NYTimes.com Article: U.S. Criticizes Trans-Atlantic Air Alliance

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U.S. Criticizes Trans-Atlantic Air Alliance

December 18, 2001

By STEPHEN LABATON




WASHINGTON, Dec. 17 - The Justice Department urged
transportation officials today to reject a proposed
alliance between American Airlines and British Airways
(news/quote) unless the two carriers sell some landing and
takeoff rights to increase competition on routes between
the United States and London.

The proposed alliance has put the Bush administration in a
difficult position as it tries to sort out a fight over
routes that are among the most profitable in the industry.
On one side are two of the world's largest airlines, one of
which has close connections to President Bush, and the
British government. Prime Minister Tony Blair has lobbied
the White House on behalf of the alliance. On the other
side is most of the rest of the industry, which has been
largely shut out of the market.

Antitrust prosecutors at the Justice Department strongly
recommended the rejection of the deal unless there were
divestitures of the rights to at least 126 trans-Atlantic
flights each week. They concluded that the proposed
combination would give the two airlines well over 50
percent of the flights between many American cities and
Heathrow Airport in London, and significantly more than
that for the even more lucrative market for business
travelers.

"The alliance threatens a substantial loss of competition
which would likely result in higher air fares and reduced
service," the Justice Department said in comments filed
with the Transportation Department, which makes the
ultimate decision about whether to approve, reject or
modify the deal.

"Unless D.O.T. requires divestiture of enough slots for new
entrants to offer nine daily round trips to London from New
York and Boston, as well as substantial new air service
from other U.S. cities, the department would oppose the
transaction."

It is unknown how today's analysis will affect the outcome
of a ferocious lobbying and regulatory battle between the
two carriers and their rivals.

In a joint statement tonight, British Airways and American
Airlines, a unit of the AMR Corporation (news/quote),
suggested that they would be unwilling to give up the slots
that the Justice Department said would, at a minimum, be
necessary to avoid antitrust problems. Still, some analysts
and rivals suggested that the Justice Department's analysis
could nonetheless clear the way for a deal that would gain
the approval of transportation officials. Other rivals said
that the report's analysis and its skepticism on the
competitive landscape of the industry was an unexpected
blow to the two carriers.

Trans-Atlantic flights to Heathrow Airport are the most
profitable in the industry, in large part because only four
airlines provide such service, with the majority of flights
from American and British Airways. The other two to provide
trans-Atlantic service to Heathrow are Virgin Atlantic
Airways and United Airlines, a subsidiary of the UAL
Corporation (news/quote).

Delta Air Lines (news/quote), Continental Airlines
(news/quote), Northwest Airlines (news/quote) and Virgin
have led the opposition to the proposed alliance.

In a joint statement issued after the report was filed,
British Airways and American commended the Justice
Department for supporting a new so-called open skies
agreement between the United States and Britain to
liberalize restrictions on routes and increase competition.
But they criticized the recommendation that they be forced
to sell slots to win antitrust immunity.

"We believe the D.O.J.-proposed divestiture of 126 weekly
slots is inappropriate," the carriers said. "D.O.J.
underestimated the commercial availability of slots at
Heathrow and the competitive advantages already being
enjoyed by other global alliance networks. Most
significantly, D.O.J. did not consider the potential
benefits of a new U.S.- U.K. Open Skies agreement."

Critics of the alliance applauded the report and
recommendations today. "The Department of Justice really in
our judgment has corroborated the assertions" made by the
primary opponents of the antitrust immunity application,
said Douglas M. Steenland, president of Northwest Airlines.
"They find that Heathrow is slot-constrained and absent
divestiture of significant new slots there is no way new
entrants can fly to Heathrow. They come up with a proposed
remedy with specific number of slots for New York and
Boston. Then they say the Department of Transportation has
to come up with an additional number of slots and needs to
provide additional remedies."

The Justice Department report surprised some rivals of the
two airlines, who for weeks have raised concerns that the
Bush administration, and in particular, the Justice
Department, would buckle under intense pressure from the
British government to grant antitrust immunity to American
and British Airways, the largest carrier in the world and
in Europe, respectively. While the Justice Department
report is not the final word, it puts significant pressure
on the Transportation Department, which has the final say
over the alliance.

In a visit to the United States earlier this fall, Mr.
Blair pressed President Bush and his senior advisers to
approve the request by British Airways and American. At the
time, the White House was presenting its own wish list to
the British government for assistance in the war in
Afghanistan.

Mr. Blair's request prompted concerns that the Justice
Department, which traditionally provides antitrust analysis
for such alliances to the Transportation Department, would
bow out of the process, or water down its recommendations.
A senior antitrust official said today that the division
had received no guidance from other quarters of the
administration or the White House about the report.

The two airlines have tried for years to consummate an
alliance to share revenue and coordinate schedules and
fares. Three years ago, the Justice Department urged that
the deal be rejected after it came under heavy criticism
from rivals.

Some critics of the alliance today noted that the Clinton
administration had recommended the divestiture of at least
336 weekly flights, which killed an earlier joint venture
proposal, and that the antitrust division at the Justice
Department should have made a similar proposal today.

"The Justice Department's analysis is terrific, but the
solution is not," said Kenneth S. Levine, a lawyer
representing Virgin Atlantic. "The solution should be
substantially more slots divested from American and British
Airways."

But Mr. Steenland, president of Northwest, said that a
close reading of the report strongly suggested that a
similar divestiture would be needed to satisfy the
anticompetitive concerns expressed today.

http://www.nytimes.com/2001/12/18/business/18AIR.html?ex=1009694155&ei=1&en=dc450172fb8ebfed



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