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BA-AA idea: 5 years and counting

By CNN's Jim Boulden

LONDON, England (CNN) -- The idea was first proposed when most people had never heard of the Internet or Osama bin Laden.

But now, five years later, British Airways and American Airlines still have a dream: to integrate all their services across the North Atlantic, the most profitable of all airline routes. Nearly half of all European travellers to the U.S. go through the UK.

The BA-AA alliance idea first took flight in 1996 when many of their competitors were striking similar deals.

Delta and Air France, Lufthansa and United, KLM and Northwest -- all are building alliances with broad sharing agreements. Yet BA and AA are still waiting for approval from regulators to join forces.

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The first attempt was blocked in 1999 when regulators and competitors balked at allowing two of the world's biggest and most profitable airlines to share aircraft and routes and cut costs by integrating their systems and employees.

The deal is critical for BA, which is losing domestic business to swifter low-cost airlines. It also has announced 5,200 job cuts after it lost some $71 million in the wake of the September 11 terrorist attacks.

"British Airways is going to have to focus more and more of its activity on the long-haul markets. And as such, the greater share of their overall profitability will be generated at the North Atlantic market," said Chris Partridge of Deutsche Bank.

Competitors of BA and AA have pleaded for years not to allow the two to get anti-trust immunity from U.S. authorities and the European Union, a necessary step before the deal can go ahead.

Virgin Atlantic and U.S. carriers Delta, Northwest and Continental have publicly apposed the alliance. In a letter to Washington, the three U.S. carriers said the deal would create "the most powerful and anti-competitive alliance in international aviation history."

The U.S. Justice Department says BA and AA should give up 126 take-off and landing slots used each week on the North Atlantic route between Heathrow and U.S. airports. By the summer of 2002, there will be more than 1,000 slots used by BA, AA, United Airlines and Virgin Atlantic.

Delta, Northwest and Continental would love to take some of those slots to offer flights at Heathrow on top of their daily flights from Gatwick, London's second-tier airport.

BA says it shouldn't have to give up any slots because, it claims, the economics of aviation have changed in the past few years and competitors all have alliances already approved by regulators.

Still, the whole slot issue appears to be a negotiating stance, and there will most likely have to be some take-offs and landings relinquished for the alliance to be approved.

Open skies

Air travel is one of the most heavily regulated industries. A current agreement dating from 1977 allows only four airlines, two British and two American, to fly out of Heathrow. These restrictions could be lifted soon, however.

"I think there is will, political and governmental, for a deal. And its about time," says Chris Tarry of Commerzbank.

The AA-BA alliance talks are going on while Washington and London have been negotiating an "open skies" agreement for the last 15 years. Those talks are now tied to the alliance negotiations. Either both will get the go ahead, or both will fail.

Apparently, though, the very definition of "open skies" has always been under discussion.

European carriers want access to U.S. domestic routes, and to fly U.S. government employees. But U.S. law says only U.S. carriers can fly internal routes, and that government and military workers must fly domestic carriers.

Foreign control of a U.S. airline is also off-limits.

Time is running out for the talks. In 2002, the EU will negotiate as one in any alliance talks, taking the British government out of the equation.

BA says it's still confident its partnership with AA will get anti-trust immunity. Competitors say they may sue if the alliance is given wings.


• Can 'open skies' really take off?
October 23, 2001

• British Airways
• American Airlines

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