Oneworld Partners Right To Unite

In announcing a three-way tie up, American Airlines (AA), British Airways (BA) and Iberia (IB) finally stamped a mark of authority not only in their quest to seek antitrust immunity for pooling their flights across the Atlantic, but they have also forced the hands of the regulators to work in their favour.

Since the introduction of the EU-US Open Skies agreement in late March 2008, the opposition from the likes of Virgin Atlantic to this deal is more than likely to fall on deaf ground, and rightfully so.

Having already seen two previous attempts between AA and BA collapse at the hands of biased EU bureaucrats, the Open Skies treaty has paved the way for the regulatory authorities to allow the major partners of the oneworld alliance to finally get the green light, having previously approved the likes of the Air France and KLM merger and a raft of antitrust agreements for the rival Star Alliance and SkyTeam Alliance partner airlines.

Image copyright of FleetBuzz Editorial.com

“This alliance would give them a stranglehold on Heathrow-US flights. BA and AA will not face enough competition on their huge network to stop them raising prices,” says Virgin Atlantic CEO, Steve Ridgway.

“If BA/AA were to receive clearance, UK consumers would soon find their fares to the US rising because there would be less competition,” says Sir Richard Branson.

Quite how Branson came to that conclusion is as bizarre as the claim itself given that Continental Airlines, Delta Airlines, Northwest Airlines and US Airways commenced services to Heathrow within hours of the EU-US Open Skies treaty coming into force. The consumer then, certain has choice, and as alliances develop and weaker airlines face demise, the opportunity for these new entrants to offer more flights to and from Heathrow certainly dispels Branson’s falsified claims.

Image courtesy of Delta Airlines

While BA had openly shown concern with the way its Heathrow base would be opened up to such new competition, the airline has used the Open Skies treaty to its advantage, rather than continually whine about it, as Branson and Virgin have done continually for nearly two or more years.

Firstly, it took the radical step to launch Paris-based, OpenSkies - a premium carrier offering direct flights to New York in stark competition with Air France. It consolidated that product by purchasing French airline, L’Avion.

The disastrous move to Terminal 5 was a headache born out of inadequate training and BAA’s inept attitude to take responsibility for essentially what amounted to a building not fully fit for operation.

More recently, BA and partner Iberia have revealed that the two are in detailed negotiations to merge. Despite reporting an 88% drop in profits, BA has continued to invest in order to counter both rising fuel costs and the challenge of new US airlines operating into its Heathrow hub.

Its recent order for 777-300ER’s is a statement of that intent.

Does Virgin’s stance against BA hold credence?

Quite simply - no.

In lobbying the two US Presidential candidates against the tie up between AA and BA, Virgin underlines its own incompetencies yet has done virtually nothing to rectify it. Aside from the PR exercise to demonstrate biofuels on one engine of a 747-400, Singapore Airlines, who hold 49% of Virgin repeatedly expresses complete dissatisfaction at the carrier.

To this end, Singapore Airlines has failed to find a buyer for its stake and now holds on in the hope someone can put it out of its misery.

“There is nothing to stop Virgin attempting to do something similar with a US airline or, now that Open Skies is an up and running, forging closer links with an existing European legacy carrier that has Heathrow based slots such as Lufthansa,” says Howard Wheeldon, senior strategist at BGC Partners.

Having dissolved a long standing partnership with the then named US Air, BA’s access into the domestic scene in the United States has been a low key affair.

“The truth is that BA needs American far more than American probably needs BA. That is not to say that having BA alongside doesn’t provide huge potential advantages for American and that well exceed those available within the existing ten member ‘oneworld’ alliance. Put together in its modern form by Bob Crandall back in the early eighties American is a formidable partner for any airline,” says Wheeldon.

Image courtesy of American Airlines

Virgin also fails to acknowledge the entry of new competition since Open Skies came into being. Northwest Airlines, Continental Airlines, US Airways, Delta Airlines and even Air France have all launched new services from an already crowded Heathrow hub.

It is precisely this reason that Willie Walsh stands resolute in that he will not relinquish any slots at Heathrow to placate regulators.

“There should be no slot remedy. I don’t see how it could be justified,”  states Walsh.

The advent of more Airbus A380 flights coupled with Boeing 787’s, the mix of hub and point-to-point flights from the airport serve as a timely reminder that competition has increased and will continue to increase. Virgins broken-record like complaints would gain more credence if the opposite were true - but it isn’t.

The EU has almost breezed through applications from Star Alliance and SkyTeam Alliance requests for antitrust immunity - to stall on this deal would be a hypocritical move given the EU’s petulant insistence that an overarching agreement between it and the US was the deal it so desperately sought to consign the Bermuda Two deal into the history dustbin.

“We believe our proposed cooperation is an important step towards ensuring that we can compete effectively with rival alliances and manage through the challenges of record fuel prices and growing economic concerns,” says Gerard Arpey, chairman and chief executive of AMR Corp., the parent company of American Airlines.

Backing up Walsh’s earlier statement on slots, Arpey was equally forthright and blunt.

“There is no rational basis for us to give up slots,” he said.

In short, AA and BA have no need or reason to give up any slots under the new Open Skies treaty. The new US carriers now flying into Heathrow clearly did not have a problem buying up slots from other carriers or using slots held by other partner airlines - neither then, is it BA’s or AA’s problem if these same carriers cannot acquire more.

Deliberate intervention to skew the allocation of slots is not free market economics and any EU ruling to demand slot disposal by BA and AA will bring into question, if not disrepute, the approvals given to other antitrust applications.

Willie Walsh’s statement had sharp undertones directed squarely at Virgin.

“We are applying for EU US anti-trust immunity in a changed regulatory world where London Heathrow is open to any US or EU airline that wants to fly to the United States and where rival alliances have immunity,” he said.

“Having gotten your own operation in the transcontinental US markets, you do not want to allow British Airways and your US competitors equivalent opportunities,” says former American Airlines CEO, Bob Crandall.

“Had you opposed the other alliances, or stayed out of the US market, your protestations might have had some validity. As the world is, however, you are merely seeking protection from the very competition you inflict on others.“

To coin a good old English phrase, Virgin is “barking up the wrong tree”.

“Since ‘Open Skies’ which abolished restrictions on the number of airlines flying between the US and EU came into force last March no less than five new competitor airlines are flying between the US and Heathrow. The larger Star alliance that has Lufthansa, United, BMI and Singapore Airlines already has 35% of the US/EU market and SkyTeam that includes Air France, Delta and Northwest has 28%. Against this, oneworld which is the only one of the three that does not have anti-trust immunity has only 21% of this market,” says Wheeldon.

BMI boss Sir Michael Bishop is the one unlikely figure that has grown to accept alliances and the quest for antitrust immunity.

“The path along which BA is now proceeding is no different. BA and Iberia are seeking to merge in the same way that Air France and KLM have. And they are seeking immunity in the same way as Air France/KLM have done with North-West in the US and Lufthansa has done with United.

“I don’t think this is anything new. In fact it is more likely to be successful because there are precedents for it now.

They’re catching up with what’s been going on for the past three or four years,” he says in an interview with the Telegraph.

If Virgin had spent as much money being passenger focussed as it does wasting it on “No Way BA/AA“  and “4 engines 4 long haul” slogans, endorsed by Airbus’ safety scaremongering, we might be forgiven for thinking Sir Richard Branson may actually have a point.

Image courtesy of Boeing

As it stands, he doesn’t - equally, the regulators too have less justification to hinder this deal given their approval of other, rival alliances.

“The advertising campaign that Sir Richard proposes is nothing but a waste of money – money that his main shareholder Singapore Airlines can surely ill afford to be wasting. Yes, it makes for great publicity and no doubt it will be easy to reminisce on old bully boy tactics reputedly used by BA twenty odd years ago.

So be it but live in a different age and corporate world to the one that Sir Richard likes to embrace and it is one that demands radical action to meet new and more radical demands. The situation on the ‘street’ for airlines is best considered as dire right now. No airline can be safe but the least safe are those that refuse to adapt. BA at least can hardly be accused of that,” says Wheeldon.

In short, the quicker Virgin accepts the realities of the changed marketplace, the better job it can do by concentrating on serving its customers, or indeed, those customers it wrongfully alleges will bear the brunt of higher ticket prices on the back of this three way airline deal.

Right now, however, Branson and Virgin Atlantic quite simply look idiotic.

3 comments September 22nd, 2008