AMR, BA drop alliance plans
graphic January 25, 2002: 6:08 p.m. ET

Say DOT demand to give up London slots to competitors too high a price.
By Staff Writer Chris Isidore
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  • Justice opposes American-BA alliance - Dec. 17, 2001
  • BA and American in talks on joint venture - Jun. 6, 2001
  • The three horse-race - Jun. 9, 2000
  • DOT rejects AA-BA airline alliance - Jul. 30, 1999
    NEW YORK (CNN/Money) - American Airlines and British Airways dropped their plans for a trans-Atlantic alliance Friday afternoon, saying conditions required by the U.S. Transportation Department to approve the deal were too demanding.

    The U.S. DOT approved an alliance earlier in the day, but said it would only do so if the two carriers gave up enough landing slots at London's Heathrow Airport to allow 16 round-trip flights a day by the airlines' major U.S. competitors.

    The move by the two carriers caused a cancellation late Friday of the next round of talks between U.S. and British transportation regulators on potential changes in the aviation agreement to liberalize rules on flights between the two countries.

    This is the second time that a potential alliance between the two carriers, the largest airlines in each country, has been called off due to U.S. demands for greater access to Heathrow. The agreement being sought, known as an "open skies" agreement, is already in place between the United States and most other nations with significant air travel.

    "The conditions laid down by the U.S. government do not make sense for either company," said a statement issued jointly by Donald Carty, CEO of American parent AMR Corp. (AMR: up $0.87 to $25.37, Research, Estimates), and Rod Eddington, CEO of British Airways (BAB: down $1.49 to $31.49, Research, Estimates). "We will not acquiesce to unrealistic, and in our view, unnecessary demands. For us, the price is just not right."

    The Transportation Department, which had authority on whether to grant the two airlines antitrust immunity, said the demands it required were reasonable and in the best interest of trans-Atlantic airline passengers.

    "Final approval of antitrust immunity, which depends on several conditions yet to be met, will greatly enhance competition in the nation's largest overseas market by allowing four new U.S. carriers to enter the London Heathrow market," said the DOT statement, issued before AMR and BA announced they had dropped their plans.

    Rejection of conditions no surprise

    Airline analysts said they were not surprised that BA, which stood to lose most of the slots if the DOT's demands were met, would not want to go ahead with the deal.

    "That's a lot of slots for BA to give up," said Ray Neidl, airline analyst with ABN Amro.

    Neidl also said it was possible that the two carriers would still try to convince negotiators to change their terms and revive the alliance plans.

    The above graphic shows the value of British Airway's American depositary receipts (ADRs).
    "I don't think the show is over," he said "My best guess is they'll try to work for a deal more favorable to them."

    The two carriers were already on record as opposing giving up slots to allow nine daily round-trips to Heathrow by competitors.

    The two airlines initially issued a noncommittal statement in reaction to the DOT ruling, saying they were studying the DOT ruling, while criticizing the demand to give up landing slots.

    "We view that decision as evidence that the DOT recognizes the consumer benefits of competing alliances," said the two airlines' statement. "We believe our alliance will deliver more choice, better products and better prices for transatlantic air travelers and will put both airlines on a level playing field with other alliances."

    A few hours later the release went out saying they were dropping the plans for an alliance altogether.

    Airline alliances require antitrust immunity allow carriers to work together on issues of pricing, schedules and marketing, virtually merging their international operations. Since trans-border airline mergers are still limited by most nations' laws, the alliances are the major way carriers can work together.

    Other U.S. carriers also opposed terms

    The DOT demand would have given six daily round-trip flights to Heathrow to Delta Air Lines (DAL: down $0.02 to $32.00, Research, Estimates), five flights to Continental Airlines (CAL: up $0.73 to $30.29, Research, Estimates), three flights to Northwest Airlines (NWAC: down $0.02 to $15.79, Research, Estimates), and two to US Airways (U: down $0.10 to $5.10, Research, Estimates).

    In addition it required British Midlands Airways, which has proposed to join an alliance with UAL Corp. (UAL: up $0.39 to $15.15, Research, Estimates) carrier United Airlines, to give up one of its daily round-trip flights to United.

    Even if AMR and BA had agreed to those requirements, the decision would not have been welcomed by the other U.S. carriers, which had been seeking far more slots at Heathrow. Continental issued a statement just before American and British Airways pulled the plug on the deal, calling the DOT tentative approval of the deal "a significant blow to trans-Atlantic air competition that will lead to higher airfares and poorer service for consumers on both sides of the Atlantic.

    "The world's largest airline and Europe's largest carrier contend they can't compete without the ability to fix prices and schedules and dominate the world's largest business market," said Continental's CEO Gordon Bethune in his statement. "This is a deal that just should not be approved under any circumstances."

    Delta issued a statement saying it favors further liberalization of U.S.-British air travel, but it said that far greater access to Heathrow for U.S. carriers is needed for such an agreement to work.

    American Airlines and British Airways began efforts to team up in 1996 but ceased attempts in 1999 when the issue of other U.S. carriers' access to Heathrow caused a breakdown in talks between the British and U.S. governments on liberalizing regulations on air travel between the two nations.

    Check airline stocks here

    Shares of AMR Corp. closed higher Friday, while shares of British Airways were lower in both London and U.S. trading. Shares of the other major U.S. carriers that would have gained access to Heathrow were mixed. graphic


    Justice opposes American-BA alliance - Dec. 17, 2001

    BA and American in talks on joint venture - Jun. 6, 2001

    The three horse-race - Jun. 9, 2000

    DOT rejects AA-BA airline alliance - Jul. 30, 1999