By Susan Cornwell WASHINGTON, Jan 4 (Reuters) - The gains from a proposed alliance between British Airways (BAY) and AMR Corp's (AMR) American Airlines may not outweigh the harm it could do to competition in the skies, a congressional report said on Friday. The proposed alliance would "dominate markets" between major U.S. cities and London if allowed to go ahead unfettered, the General Accounting Office, the audit arm of Congress, said in an analysis. The two airlines already control over half the nonstop flights between the United States and London -- and London's Heathrow airport is so congested, it would be difficult to open it up to more rival air carriers, the GAO said. "Gains from the alliance and from negotiating an open skies agreement with the UK (United Kingdom) may not offset the harms from reduced competition," the GAO report said. An American Airlines spokeswoman, however, said the report was "very limited in its analysis, and its observations were qualified, recognizing the potential benefits as well as concerns." American Airlines and British Airways are seeking antitrust immunity to closely coordinate their schedules and jointly set prices on flights between the United States and Britain. They are two of only four airlines allowed to serve Heathrow directly from the United States under the current bilateral aviation treaty between the two countries. The other two are Virgin Atlantic [VA.UL[ and UAL Corp's (UAL) United Airlines. The U.S. Transportation Department has said it would like to make a final decision on the proposed alliance early this year. GAO did not propose a specific remedy. The Justice Department last month urged rejection of the alliance unless rival U.S. carriers are granted slots for at least nine daily round trips to Heathrow from New York and Boston. The GAO report said that by law the government could only approve an alliance that substantially reduces competition if it provided public benefits that could not be met in another way. But the potential benefits from this deal were limited, it continued, noting that neither airline claimed there would be substantial savings that could be passed on to customers. OPPONENTS NOT SURPRISED Opponents of the proposed alliance said they were not surprised by the findings. "This confirms what we and others have said, that nothing has changed. It's about access to Heathrow," said Scott Yohe, senior vice president for government affairs at Delta Air Lines (DAL). The GAO analysis had been requested by Sen. Ernest Hollings, the South Carolina Democrat who chairs the Senate Commerce Committee, and Sen. John McCain of Arizona, the ranking Republican on the committee. American Airlines spokeswoman Sonja Whitemon said Sen. Hollings was "a long time critic of all airline alliances." Last month Hollings, clearly worried about the impact of the proposed alliance on competition, asked the U.S. government to delay its decision on the matter until the congressional report was finished. The United States has allowed previous airline alliances with antitrust immunity where a market-opening agreement was reached with the country of the foreign airline. It is considering such an "Open Skies" agreement with London that would open up Heathrow to other airlines. But the GAO report quoted the slot administrator at Heathrow as saying that opportunities to accomodate new entrant U.S. carriers in the near future are "extremely limited". "Without some regulatory remedy, the AA/BA alliance could dominate markets between major U.S. cities and London, especially in those that originate or terminate at London's Heathrow airport -- the preeminent airport in the United Kingdom," it said. The report noted that the United States and Britain may well have differing interests in expediting a bilateral open skies agreement and a decision on the proposed alliance. Britain might benefit from a speedy decision because of the likelihood of a European court ruling this year that could outlaw European Union nations from negotiating individual air agreements with non-EU countries, the GAO said. The U.S. Department of Transportation refused a similar petition by American and British Airways in 1999, citing insufficient access to Heathrow to conclude an open skies agreement. At that time the GAO said it saw a need for 23 daily round trip slots for competitors at Heathrow if the alliance was allowed to go ahead. ©2001 Reuters Limited.