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American, British Airways And Iberia Want To Team Up, But It Could Mean Fare Hikes

Partners or robber barons of the skies?  Aug 25, 2008

A war is brewing over the Atlantic Ocean - high above the ocean.

American Airlines, British Airways and Spanish carrier Iberia are trying to team up in a move that their competitors call monopolistic and say could lead to higher airfare prices.

The three carriers say their joint business agreement will give travelers greater choice, better connections and improved flight schedules. They are seeking immunity from antitrust prosecution here and in Europe.

"If you listen to the alliances, it means consumer benefits out the wazoo," said Robert Mann, an airline analyst and consultant. "If you look at what they are saying to Wall Street, it says the ability to coordinate schedules and pricing, which means eliminating low-fare excess capacity, which would seem to be inherently not consumer-friendly."

Under the proposal, the three airlines would remain independent companies but would be able to cooperate with schedule planning and pricing. Right now such actions are generally illegal under antitrust laws.

The companies would also expand their codeshare agreements in which one airline sells seats on a flight operated by another. For example, a traveler going from St. Louis, Mo., to London could buy a ticket through American but be on an American jet for the first half of the trip and a British Airways jet for the second leg.

Several airlines already have antitrust immunity for their alliances.

United and German carrier Lufthansa and other members of their Star Alliance have such protection.

Northwest and Dutch airline KLM (now merged with Air France) also have that protection. Delta is merging with Northwest and also is protected from antitrust laws. All of those airlines are part of the SkyTeam alliance.

American, British Airways and Iberia are part of the rival oneworld alliance.

This is the third time that American and British Airways have sought such protection. The first time was in 1996, when Northwest and KLM partnered and when United and Lufthansa joined forces. The second attempt was in 2002. Both times, the agreement against immunity was that the two airlines controlled key landing spots at London's Heathrow Airport, one of the most lucrative markets in the world.

Cheap Flights or Price Hikes?

When the first attempt was rejected, the head of the Justice Department's antitrust division said in a statement: "The combination of American and British Airways would result in air travelers paying significantly higher fares for travel between the United States and Great Britain."

But that all changed this year when the Open Skies agreement went into effect, opening up Heathrow a bit to other airlines that had long been regulated out to London's other airports.

Continental, Delta, US Airways and Northwest have all gained landing slots at Heathrow because of Open Skies, but Mann says they all want more. He expects those U.S. carriers to try and block immunity as part of a negotiation to get greater access to Heathrow.

The United States-to-London market is one of the world's biggest, Mann says. But more important, because of the flow of business travelers airlines are able to charge some of the higher premiums for the routes, flights landing at Heathrow instead of one of London's other airports, such as Gatwick, can be 15 percent to 20 percent more expensive.

Mann calls it "potentially one of the most lucrative markets in the world."

Richard Branson, president of Virgin Atlantic, has also raised a ruckus saying such an agreement would "damage competition."

In a letter to both U.S. presidential candidates, Sens. Barack Obama and John McCain, Branson said that "airlines everywhere are struggling with the current price of oil, but the solution to their problems should not lie in an anti-competitive agreement, which will inevitably lead to less competition and higher fares."

Rick Seaney, an ABC News columnist and CEO of, an airfare search site, said that competition is the No. 1 driver of airline ticket pricing.

"Any time an airline goes bust, or two or more merge/partner, it means higher airline tickets for passengers," Seaney said. "We have already seen mortal enemies British Airways and Virgin Atlantic admit to colluding on fuel surcharges and agree to pay tremendous fines. … These antitrust agreements basically make this sort of activity legal."

Better Flight Options

Mann says American and British Airways have some legitimate arguments: First, the other airlines have immunity; second, while they do control a little more than half the flights at Heathrow, Star Alliance airlines have a greater share of flights at Frankfurt and SkyTeam has a larger percentage in Paris.

Also, airlines can serve certain routes through alliances that they otherwise might not try. For instance, Northwest and its partner KLM had nonstop service from Hartford, Conn., to Amsterdam.

"That's a market that frankly would have never been served nonstop without an alliance," Mann said.

Richard Aboulafia, an aviation analyst with the Teal Group, says that Iberia is part of the deal because the big airlines want to "bulk up with the niche players before somebody else grabs them."

Iberia also has several key Latin America routes, which can be added to British Airways and American's networks.

"No matter how much you want them or not, you don't want the other guy to bulk up with them," Aboulafia said. "It's all about maintaining that critical-mass global network."

But ultimately, Aboulafia says the deal remains about Heathrow and how much American and British Airways are willing to give up there.

"A lot depends on what they offer as a concession. It does heavily come down to Heathrow and access," he said. "There is no more lucrative traffic than North Atlantic Heathrow. The fact is that BA [British Airways] and AA [American] will have an extremely strong position there. … There are many nice alternate airfields, many inhabited by unicorns or leprechauns."

Partners or robber barons of the skies?
ABC News

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