David Prosser's Outlook: This time, even Sir Richard Branson may not be able to ground his big enemy
Friday 15 August 2008
It's good to know that in a world of perpetual change, there are still a few constants to which we can all desperately cling for stability. Specifically, that come hell or high water, British Airways and Virgin Atlantic will always be at each other's throats. So much so that even before Willie Walsh announced yesterday that BA and American Airlines were applying for anti-trust immunity (ATI) in order to forge a new partnership on flights between Europe and North America, Sir Richard Branson, Virgin's boss, had already had a tantrum about the idea.
At the weekend, Sir Richard wrote to Barack Obama and John McCain demanding that the winning presidential candidate blocks the ATI application, for the same reason that similar applications by the two airlines were turned down in 1997 and 2001 – that they would damage competition. Nonsense, say BA, AA and Iberia (the Spanish airline, planning a merger with BA, is also part of the application) – the airline industry has completely changed since then, particularly following the Open Skies accord that has liberalised the market for routes between the European Union and the US.
This is a row that will rage on for many months, but there's no doubt that this application stands a much better chance of success than the last two attempts.
Sir Richard told Messrs Obama and McCain that the Open Skies agreement was a "complete red herring" because it had not resulted in any increase in competition or reductions in fares.
Well yes and no: it's certainly true that fares on transatlantic flights have not come down since Open Skies went live earlier this year, but given the extraordinary rise in the cost of jet fuel, that's hardly surprising. As for competition, there are now nine operators offering 94 flights a day between Heathrow and the US, compared with 76 daily services from just four airlines prior to Open Skies.
However, those figures are a little misleading. Three of the new operators on Heathrow to the US routes come from the Skyteam airline alliance, while a fourth is a member of the Star alliance. The fifth new entrant, Continental, is in the process of joining Star. Arguably then, Open Skies has simply given the global airline alliances more freedom to reallocate flight slots between their members, rather than encouraging genuinely new entrants.
Moreover, while there are nine airlines flying between Heathrow and the US, BA and AA between them offer just over half the seats. And while the two airlines have, in previous attempts to win anti-trust immunity, offered to give up some of their flight slots, they are not doing so this time, arguing that Open Skies has enhanced competition sufficiently for them not to need to do so.
Still, the fact Sir Richard that has succeeded in making a big noise about the BA tie-up with AA should not distract us from the fact that Virgin is purely concerned about competition on routes between the UK and North America. This is only one part of the market that a deal between BA, AA and Iberia would cover.
Once you turn to travel between the European Union and the US as a whole, the case for looking kindly on this latest application for ATI is strong. Skyteam and Star respectively have 35 and 28 per cent shares of the market for non-stop travel between the EU and the US. One World, the alliance to which BA and AA belong, has just 21 per cent, yet while its two bigger rivals already have ATI, it does not. Moreover, it is not difficult to identify European airports where Star or Skyteam enjoy much greater dominance than that of BA and AA at Heathrow. Star has 80 per cent of the seats on flights from Frankfurt to the US, for example, while Skyteam has an 85 per cent share of the Amsterdam to US market.
Not that competition worries are the only stumbling block BA and AA must overcome. While Senators McCain and Obama are both supporters of the principles of free trade and free markets, those values mysteriously seem to go missing when there's any question of American interests being at stake. Both candidates have been more than happy to pander to protectionist concerns, which is no doubt one reason why Mr Walsh was at pains to emphasise yesterday that this alliance is not a prelude to a merger between BA and AA. Not that American laws on airline ownership would currently allow a merger in any case (though they may one day do so), but the last thing BA wants is to be seen in the US as having a much bigger influence in the running of one of America's biggest companies.
Even without a merger, however, yesterday's deal between AA and BA represents another step forward in the inexorable process of global airline consolidation. Open Skies was a convenient reason for AA and BA to give when asked why they were reopening the debate about an alliance, but the real story here is one of economic necessity, just as BA's change of heart over a merger with Iberia was.
Just two weeks ago, remember, Mr Walsh said BA was currently operating in "the worst trading environment the industry has ever faced". AA boss Gerard Arpey has made equally apocalyptic pronouncements.
In the face of soaring jet fuel costs – the oil price may have come back in the past two months but is still miles higher than the levels with which airlines have previously had to cope – even the largest airlines must find new ways to cut costs and maximise revenues. Mr Walsh expects BA to make a small profit this year – if so, it will be one of very few companies in the sector to do so. And while getting up Sir Richard's nose will no doubt please some at BA, the commercial imperative of an alliance with AA is the really compelling motivation for this arrangement.
Thank heavens for our friends from Poland
We have yet another reason to be grateful to our neighbours from the eastern end of the European Union. Government figures show that without a big increase in the number of visitors to this country from the EU accession states such as Poland and Lithuania – some tourists, some coming to see friends and family now living in the UK – overall visitor numbers would have fallen even more significantly than they actually did over the past few months.
So much for the special relationship. Americans who used to come here in droves are now doing their bit to sabotage our tourism industry – US visitor numbers were down 8 per cent in the past quarter. Visitors from the accession states, meanwhile, were up 15 per cent. Nor do the eastern Europeans appear to be spending any less money while they're over here. Indeed, total spending by visitors to the UK actually rose marginally, despite the drop-off in numbers, suggesting that the Poles and their friends may actually be spending more than the Americans used to.
Partly, of course, this is all about currencies. The dollar has been unusually weak against sterling this year, while the euro has been particularly strong. But not all of Europe has been cashing in – indeed, overall European visitor numbers to the UK were down.
The slowing global economy is another problem for tourism bosses – the cold economic winds were felt first in the US, from where the falls in visitor numbers have been most marked.
Britain's tourism industry isn't entirely dependent on people coming here from overseas. Indeed, there is increasing evidence that many Britons are this year choosing to holiday in the UK, rather than abroad, though results from travel agents in this country at least continue to support their claims that the vacation business is recession-proof.
Even so, leaving aside the question of where our overseas visitors are coming from, it looks difficult to square the latest government figures with the optimistic projections for growth in tourism made by Visit Britain, our national tourist agency. And that's yet another economic worry with which the UK must contend.
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