BA in talks with American and Continental

British Airways said yesterday that it was "exploring opportunities" with American Airlines and Continental Airlines that rivals fear could be the first step towards the creation of an industry goliath that would have a hugely dominant position at Heathrow.

As a first step, the discussions now under way are likely to be centred on forging deeper code-sharing partnerships. Rivals fear, however, that BA and American could use any agreement reached now as a starting point to once again attempt a long-desired merger of the two companies. Regulators approved the first attempt in 2001 but studded their approval with so many onerous conditions that the companies scrapped the deal.

A combination of BA and American, the largest carrier in America, would yield a giant with two-thirds of the slots at Heathrow for transatlantic flights. The addition of Continental, which earlier this year spent $209m on four sets of take-off and landing slots at Heathrow, would create one of the largest airlines in the world.

Sir Richard Branson, the president of Virgin Atlantic, vowed to fight what he saw as a clear first step of an attempt to create one player that would utterly dominate the transatlantic market, the most lucrative in the world. He said: "When BA and AA first tried to get together nearly 10 years ago, the regulators ruled it was against the consumer interest. Nothing has changed. A link-up between BA and AA is still anti-competitive and now they have the cheek of trying to add Continental to the mix too."

Under the Open Skies treaty, which came into effect last month to open the transatlantic market to full competition, European airlines are still prohibited from taking over US carriers. American airlines, however, do have that privilege. Any deal would be subjected to intense regulatory scrutiny. Aviation analysts say any current talks will centre on alliances and code-sharing.

British Airways and American are already partners in the OneWorld Alliance. After Continental called off merger talks with United Airlines last weekend, it hinted it could leave the SkyTeam Alliance, whose members include Air France KLM and Delta. "We are considering alternatives to SkyTeam as we carefully evaluate which major global alliance will be best for Continental over the long term." US carriers would also be likely to protest a tie-up.