BA's transatlantic alliance set for take-off

British Airways and American Airlines are aiming for regulatory approval for a wide-ranging transatlantic alliance by the end of this year.

Five years after the two airlines, the lead members of the Oneworld alliance, first announced plans to merge their services across the Atlantic, hopes are high in both camps that a breakthrough might at last be on the cards.

The first signs of progress came last month when BA's chief executive, Rod Eddington, and Don Carty, his opposite number at American, met the new US Transportation Secretary Norman Mineta.

The second came with the resumption of "open skies" talks a short while later between the US and UK aimed at liberalising the highly restrictive air services agreement between the two countries.

The third came with the announcement from British Midland and United Airlines, members of the rival Star Alliance, that they want a full open skies accord immediately and intend to seek anti-trust immunity to merge their own transatlantic services. This was a clear sign that BA's opponents are in the market to do a deal.

The Eddington-Carty-Mineta encounter was characterised by BA as a courtesy call, a "get to know you" meeting. But behind the scenes BA and American have some two dozen working groups beavering away on a detailed proposal. Mr Carty, who has been a friend of US President Bush ever since he first emerged on the political scene as Governor of American's home state Texas, was more forthright. He said he was "very optimistic" adding that if the two airlines came up with a firm proposal there was no reason why a deal could not happen "very quickly".

It now appears that the two men did indeed put a proposal to Mr Mineta, including an indication of the price they would be prepared to pay to gain anti-trust immunity.

Five years ago, the European Commission decided the price should be the surrender by BA of 267 take-off and landing slots at Heathrow while the US Justice Department demanded the release of 206 slots. Had BA paid the price demanded by Brussels, it could have cost the airline some £400m in lost profit – scant surprise, then, that it never got off the ground.

Why should things be any different now? Chris Tarry of Commerzbank, says that what has changed is the structure of the market. "Competition in the airline industry is now increasingly between the networks of alliances rather than between airlines and the fastest growing area of benefit for alliances across the Atlantic is the ability of the partners to feed each so-called behind and beyond traffic through their respective hubs."

In the case of the Star alliance, this is estimated to bring in benefits of around $100m a year. But BA and American cannot tap any of this extra revenue because they do not have approval to pool their services, they cannot even code-share across or operate their frequent flyer programmes jointly across the Atlantic. An analysis by Comerzbank shows that in most cases, Air France, Lufthansa and KLM are growing their key transatlantic routes from their respective hubs faster than BA is at Heathrow.

Mr Tarry also says that the thorny issue of slots disposal is less of a problem now because of the growth in size of the alliances. The eight members of Oneworld for instance now account for 46 per cent of slots at Heathrow while Star accounts for 25 per cent. Even Skyteam, whose big two members are Air France and Delta, control 4 per cent of slots. "It is possible to argue that most of the slots requirements could be met by transfers between partners. Consequently, the 'price' to BA and American would be small," he adds.

There is another factor which is increasing the urgency of the alliance talks and the open skies negotiations. This is the real possibility that Brussels will wrest authority from the UK for negotiating air service agreements on a multi-lateral basis before it can complete a bi-lateral open skies deal with the US.

Sir Michael Bishop, the chairman of British Midland, says: "I am very confident we will see a change in attitude. I believe we will see more progress in the next nine months on open skies than we have seen in the last six years."

The intense groundwork that BA is also now putting in to win Brussels over is also in stark contrast to its attitude five years ago when its presumption of EC approval immediately antagonised the then Competition Commissioner, Karel van Miert.

Mr Tarry says he is "reasonable optimistic" that an agreement is in sight at last after five hard years. But nobody in BA will say publicly that the winning line is in sight. There have been too many disappointments before. As one insider says: "The momentum is building but people are reluctant to be overtly optimistic because we have all been here before."