American signs deal with European airlines

BY STEVE ROTHWELL AND JOHN HUGHES

Bloomberg News

British Airways and American Airlines agreed to create an alliance that would allow them to operate as a single carrier on trans-Atlantic routes and dominate U.S. flights at London's Heathrow airport.

The airlines and Spain's Iberia Lineas Aereas de Espana will seek antitrust clearance to cooperate on flights between the United States, Mexico and Canada and the European Union, Switzerland and Norway, they said Thursday. The application also includes Finnair and Royal Jordanian Airlines.

British Airways' bid for closer ties with American is the third since 1996, with the last proposal scrapped in 2002 after U.S. regulators indicated they'd require the surrender of 16 Heathrow flights to rivals. The alliance would boost revenue as high fuel prices erode earnings and help the partners compete with Air France-KLM Group and Delta Air Lines, which won clearance for their alignment in April.

''Our proposed cooperation is an important step toward ensuring that we can compete effectively with rival alliances and manage through the challenges of record fuel prices and growing economic concerns,'' AMR Chief Executive Officer Gerard Arpey said in the statement. British Airways CEO Willie Walsh said the deal will coordinate schedules and provide travelers with more destinations and easier flight connections.

The airlines said they will apply for antitrust immunity to the U.S. Transportation Department and notify the appropriate regulatory authorities in the European Union.

An alliance with American, the largest U.S. carrier and No. 1 worldwide by traffic, would reinforce British Airways' status as the leading U.K. long-haul operator. No. 2 Virgin Atlantic, which competes on flights between Heathrow and New York, opposes the plan and owner Richard Branson has lobbied U.S. presidential candidates Barack Obama and John McCain to block it should they be elected.

British Airways CEO Walsh said a new ''open skies'' air services treaty introduced in March has opened Heathrow to more competition and that market dominance is not an issue. His airline and American were previously two of only four carriers permitted to fly to the United States from the airport, Europe's busiest. Walsh said on Aug. 1 he'd make an application for antitrust immunity within two weeks.

Adding Iberia to the partnership would extend the alliance's reach beyond the North Atlantic. Spain's largest airline has one of the largest networks between European and Latin America, and American is one of the biggest operators from the United States to Latin America. British Airways said July 29 that it planned to merge with Iberia, creating an airline with two fleets and a dual listing in London and Madrid.

The global airline industry is heading for losses that may exceed $6.1 billion this year, according to the International Air Transport Association. Consolidation and closer cooperation may help carriers avert bankruptcy and cut seats to spur demand.

''There are going to be a lot of costs you could cut, it gives them a much stronger Atlantic network,'' Nick Cunningham, an analyst at Evolution Securities in London, said before Thursday's announcement. ''Clearly there is quite a lot to play for.'' Cunningham has an ''add'' rating on British Airways.

Shares of London-based British Airways, Europe's third-largest airline, rose as much as 5.4 percent to 269.25 pence and was trading at 260.5 pence in the U.K. capital. The stock has declined 16 percent this year. Fort Worth, Texas-based AMR closed at $10.86 Wednesday and has dropped 23 percent this year.

All five airlines involved in the antitrust application are partners in the OneWorld global airline alliance.

Delta, leader of the SkyTeam alliance with Air France, is planning to merge with Northwest. Continental Airlines applied last month for U.S. antitrust immunity to join the Star Alliance and work with carriers including United Airlines and Deutsche Lufthansa. United, starting on March 30, was allowed antitrust immunity to collaborate with U.K. carrier BMI.

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