DealZone

Mergers are a no-go, but will alliances fly?

July 3, 2008

british.jpgAs airlines try to cut costs and stay afloat without consolidation, more of them are looking at alliances that seek antitrust immunity as an alternate to mergers.

Airline alliances allow partners to streamline costs while sharing revenues. Without antitrust immunity, the data and revenue shared on the routes would normally be considered collusive.

The question is, will all these alliances get the green light from regulatory authorities? That’s anyone’s guess. But it’s likely that they will, at the very least, have a long taxi before hitting the skies.

After Delta Air Lines and Northwest Airlines agreed to merge in April, creating the world’s largest airline, U.S. airlines have been scrambling to find ways to streamline themselves. Without mergers.  

Last month, Continental Airlines and United Airlines announced a co-operation plan of their own and today, sources said joint venture talks between American Airlines, British Airways and Iberia Lineas Aereas are picking up steam and the three parties could announce an agreement in the next week or so.

Their plan is to apply for antitrust immunity as soon as they sign off on a deal, one source said. But one would think they are likely to run into obstacles to get approval.

American, the largest U.S. airline, and British Airways have tried and failed to gain anitrust immunity twice before, but are now likely to argue a case with U.S. regulators that the competitive landscape has changed due to the “Open Skies” agreement.

That agreement between the United States and the European Union came into force in March, allowing airlines to access any U.S. city from any point in the EU and vice versa.

So their argument would say the agreement makes the market more competitive. But we thought competition was good…?

Ah, for the consumers, yes. For the airlines, no. So these carriers want to change the market by reducing competition. Is that a good idea? The Department of Transportation may have some thoughts on that.

An immunized alliance between American, BA and Iberia, Spain’s largest airline, could build the most extensive network between Europe and the Americas. Iberia is the largest operator of flights to Latin America.

Another problem: British Airways is the largest holder of takeoff and landing rights at the Heathrow terminal in London. BA has 40 percent of the slots at London’s Heathrow, the world’s busiest airport. And in 2006, BA and American held over half the capacity between Southeast England and the United States between them.

In the past, U.S. antitrust authorities have asked the carriers to give up some slots at Heathrow if they wanted approval for the alliance. But they chose to say no.

Times have changed: fuel prices have skyrocketed, the economy has weakened and the bad housing market is prompting more people to spend less. Still, the same requirements for Heathrow will likely apply again.

British carrier Virgin Atlantic, controlled by billionaire Richard Branson, has already expressed opposition to the possible alliance.

“We would oppose this attempt to create an anti-competitive alliance,” Paul Charles, a spokesman for London-based Virgin Atlantic, said today.  “It would form a dominant mega- power on trans-Atlantic air routes from two of the largest EU members, forcing up ticket prices for passengers and restricting choice.”

But after racking up more $35 billion in losses in the past few years and the prospect of losing billions more, airlines are faced with few choices and greater risks. Risking another failed alliance is probably worth the shot.

Not trying is probably not even a choice.

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