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BA: the view from the White House

Beyond Brussels the AA link-up faces further challenges, writes Steven Solomon in Washington
While the British Airways-American Airlines alliance spotlight is now focused on Brussels and London, Washington patiently waits its turn to rule on the proposed pact - and to impose its terms and international agenda on the UK.

If the proposed BA/American deal survives the bruising UK/EU political battle, it will face the perhaps more daunting challenge of the US regulators. For the alliance to have any chance of passing muster, the UK government first must agree to scuttle the 1977 bilateral accord which governs transatlantic air traffic between the two nations. It is an accord Washington views as protectionist and highly one-sided - in Britain's favour.

"We think the US-British aviation agreement is a disgrace," says Patrick Murphy, the deputy assistant secretary for aviation and international affairs at the US Department of Transportation. "We hate it."

In its place, the US will insist that Britain accept the model "open skies" agreement it has signed with 25 nations, including Germany, the Netherlands and seven other European states. The Clinton administration has been aggressively promoting "open skies" as the new world norm for air traffic since 1994.

Essentially, the "open skies" approach liberalises air traffic by granting unrestricted access to all carriers of each partner to fly into and out of each partner country. After nearly 20 years of operating in a deregulated home environment, US airlines are among the world's most efficient. They are desperate to bite into the high fares on highly-restricted transoceanic and other international routes.

The US bid for a global "open skies" regime, which US officials believe most major countries will adopt by the end of the decade, is boosted by the airline industry trend towards international alliances. These pacts' need for US anti-trust exemption has given Washington a lever: anti-trust exemption in return for an "open skies" bilateral.

US-UK "open skies" would mean US carriers could fly on to other "open sky" nations from London. Intra-European flights would also be governed by EU rules. As Heathrow is the leading gateway airport and landing and take-off slots are scarce, US-UK "open skies" would have to include guarantees of sufficient Heathrow access for US carriers to open up European and transatlantic air competition.

UK officials have long resisted such an "open skies" agreement. US officials bitterly claim the UK broke its word to negotiate an "open skies" accord when BA invested in USAir (now US Airways) in 1993. "They promised us the existing agreement would be eliminated within a year after the BA- USAir deal - and they reneged," says Mr Murphy. "They relied on bogus arguments. So the US only has two airlines going into the most important airport in Europe, while we have eight airlines flying into Frankfurt and eight into Paris. This is a total aberration for the UK as they privatised early, have strong airlines and have been the leaders in EU liberalisation."

US anger at the perceived British betrayal has been so strong that senior officials even seriously debated renouncing the US-UK accord unilaterally. "We decided not to do so," says Mr Murphy, "because of the larger US- British relationship and because it would set a horrible precedent." US officials also believed that market forces would sooner or later require British carriers to need a strong US alliance, forcing the UK to accept an "open skies" accord on US terms.

The BA-AA alliance now offers fulfilment of this scenario. The US must first await the outcome of the Brussels-London tussle. With BA and American both focusing their efforts in Europe, US proceedings on the proposed alliance are virtually stalled.

"Until the dust settles on the European Commission ruling, there is no point in the US and UK moving ahead with 'open skies' negotiations," says Jeff Shane, former US assistant secretary for transportation.

US and British negotiators haven't met since February, just before the spotlight turned to Europe. The original flurry of talks spurred by the BA-AA plan bogged down. When talks resume, the US will insist that Britain accede to the same unamended model signed by a fast-expanding list of nations.

Meanwhile, half a dozen US carriers are fiercely lobbying against the alliance at home, saying it is anti-competitive. "BA and American are creating the biggest monopoly ever in the largest market and they will dominate many other city pairs," says Mr Shane, now a lawyer in private practice representing Virgin Atlantic. "It's a licence to print money." If the pact wins US approval, Virgin and US carriers are jockeying for position to gain the Heathrow slots BA and American will have to give up.

How many slots the US will demand is indicated by one recent US government study which calculated that US carriers needed 23 daily round trips to ensure adequate transatlantic competition. This translates to 332 weekly slots given up, closer to Brussels' figure than the 168 slots suggested by London.

"The 168-slot proposal was met with derisive laughter on both sides of the Atlantic," says Mr Shane.

US scrutiny of the alliance is likely to be tough, and approval may include many conditions. US regulators are obliged to "show cause" why the alliance improves the competitive environment in a way that cannot be otherwise obtained. The US may argue that the BA-American alliance is necessary to counterbalance the globe-straddling Star Alliance of United of the US, Germany's Lufthansa, SAS of Scandinavia and Air Canada. If the other carriers are dissatisfied with the outcome, they can appeal the ruling in court. "No one has seriously appealed an alliance before," says Mr Shane. "This could be the first time."

If the price of approving the alliance is too high, BA and American may simply walk away. After all, each is well-placed on one of the world's most profitable routes. If the alliance does fly, however, it will hasten the creation of a new "open skies" world order. Adding London to the expanding network of "open skies" nations will exert tremendous pressure on France and other European hold-outs. The US has so far ignored EU threats of legal action against previous European "open skies" agreements. It says it is ready to discuss a regional "open skies" arrangement when Brussels' authority to negotiate is clarified.

A new world aviation regime would supercede today's regime forged by Winston Churchill and President Franklin D Roosevelt in 1944. As the US then had most of the world's aircraft, Roosevelt advocated global "open skies", but Churchill favoured bilateral arrangements and won the day. Half a century later the result is an archaic maze of over 1,000 bilateral accords.

Whether or not the BA-American deal survives, US officials are confident that the market forces of globalisation will eventually force BA and Britain to accept "open skies" - on US terms.