American British Continental: easy as ABC. But does it add up


As the drowning men that constitute the US network airline industry flounder around for a miracle solution, British Airways starts to look a lot more attractive than its recent reflection in the windows of Heathrow’s Terminal 3.

American, unique among US majors in that it hasn’t relied on Chapter 11 bankruptcy to restructure, has long been a bilateral partner of BA in the oneworld alliance. Meanwhile Continental, which has extensive experience with bankruptcy reconstruction, has been sidelined by the Skyteam group, as Delta and Northwest try to clamber onto their leaky merger lifeboat. There apparently isn’t enough room for three US airlines there – nor, in reality, even for two.

And, after examining and rejecting a merger with Star Alliance’s United, Continental is left with only oneworld, led in Europe by BA, as an option. Negotiating point number one for BA.

The British carrier has been left behind by its continental rivals, Lufthansa and Air France, in European expansion and is starting to look somewhat fragile as a global competitor. But when it comes to dealing with US airlines, BA’s biggest liability also becomes its greatest asset; the carrier’s Heathrow base was last week described by American Airlines’ CEO as the worst airport American operates to in Europe.

However, Heathrow Airport has not remained popular because it is a pretty place, but because it remains the most valuable US gateway to Europe. And British Airways holds 42% of all slots at the hub. American and Continental would add another 3% or so – but a close, antitrust-free, alliance would have a considerably greater impact on US-Heathrow slots. Negotiating point number two for BA.

Continental is also motivated by open skies on the Atlantic. US majors are rushing to establish positions offshore. One reason for the scramble can be seen from the slumping yields that US airlines are generating in their highly competitive domestic market. Each of the Pacific and Atlantic routes – with their much longer average stage lengths - are now delivering equivalent returns.

But the leverage will only be achievable if suitable partnerships can be established with European airlines. Indeed, Continental is probably much better advised to be exploring European airline links than merger with another US airline. And American, which is starting to feel serious pain, would be very happy to lock in a closer BA link, as the various parties quickly line up in what could be long term relationships.

Even assuming that the suggested ABC combination would get by the antitrust and competition authorities – not a certainty, without relinquishing slots – Willie Walsh might be well be playing coy. Despite increased access to Heathrow slots under the EU-US open skies agreement, British Airways is still sitting pretty. Mr Walsh has loudly called for a rapid move to allow cross-border mergers with US carriers. Yet this sort of common sense logic is likely to fall on deaf ears in the reactionary and nationalistic fervour of the US election process.

The fact is that Europeans have the financial strength to acquire key stakes in several US airlines, who are increasingly desperate for capital. The timing is right, with a continuing weak dollar and depressed stock prices. But the ones the European airlines want to buy are not necessarily the ones who want to be bought. Meanwhile, Mr Walsh might be well advised to keep his feet dry and wait to see what the tide washes up.

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