive problems can be amended, expects to issue a report on the proposed deal by the end of this month.

In its hearing last month, the Senate Judiciary Committee's Subcommittee on Antitrust listened to arguments by several major U.S. carriers and Virgin Atlantic. Some of the senators were peeved that BA did not show up, but industry observers said the hearing was designed as something of a venting session for the U.S. competitors.

The subcommittee in late April called on Attorney General Janet Reno to participate fully in DOT's examination of the deal."We have the U.S. DOJ and DOT, the U.K. and the EU," Schoen said. "Only the U.K. has recommended a number on slot divestiture, so once all four numbers are there and they get together and negotiate, we'll have a deal."

Meanwhile, recently formed alliances headed by Delta and United are moving forward, and both AA and BA are concerned that they're losing ground, particularly in terms of coordinated sales. BA's U.S. executive vice president of sales and marketing, Dale Moss, had said in January that he would be concerned if the alliance were not approved by April.