The Atlantic Update – Wednesday 17 October 2018

The Atlantic Update is published every Wednesday morning at 06:00 BST, providing a weekly bulletin on developments on transatlantic travel between Europe and North America.

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Delta, American Airlines, Virgin Atlantic & British Airways aircraft at London Heathrow
Delta, American Airlines, Virgin Atlantic & British Airways aircraft at London Heathrow (Image Credit: Heathrow)

Hello and welcome to the The Atlantic Update for Wednesday 17 October 2018, our weekly bulletin on transatlantic travel between Europe and North America.

Eyebrows were raised last week when the Competitions & Markets Authority announced an investigation into the transatlantic joint-venture between American Airlines, BA, Iberia and Finnair.

Given the history of the airline industry and cartel activity, you would be forgiven for thinking something was untoward.

However, the reality was more mundane than that.

In 2010, the airlines secured regulatory approval from the European Commission and the US Department of Transportation to operate an immunised joint-venture. This covers all flights between Europe and North America and allows the airlines to co-ordinate routes, schedules and fares.

This was a long held ambition of BA and American. They had twice previously attempted to secure regulatory approval. In 1999, a three year long effort proved futile. In 2002, BA and American balked at US regulator demands to hand-over 224 weekly take off and landing slots to new competitors.

In spite of vociferous protests from Virgin Atlantic, which emblazoned its aircraft with “No Way BA/AA”, BA and American finally secured regulatory approval with relatively modest concessions.

The approval was granted for a period of ten years. As the UK should, short of some sort of political earthquake over the next few months, leave the European Union on 29 March 2019 and the existing approvals are due to expire 2020, the Competition and Markets Authority should have some jurisdiction given American and BA’s presence at Heathrow.

When reviewing the competitive impact of joint-ventures, regulators have historically focused on city pairs, rather than the overall number of slots held at an airport. With this in mind, American and BA were required to make available, subject to certain conditions, slots to new entrants on overlapping routes. From London, these were Boston, Chicago, Miami and New York JFK.

This process of overseen by an independent trustee Mazars which recently advertised three slot pairs for London – New York. It is not known if anyone has taken these up.

Have consumers benefited from the joint-venture?

Arguably, yes.

Immediately on launch of the joint-venture, BA launched a new route to San Diego, which had previously been suspended twice. It has also launched new routes from London Heathrow to Austin, San Jose, New Orleans, Nashville and, from next year, Pittsburgh.

A fundamental principle of these joint-ventures is the concept of metal neutrality. Participating airlines must treat each other’s flights equally for marketing purposes. Flyers with an affinity to Oneworld also have the opportunity to “mix and match” flights.

So, for example, a passenger flying from London Heathrow to Miami in business class in the winter may prefer an American Airlines 777-300 for its business class seat with direct aisle access and WiFi for a day flight. They can also opt for a BA Airbus A380 flight for its quieter cabin and the privacy of a Club World window seat for a night flight.

US airlines have also significantly upgraded their previously inferior cabins with fully flat beds in business class and premium economy to bring them up to standard with their European counterparts.

There have also been many new entrants, notably Norwegian. Of course, some such as Primera Air were not successful. It also remains to be seen whether Reyjavik can become a major hub for transatlantic flights.

Fares also remain very competitive. BA and Virgin are currently offering lead-in economy return fares to many US destinations for less £300 return. Business class fares, at least for those who can book more than six months in advance and fly mid-week, are extremely competitive.

Has it harmed competition?

Arguably, it has harmed the competition.

American and BA have significantly higher frequencies than Delta and Virgin on many routes such as Boston and Miami. Whilst Delta has added many routes such as Portland and Salt Lake City in its ten years at Heathrow, there are signs that Virgin has reached a ceiling in its US network. It has suspended Chicago O’Hare which could not compete against 6 joint daily AA/BA services.

Delta is seeking to combine its joint-venture with Virgin with that of its long-standing joint-venture with Air France-KLM. It was clear from their submissions to regulators that the combined Delta and Virgin network at Heathrow is not enough to win corporate contracts and frequent flyers from American and BA. Hence why Delta and Virgin need to be able to tap into Air France-KLM’s global networks at Amsterdam and Paris Charles de Gaulle.

There has also been a very stark divergence in the financial performance of BA and Virgin Atlantic. Last year, Virgin Atlantic reported a loss of £28.4m. BA reported an operating profit of £1,754m carrying approximately 8 times as many passengers as Virgin Atlantic. Some of this can be explained by BA benefiting from cost synergies as a member of International Airlines Group. However, BA being able to win higher margin revenue from business customers must be a factor.

That said, what has in fact harmed rival airlines at Heathrow more was IAG buying bmi in 2012. This deprived Virgin Atlantic and many Star Alliance airlines of local connecting traffic at Heathrow, something which Virgin failed to replicate with Little Red.

What will happen next?

It is highly unlikely that the joint-venture won’t be renewed, particularly given Star Alliance and SkyTeam have their own long-standing joint-ventures.

Any challenge would be fiercely resisted given the importance of this to both American and BA.

However, there are signs that regulators on both sides of the atlantic may be taking a tougher approach. Regulatory approval for Aer Lingus to join the American and BA joint-venture seems to be taking quite some time. American Airlines and Qantas were denied regulatory approval for their trans-pacific joint-venture in 2016 and have reapplied this year. Should IAG’s bid for Norwegian go ahead it remains to be seen how regulators respond.

A straightforward renewal of the joint-venture should not be taken for granted and the commitments may be looked at again. The Competition and Markets Authority has made it clear that it is looking at the competitive impact of the joint-venture afresh. It is expected to conclude its initial findings in March 2019.

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