BA braced for merger ruling

AFTER MORE than two years of pondering and posturing, the European Commission seems set to make public on 1 July its preliminary decision on British Airways' planned alliance with American Airlines. BA's shares fell almost 5 per cent on Friday, anticipating that the decision from Brussels will be bad news for Bob Ayling's airline which counts on transatlantic flights to generate 80 per cent of its revenue.

The markets might have over-reacted. According to a senior Brussels source: "The decision broadly says yes, the alliance can go ahead, providing certain conditions are met." While the devil is in the detail, analysts believe the Commission is not going to be as tough as it indicated in the early days of the investigation. Then, EU Competition Commissioner Karel Van Miert said he believed BA would have to give up 350 slots at Heathrow. "We have had an indication from the EC they will move to approve it on reasonable terms - possibly as few 230 slots at Heathrow," said Chris Tarry, transport analyst with Dresdner Kleinwort Benson. He points out that while the investigation has been under way, BA has strengthened its position on transatlantic routes where it and American already have 60 per cent of the market, with the frequencies of BA flights to the US going up by 23 per cent and business and first-class fares going up by 25 per cent.

The Commission still has to make a final decision in the autumn after it has consulted with BA's rivals, the Department of Trade and Industry and competition authorities in the US. The final say on the alliance will rest with the latter two bodies, despite the attention given to Brussels' role in the alliance. The US government is insisting on an open skies accord with the UK, designed to give other US carriers greater access to Heathrow as a condition for its approval of the alliance. These negotiations still have to begin and are unlikely to be concluded before October at the earliest.

Meanwhile, British Airways has had to stand helpless as its biggest European rival, Germany's Lufthansa, continues to reap the profits from its so- called Star Alliance with United Airlines in the US and several other airlines around the world. The German company said last week its gains from alliances contributed as much as 10 per cent more to its operating profit last year.

The Commission will also rule on Star Alliance on 1 July and is expected to ask the German airline to cede to competitors' routes to Washington and Chicago.

British Airways is still insisting it will walk away from the alliance with American if the terms set by the regulators are too harsh. "We've always said it is not a deal at any price," said a spokesman for British Airways.

Analysts believe otherwise. "I think they will take pretty much anything they have to take," said Matthew Owen, transport analyst with HSBC. "There are no other US carriers left to link up with."