BA yesterday attempted to play down the significance of the Justice Department's intervention, saying: "This is just another step along the regulatory road."
However, the call for the alliance to be "significantly restructured" before it is allowed through could dash the two airlines' hopes of launching their long-delayed partnership this autumn.
The Justice Department said that as it stood the alliance would lead to significantly higher air fares across the Atlantic. It recommended that 336 take-off and landing slots - the equivalent of 24 round trips daily - be surrendered at Heathrow airport as a condition of approving the tie-up. It also called for the Dallas-London and Chicago-London routes operated by BA and AA to be excluded from the alliance.
BA stressed that responsibility for final approval of the alliance in the US rested not with the Justice Department but the Department of Transportation, which it said would apply a broader test of public interest. BA also said: "The Justice Department has made it clear that the slots don't have to come from BA/AA."
However, the US DoT is not expected to deliver its final verdict on the alliance before the end of the summer at the earliest, leaving the two carriers little time to begin co-ordinated services in time for the launch of the winter schedule.
BA shares slipped in early trading as news of the Justice Department's tough stance emerged but later recovered most of their lost ground. Richard Hannah, transport analyst at Bankers Trust Alex. Brown, said: "We don't think this is a deal-breaker at this stage. It is another major regulatory hurdle that has to be crossed."
The alliance has now been awaiting regulatory approval for two years and has yet to be formally cleared by the UK or the European Commission. The Office of Fair Trading recommended that the two airlines surrender 168 slots in return for approval. But in its initial ruling, the European Commission called for the surrender of up to 350 slots. Karel Van Miert, the EU Competition Commissioner, is expected to announce his final ruling in mid-June. The indications are that Brussels is looking for the airlines to make 250-300 slots available.
The Justice Department also said that approval for the alliance should be contingent on an open skies accord being agreed between the UK and the US, allowing more carriers to compete on transatlantic routes.
BA said: "Naturally, we expect the US DoT to consider not just the competition analysis but also the benefits of an open skies agreement between the UK and the US and stronger competition between global alliances."
The deadline for filings to the US DoT passed yesterday. The Department now has a month to consider them before reaching an outline decision. BA can then make representations depending on the level of concessions being demanded.
City analysts warned there would come a point when the two airlines would walk away from any deal, thus scuppering any open skies accord and depriving other carriers of any slots.