US blow to BA's planned alliance

Justice Department intervenes with demand for commercially sensitive documents on UK airline

British Airways' planned alliance with American Airlines suffered its biggest setback yet following the dramatic intervention of the US Department of Justice.

The DoJ served a Civil Investigative Demand on BA's arch rival Virgin Atlantic late last week demanding access to all the documents relating to the $1bn anti-trust action Virgin has brought against BA in the US.

The DoJ, which is responsible for consumer protection in the US, served the demand as part of its own investigation into the implications of the proposed alliance between BA and American.

Virgin confirmed yesterday that it had received the demand and that it was co-operating fully with the DoJ.

DoJ agents will shortly begin collecting the hundreds of thousands of documents Virgin's lawyers have been collating in preparation for the case against BA. Significantly, the bulk of the documents belong to BA and set out in detail the national carrier's commercial practices which, Virgin argues, constitute an abuse of its monopoly power.

The documents have been obtained from BA under the discovery process on the strict understanding that they are seen only by Virgin's lawyers and not by representatives of the company - a clear indication of their commercial sensitivity.

What is most worrying for BA about the DoJ's intervention is that it comes without any prompting from the US Department of Transportation. It is normal in cases of airline mergers for the DoT to apply to the DoJ on behalf of the companies concerned for anti-trust immunity. However, the DoT has not yet made an application on behalf of BA and American, suggesting that the Justice Department has already identified potential consumer protection implications.

BA is also understood to have been served with a Civil Investigative Demand. However, Robert Ayling, BA's chief executive, said yesterday that he was unaware of this.

The Department of Justice is extremely powerful and can be ruthless in its pursuit of practices it believes are anti-competitive. It has been involved in a long-running battle with Microsoft, the US software giant, forcing it at one point to abandon an important takeover bid.

The nub of Virgin's anti-trust case against BA, which is still being prepared for a trial next year, is that the national carrier is already engaged in anti-competitive practices. BA is vigorously defending the action.

The Department of Justice is not investigating the specific aspects of Virgin's case against BA. However, that the department has deemed all the documents relating to that litigation relevant to its inquiry suggests that they may have some bearing on the DoJ's conclusion.

The alliance would create the world's most powerful airline grouping. Taken with BA's existing partnerships it would represent a global network of magnitude.

However, it is on the crucial Atlantic routes that the combined might would be most apparent. The two airlines already control 70 per cent of the Heathrow to Kennedy Airport route and more than 60 per cent of all UK/USA routes. It is this domination that has brought howls of protest from rival US and British carriers demanding that the deal be blocked.

The DoJ's investigation is the latest and most serious to cloud the proposed alliance. Already it has attracted the attention of regulators in Britain and Europe.

The Office of Fair Trading is examining the proposed alliance. The deadline for submissions is this week, after which the OFT will decide whether a Monopolies reference is required.

A Parliamentary Select Committee also sits this week and its inquiry will include an examination of the BA/American deal.

Last week the European Commission announced it was launching a joint investigation into the competitive effect of all six transatlantic alliances between European and US carriers including that proposed by BA and American.