Atlantic Airline Alliance Draws Scrutiny

An agreement between British Airways (BAY.L), American Airlines (AMR) and the Spanish carrier Iberia (IBLA.BE) to co-operate on ticket prices and transatlantic schedules is being investigated by European competition regulators who say the pact may breach anti-trust laws.

The Oneworld alliance members had planned to take advantage of the "open skies" agreement, which allows any airline to fly between the European Union and the US, to persuade officials that the proposed tie-up did not give the three a dominant market position. However, news that the European Commission is investigating the deal suggests it is unhappy with what would be BA and AA's dominant market share – a concern that twice led to the deal being scuppered in the past.

The move was cheered by BA's rivals, particularly Sir Richard Branson's Virgin Atlantic, which welcomed the decision to put what it calls "a monster monopoly" on notice that rules may have been broken.

The EC competition watchdog said it had sent a charge sheet to the three airlines. Since April, it has also been investigating similar deals between the 24 members of the rival Star Alliance – including BMI, United (UAUA) and Lufthansa (LHAG.DE) – as well as the SkyTeam partnership of 11 airlines including Air France-KLM (AIRF.PA), Delta (DAL) and Aeroflot (AFLT.RTS). It has yet to move on either inquiry.

"The EC can confirm that it has sent a statement of objections to British Airways, American Airlines and Iberia, members of the Oneworld airline alliance, in relation to their proposed co-operation ... which the commission considers may be in breach of European rules on restrictive business practices," it said yesterday.

A statement of objections is a formal document sent to inform companies of complaints against them. The three airlines have been asked to reply, setting out their defence. BA said it was looking forward to answering the commission's questions, adding: "The EU's thorough review of our plans and supporting evidence was anticipated and is similar to its continuing review of the Star and SkyTeam alliances which already have anti-trust immunity from the US Department of Transportation.

"We believe the quickest way to robust competition and more travel choices for consumers is to ensure that all three global airline alliances can compete on an equal footing.

"It would also allow Oneworld to compete on a level playing field with Star Alliance and Skyteam, which have larger and increasing shares of transatlantic traffic and have been granted anti-trust immunity."

Oneworld members have also asked for immunity from US officials, but this has not yet been granted. Gert Zonneveld, an analyst at Panmure Gordon, said Oneworld was likely to come under more scrutiny than the other agreements because of its bigger market share.

"BA and AA's market share is substantially larger than the other alliances' and that is why the Oneworld venture has been challenged by the anti-trust authorities, and indeed, why it has already been twice down," he said. "Of course, they will eventually come to some sort of agreement but it may demand a high price from BA, especially if it is linked to giving up slots at Heathrow."

If officials do rule that the Oneworld partners' deal is unlawful, it will kibosh BA's third attempt to join forces with American Airlines. The previous attempts, in 1997 and 2001, failed because regulators insisted on the pair giving up take-off and landing slots at Heathrow to reduce their dominance at the world's busiest airport.

When he announced plans to join forces with American last year, BA's chief executive Willie Walsh said he believed the open skies agreement would allow the deal to be agreed without many concerns over competition.

Officials will also have noted BA's suggestion earlier this week that it could wrap up its merger with Iberia by the end of the year.

On Wednesday Mr Walsh said the appointment of a new chairman at Iberia had given fresh impetus to talks about a £4.2bn all-share deal. Asked if a deal would be completed by Christmas, he added: "We have been making good progress since the change of leadership at Iberia. We have met them on three occasions and we are meeting them again in the next few weeks."

Opening the skies: Where previous tie-ups faltered

Questions from the competition authorities are nothing new to British Airways and American Airlines.

The UK flag carrier has tried three times to form an alliance with American Airlines. The first two bids, in 1997 and 2001, foundered on demands from UK, European and US competition regulators that the two airlines give up some of their prized take-off and landing slots at Heathrow, the world's busiest airport.

In 1997, the Office of Fair Trading called for a surrender of up to 267 slots, while the bid four years later fell apart when the US Department of Justice said that the two companies would have to hand back 126 weekly slots. It was a move too far for the airlines and the engagement was called off on both occasions.

It seems that round three will also come down to regulators demanding that slots are given up. BA and AA may already know this, but will hope that they can persuade officials that the "open skies agreement", which allows more airlines to operate on financially important transatlantic routes, tempers their combined market share.

    Before it's here, it's on the Bloomberg Terminal.