American entering 3-member alliance British Airways, Iberia also on team By Julie Johnsson | Chicago Tribune reporter August

15, 2008 In another sign that globalization is taking wing within the airline industry, American Airlines, British Airways and Iberia have formed a venture to closely coordinate flying between North America and Europe. The virtual merger, announced Thursday, would bring together the two biggest players in the North Atlantic market, American Airlines and British Airways. They currently dominate travel on key business routes between the U.S. and United Kingdom, accounting for 66 percent of the current capacity between Chicago and London Heathrow Airport, for example. How to deal with consolidation will pose a thorny policy question for the next U.S. president. That person will likely have to approve the new American venture as well as one proposed by Chicago-based United Airlines while determining the role U.S. carriers will play in the emerging global networks. "It's an interesting play," said Brian Havel, director of DePaul University's International Aviation Law Institute. "It puts pressure on the U.S. government to think about the next generation of airlines." Carriers that belong to the three major global marketing alliances increasingly are seeking closer ties that will allow them to form worldwide networks while sidestepping rules that limit foreign carriers to small ownership stakes in U.S. airlines. Six members of SkyTeam, which includes Delta Air Lines and Northwest Airlines, already have antitrust immunity to synchronize flying across the North Atlantic, as do nine members of the Star Alliance, co-founded by United Airlines. United is forming a separate North Atlantic venture with two overseas carriers and Continental, which is joining the Star Alliance. The pact would allow them to share schedules, gates, lounges and frequent-flier programs. "All we are trying to do with British Airways and Iberia is to be able to compete on a level playing field with SkyTeam and the Star Alliance," Gerard Arpey, chairman and chief executive of American Airlines, told the Tribune. "We think the regulators will see it way."

British Airways is in talks to acquire Iberia. American had earlier sought antitrust approval to partner with Iberia. The clash of the titans could leave little place on lucrative routes for independent carriers like Virgin Atlantic Airways, which has opted not to join one of the major alliances. Steve Ridgway, CEO of Virgin Atlantic, a vocal critic of the latest venture, told the Tribune that American and British Airways already are formidable competitors, with the latter controlling more than half of the landing slots at capacity-constrained Heathrow. "British Airways on its own out of Heathrow is already bigger than the Star Alliance in Frankfurt and SkyTeam in Parisand that's before you get American in there with them," he said. "Consolidation needs to be intelligently done because you harm the ability of airlines to compete with each other." Branson objects Virgin's founder and chairman, Richard Branson, has already asked both presidential hopefuls to block the British-American deal. "We are not against consolidation, but this alliance is on a scale never seen before," he said in a statement Thursday. This marks the third time that American and British Airways have tried to form a closer relationship. They were forced to abandon earlier efforts when it became clear that British Airways would have to divest holdings at Heathrow to overcome antitrust concerns. Arpey believes they will be able to team up this time without such requirements because of a new treaty between the U.S. and European Union, which took effect this spring, and opens Heathrow to new entrants and is designed to spur competition across the Atlantic. "The world has changed quite a bit from our last attempt back in late 2001, 2002," Arpey said. Arpey and his would-be partners Thursday asked the U.S. Department of Transportation for antitrust immunity across the Atlantic, along with Oneworld alliance partners Finnair and Royal Jordanian. Arpey said he was optimistic the application would be reviewed before President Bush leaves office. But others said the process might take six to nine months, longer than the five months remaining in Bush's term.

The Department of Justice will have to weigh in on the competitive impact as will the EU. "It's unlikely to be resolved by the Bush administration," said Havel, an international law expert. "This is the critical issue: Will British Airways accept the termsand there will be terms. British Airways-American Airlines is far too strong on the trans-Atlantic. And Heathrow, for good or bad, remains the priority No. 1 business hub."