BA alliance hits more turbulence

Gatwick could be the escape route, but EU pressure may still threaten the pact with American, says Peter Robison

Observers wonder whether British Airways and American Airlines have a card up their sleeve as anti-trust regulators, rival airlines and consumer advocates focus on access to Heathrow Airport as key to their planned alliance.

BA's dominant position at Heathrow has traditionally been its main money- spinner. It's no surprise, then, that stripping BA and American of some of their large cache of take-off and landing slots at Heathrow has been the focus of anti-trust reviews in the US, the UK and the European Union.

But it's not certain that Heathrow is as important as it used to be. Even if regulators do force BA and American to give up slots at Heathrow, they could use their combined marketing clout to shift the focus of transatlantic travel to Gatwick. Then rivals would pile into Heathrow, only to find so much competition that brutal price-cutting would hit their yield from each ticket.

"Gatwick used to be the bucket and spade airport, the poor boy,'' said Chris Partridge, aerospace banker at Deutsche Morgan Grenfell. "Now the network out of Gatwick is comprehensive, and Heathrow is turning into a competitive market where yields do nothing but go down."

BA, he noted, now flies more routes from Gatwick than it does from Heathrow. It proposed the alliance with American in June 1996, and anti-trust reviews are expected to come to a head in late October.

"BA is positioning itself to be able to give away those slots," said Mr Partridge. "Where BA is the carrier of choice, it's moving traffic away from Heathrow and building up another long-haul network."

Meanwhile, the tortuous path towards regulatory approval took a new twist late last week as a top US trade official chided the EU's tough stance on the pact.

Stuart Eizenstat, the undersecretary of state for economic affairs, urged EU competition commissioner Karel Van Miert to approve the alliance in an unexpected US endorsement of the plan and asked him not to impose "impossible" conditions.

It was meant as a gentle message to Mr Van Miert just weeks after a tussle over Boeing's purchase of McDonnell Douglas threatened a transatlantic trade war before the world's dominant plane manufacturer accepted EU-ordered concessions.

While the two airlines hailed the vote of confidence from the US, analysts warned that the public disagreement could signal the start of another messy dispute that would further delay their plan to unite transatlantic flights and fares.

"It runs the severe risk of turning up the temperature because Mr Van Miert is not a man who likes to be told what to do by the US,'' said Chris Avery of Paribas Capital Markets.

On the face of it, regulators on both sides don't appear too far apart. The EU has asked BA and American to give up enough runway and gate access at Heathrow for 25 daily round-trip flights, while the US General Accounting Office called earlier this year for 23 competing daily round-trips.

But Mr Van Miert has gone much further than other regulators with plans for cuts in the frequency of their flights, a key concession for an alliance primarily targeted at the business passengers who pay premium prices for the flexibility of several flights a day.

He wants a 50 per cent cut on routes between Heathrow and Chicago, for instance, and also suggested barring the airlines from uniting their frequent- flier programmes - putting them at a disadvantage with rivals such as the "Star Alliance", a five-carrier pact headed by Germany's Lufthansa and United Airlines.

The EU has emphasised that its recommendations are only preliminary and may still change.

As deregulation has advanced and put major airlines under pressure, they've responded with alliances that allow them to unite operations like baggage handling, co-ordinate their airplane purchases and sell seats on each other's routes as their own.

Chris Tarry, an analyst at Dresdner Kleinwort Benson, estimates American could contribute almost 1,400 passengers a day to BA's network within three years, compared with 500 for its former partnership with US Airways.

US policymakers still view an open-skies treaty with Britain as the jewel in their crown. But the ripples between Mr Eizenstat and Mr Van Miert this week heightened US fears that the EU might push BA too far. To the point that it withdraws from the alliance and scuppers the chances of opening Heathrow to all the US airlines that want access.

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