US government watchdog delivers fresh blow to BA-AA alliance plan

British Airways' proposed transatlantic alliance with American Airlines suffered a fresh blow yesterday after an influential US government body criticised the link-up on competition grounds.

The US General Accounting Office, which acts as an advisor to Congress, questioned what benefits passengers would derive and said that such gains as the alliance did bring may not be enough to offset the harm it did to competition.

The GAO's report, prepared for the Senate commerce committee and posted on its website, also said there would be only "limited" benefits from any open skies agreement that would accompany the BA-AA alliance because of severe capacity constraints at Heathrow airport.

The GAO is the second US government body to cast doubt on the alliance in the last month. A week before Christmas, the US Department of Justice produced a critical report on the link-up saying it could result in higher fares and reduced service and calling for BA and AA to surrender 126 weekly runway slots at Heathrow. The final decision on whether to approve the deal rests in the US, however, with the Department of Transportation.

An alliance of BA and American would "exercise considerable control" over routes between big American cities and London with the two airlines accounting for 61 per cent of non-stop flights between Heathrow and the US, says the GAO report.

"Without some regulatory remedy, the AA/BA alliance could dominate markets between major US cities and London, especially those that originate or terminate at Heathrow," says the report. "Moreover an open skies agreement, in and of itself, may not guarantee the right of other airlines to enter these markets," it adds.

The 11-page analysis argues that potential benefits may be limited and says that neither BA nor AA were claiming that they could generate substantial operational savings that could be passed on to shareholders, employees or customers.

BA and the British government are anxious to get the alliance approved before a European Court of Justice ruling, expected early this year, which is expected to support the right of the European Commission to negotiate air service agreements on behalf of member states. This would put paid to hopes of concluding an early open skies agreement between the UK and US and so scupper the BA/AA alliance.

But the GAO report says: "The interests of the United States in having [an open skies deal] expedited are less clear." It says that while an open skies agreement might benefit US consumers, the terms of the deal are more important than how quickly it is negotiated.

BA said the GAO report had been prepared at the request of the chairman of the Senate commerce committee, Ernest Hollings, who was a long-standing critic of airline alliances in general. It also took heart from the fact that the GAO had not put a figure on the number of slots BA and AA should give up in return for gaining approval for the alliance. In 1997, when the two airlines last applied for permission to merge their transatlantic services, the Department of Justice, the UK's Office of Fair Trading and the European Commission called for the surrender of between 196 and 267 slots.

A BA spokesman added: "The GAO report is pretty limited in its analysis but it does recognise potential benefits as well as areas of concern."