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August 4, 2001

British Airways and American Will Propose New Alliance

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LONDON, Aug. 3 Two years after regulators blocked their initial plan to form an alliance, British Airways (news/quote) and American Airlines said today that they would again seek approval to offer customers one-stop shopping services like joint fare information, coordinated flight schedules and reciprocal frequent flier benefits.

To make their case to antitrust regulators in the United States and Europe, the airlines plan to argue that the competitive landscape has changed since then, executives from both companies said today.

They acknowledged that any agreement would be contingent on the renegotiation of an airline treaty that would permit more United States carriers to fly to Heathrow Airport in London. Under the current treaty, only American Airlines, owned by the AMR Corporation (news/quote), and United Airlines, part of the UAL Corporation (news/quote), have access to Heathrow. Discussions pertaining to an "open skies accord," which would permit United States and British airlines to fly to any destination in either country, have been intermittent for years, but an agreement has remained elusive.

"What is different is the regulatory and political climate in which" this agreement will be considered, said Will Ris, the senior vice president for government affairs at American Airlines.

A new administration in Washington coupled with a changing regulatory environment in Europe are putting the alliance in a new light, analysts said. And British Airways has a new chief executive, Rodd Eddington.

At the same time, heightened competition at Heathrow and, more generally, on routes between Europe and the United States will make it easier for British Airways and American Airlines to make their case, analysts say.

The deal would be subject to approval by regulators from the United States Department of Transportation and their counterparts in Britain, and the European Union's competition commissioner, Mario Monti.

"They're likely to take another shot with what they perceive to be a more liberal administration," said Glenn Manishin, an antitrust lawyer with Patton Boggs in Washington.

Mr. Manishin added, however, that President Bush's more lenient approach to antitrust legislation, compared with that of the previous administration, does not necessarily translate into the realm of international trade. In that arena, he continued, Mr. Bush has been seen as more protective of United States interests, a stance that could complicate the negotiation of a new airline treaty.

Initial discussions in June between Norman Y. Mineta, the United States secretary of transportation, and John Prescott, Britain's deputy prime minister, aimed at hammering out an open skies agreement produced favorable results, and a second meeting is scheduled for the fall.

Air France and Delta Airlines are expected to seek antitrust immunity for their alliance, and that could help pave the way for a British Airways- American deal, analysts said. Immunity for Air France and Delta would also be dependent on France's signing an open skies agreement with the United States.

Another factor could be the proliferation of other partnerships like the Star Alliance, which includes United, Deutsche Lufthansa, Singapore Airlines (news/quote) and British Midland. It controls 27 percent of the slots at Heathrow, close to the 30 percent held by British Airways, and not far behind the 39 percent controlled by British Airways and American combined.

Andrew Cahn, the director of industry and government affairs for British Airways, said that such heightened competition in London puts British Airways at a disadvantage, especially when compared with Air France which controls 55 percent of the slots at Charles de Gaulle Airport in Paris, and Lufthansa, which has close to 60 percent of the slots at the Frankfurt airport. Those airlines, among others in Continental Europe, are offering more direct flights to the United States, which is eating into the core market of British Airways.

"The marketplace across the Atlantic has gotten more competitive," Mr. Cahn said.

British Airways and American Airlines held informal discussions with regulators on both sides of the Atlantic before deciding to push ahead with their latest proposal, which is not as broad as their original plan. Only 9 trans-Atlantic routes would share profits, compared with more than 30 in the initial plan. And there are no plans to combine the work forces of the two airlines, a measure included in the original deal. Nevertheless, closer ties would permit the airlines to save money by sharing crucial price and traffic information, something that other alliances with antitrust immunity have benefited from for years.

Despite such changes, analysts and industry executives say, British Airways and American will still face steep hurdles in trying to win regulatory support.

The original discussions fell apart after British Airways refused to forfeit 267 slots at Heathrow, a concession regulators on both sides of the Atlantic are still likely to demand, although the exact number of slots to be given up may vary.

"We are starting from scratch with regulators," Mr. Cahn said. "But this is not a deal we would do at any price."

Even if British Airways gave up enough slots to appease regulators, the tight constraints at Heathrow would make it difficult for new competitors to enter the market. Unlike other airports in Continental Europe, Heathrow has been prevented by environmental regulations from adding runways to keep up with demand.

"You can open up an airport and grant a carrier rights to serve that airport, but you have to have the slots, the gates and the counter space," said Michael J. Linenberg, an analyst at Merrill Lynch (news/quote).

Further complicating matters is a review by the European Commission, the executive arm of the European Union, into the airline agreements the United States has struck with individual European countries. The commission wants to negotiate with the United States on behalf of all its 15 members, saying that one pan- European airline treaty would be the best way to open markets.

The proposed combination also is expected to face opposition from some of British Airways' closest competitors. Sir Richard Branson, the chairman of Virgin Atlantic, said today that nothing had changed since the first proposal failed. "We will fight it tooth and nail," he said.

American and British Airways have continued to work together in limited ways since the failure of their 1996 deal, calling their confederation the OneWorld alliance.

The new alliance proposal would permit the airlines to list each other's flights on their schedules, to work together on prices and advertising and to share profits on nine routes between London and Boston; Chicago; Dallas-Fort Worth; Los Angeles; Miami; New York; Raleigh-Durham, N.C.; St. Louis; and San Francisco.

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