Oct. 22 (Bloomberg) -- American Airlines and British Airways may win U.S. approval for an international alliance as the Obama administration works through its disagreements over antitrust policy for the aviation industry.

AMR Corp.’s American, the second-largest U.S. carrier, and British Airways Plc, Europe’s third biggest, seek permission to jointly price, market and schedule international flights without risking prosecution for anticompetitive behavior.

The Transportation Department, which faces an Oct. 31 deadline to decide and has favored such alliances, is likely to approve the deal, said former department official Patrick Murphy. The question is what conditions the agency may attach, he said. The Justice Department, which has pledged more vigorous antitrust enforcement, publicly opposed the last such accord.

“You are going to see better coordination” between the Transportation and Justice Departments, said Murphy, a Washington consultant who was deputy assistant transportation secretary under Presidents Bill Clinton and George H.W. Bush, in an interview. “Last time around there was a lack of coordination that was unusual.”

Continental Airlines Inc. won approval in July to coordinate flights abroad with UAL Corp.’s United Airlines and eight other carriers. The Transportation Department exempted certain routes from that agreement after the Justice Department publicly called it a bad deal for consumers.

Carriers, restricted by law from cross-border mergers, seek antitrust immunity to act more like single entities. They use each others’ routes to expand networks, grow revenue without adding costs and compete with other large alliances, said William Swelbar, a research engineer at the Massachusetts Institute of Technology who specializes in airline economics.

Iberia, Finnair

American’s revenue may increase 3 to 5 percent if its role in the Oneworld alliance is immunized, according to Swelbar. The carriers in Oneworld now are limited to booking passengers on each others’ flights.

Other members of Oneworld included in the immunity proposal are Iberia Lineas Aereas de Espana SA, Spain’s biggest carrier; Finnair Oyj, Finland’s largest airline; and Royal Jordanian Airlines, Jordan’s state carrier. American, British Airways and Iberia also seek to collaborate in a joint business agreement.

Bill Mosley, a Transportation Department spokesman, declined to comment on the case, and Gina Talamona, a Justice Department spokeswoman, said she couldn’t discuss what advice her agency would give.

‘Defining Moment’

The most vocal opponent of the alliance between American and British Airways is U.K. billionaire Richard Branson’s Virgin Atlantic Airways Ltd., which says the deal would undercut competition.

“We are at a defining moment for the Obama administration” and “its re-energized competition policy,” said Paul Charles, a spokesman for Virgin Atlantic, in an e-mail.

The administration’s challenge in applying antitrust policy to aviation had its first test this year over the decision letting Continental join Star, the world’s largest airline alliance.

After the Transportation Department granted preliminary approval, the Justice Department objected. Its position reflected the department’s approach under President Barack Obama and antitrust chief Christine Varney, who has vowed the department will be “aggressively pursuing” anticompetitive behavior.

The airlines’ request “is unprecedented in scope and breadth, sanctioning collusion by United and Continental on all international service,” the Justice Department wrote in a June 26 filing. “The result is likely to be substantial consumer harm.”

‘Considered Their Views’

The Transportation Department, which has the final say, responded to specific objections from the Justice Department. The final order barred the airlines from coordinating prices on nine routes including between New York and Stockholm, Copenhagen, Geneva, Lisbon and Ottawa.

“We very carefully considered their views and adopted them in part,” Robert Rivkin, the Transportation Department’s general counsel, said at a conference in Chicago on Sept. 24. “There’s continuing close collaboration.”

Citing the public airing of differences last time, the senior lawmakers on the Senate Judiciary Committee’s antitrust panel have urged the Transportation Department to “pay substantial heed” to the Justice Department on the American- British Airways alliance.

‘Greater Authority’

Democratic Senator Herb Kohl of Wisconsin, the panel’s chairman, and Republican Senator Orrin Hatch of Utah said in a letter Oct. 13 that they will examine “whether legislation should be drafted to give greater authority to the Justice Department” in airline antitrust decisions.

Flatly rejecting the American-British Airways alliance would be “manifestly unfair” after the Transportation Department approved two bigger alliances, said Paul Dempsey, director of the Institute of Air and Space Law at McGill University in Montreal.

In addition to the Continental-United accord, the Transportation Department gave antitrust immunity last year for Northwest Airlines Corp. and Delta Air Lines Inc. to collaborate with Air France-KLM, Italy’s Alitalia SpA and Ceske Aerolinie AS in SkyTeam, the second-largest alliance. Northwest and Delta have since merged.

“It’d be ridiculous to leave several airlines out of an immunized partnership across the North Atlantic when everybody else is immunized,” American Chief Executive Officer Gerard Arpey said on a conference call yesterday.

‘Open Skies’ Treaty

The American-British airline request also follows the start of the U.S.-European Union “Open Skies” treaty.

The aviation agreement, which took effect last year, ended the monopoly of American, British Airways, Virgin Atlantic and United Airlines on flights between the U.S. and London’s Heathrow, Europe’s busiest airport.

“The existence of an Open Skies agreement with the EU would seem to improve their prospects for approval,” said Jeff Rosen, a former Transportation Department general counsel under President George W. Bush. Rosen, a partner at Kirkland and Ellis LLP in Washington, spoke in an interview.

American and British Airways sought approval for an alliance twice before, most recently in 2001. The airlines abandoned that application in 2002 after the Bush administration’s Transportation Department said the carriers would have to give rivals 224 weekly take-off and landing slots at Heathrow.

“A lot has changed since that last proposal, and all of it favorable to competition,” said Murphy, the former Transportation Department official. “One would think the conditions would have shrunk quite a bit.”

European Commission

“I remain very optimistic” about approval, British Airways Chief Executive Willie Walsh said in an interview Oct. 14. The approval will likely come without the requirement that flights at Heathrow be surrendered, he said.

European regulators are also examining the plan. The European Commission said Oct. 2 it sent complaints to Fort Worth, Texas-based American, British Airways and Iberia concerning their agreement. The Brussels-based commission said the deal may break EU rules on “restrictive business practices.”

“The European Commission has rightly raised serious concerns,” Charles of Virgin Atlantic said. American and British Airways will hold 82 percent of the market between Boston and Heathrow, he said. “That’s not a market share, that’s a monopoly.”

‘Lots of Ways’

Virgin Atlantic’s examination of particular markets is “bogus” because consumers have multiple travel choices, said Will Ris, senior vice president of government affairs for American. A flier from Dallas can get on an American flight to Heathrow or stop in New York to catch a Virgin plane, he said.

“There shouldn’t be concerns about any particular market,” he said. “There are lots of ways to get between two points.”

American is the second-largest U.S. carrier after Delta. British Airways is Europe’s third largest after Air France-KLM and Deutsche Lufthansa AG.

To contact the reporters on this story: John Hughes in Washington at jhughes5@bloomberg.net.

Last Updated: October 22, 2009 00:00 EDT