Sir Richard Branson is launching a campaign to try to block the proposed tie-up between British Airways (BA) and American Airlines (AA).

The Virgin Atlantic boss has already attacked the plans, claiming it would create a “monster monopoly”.

British Airways counters that the proposed tie-up would be good news for both passengers and the wider industry.

A growing number of global airlines are seeking mergers or other forms of tie-ups as they battle high fuel prices.

‘Major battle’

“We are going to wage a major battle to stop the two largest airlines in the world effectively working as one carrier,” Sir Richard told the BBC’s Today programme.

“Allowing the two biggest carriers in the world to effectively act as one…will be anti-competitive.”

British Airways and its US rival are not aiming for a full merger.

Rather, they aim to be able to agree fares, routes and schedules.

Also speaking to the Today programme, BA chief executive Willie Walsh countered that a tie-up with AA would be “great news for the consumer”.

“This is an issue that will be accessed by the competition regulators, the experts in this field,” he said.

BA has tried and failed to form a tie-up with AA twice before, in 1997 and 2001.

Mr Walsh said this time around he was confident the deal would gain regulatory approval due to the increased competition in the airline industry following the Open Skies deal between the US and European Union.

Open Skies – which came into force in March this year – has ended limits on which airlines can fly between the US and Europe.

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They are two of global aviation’s biggest birds – and by cosying up close to each other they hope to keep themselves out of the turbulence rocking the world’s airlines, especially on key transatlantic routes.

British Airways and American Airlines are effectively applying for the right to break the US laws that prevent companies from co-operating too closely.

Anti-trust immunity, as it’s known, is designed to stop cartels unfairly dominating markets and it is a big issue in aviation.

The reason is that of the three big airline alliances operating out of Heathrow Airport, two have anti-trust immunity.

Skyteam, including Delta, Northwest and Air France is one. The Star Alliance including Continental and US Airways is the other.

But One World – the British Airways and American Airlines alliance – is the third, with no such immunity.

Fixing fares

If BA and AA can persuade the US Department of Transportation of their case they will be able to merge in all but name.

Incidentally they can’t actually merge because of American laws preventing foreign ownership of US airlines.

“A BA/AA alliance would be bad for passengers, bad for competition and bad for the UK and US aviation industry” Sir Richard Branson Virgin Atlantic

But it would mean BA and AA could fix their fares, routes and schedules together.

A passenger using the BA website would also be able to buy through tickets on American to some of the smallest US destinations.

They would get BA air miles the whole way. Theoretically their bags would be checked all the way through, as if there was just one airline.

All of which may sound good for passengers.

But what happens when you let two massive airlines become practically one even more gigantic carrier?

‘Too dominant’

Well this is what Sir Richard Branson – chief executive of BA’s eternal rival Virgin Atlantic – says about it.

“Make no mistake. A BA/AA alliance would be bad for passengers, bad for competition and bad for the UK and US aviation industry”.

Virgin believes that BA and AA are already too dominant – controlling 200,000 of the 480,000 take-off and landing slots at Heathrow.

And 62% of passengers travelling between Britain and America use one of the airlines.

This, Virgin says, is an advantage at Heathrow so big that the two shouldn’t get anti-trust immunity even though their rivals have it.

“BA would argue that by reducing the number and synchronising services they could provide a more efficient operation and reduce costs” Peter Morris Aviation analyst

For the transatlantic partners this tie-up has been on the wish-list for years.

They have already applied twice, in 1997 and 2001 but were told they would have to give up too many slots across the Atlantic to make it acceptable to them.

But now we have the Open Skies agreement which gives rights for a wider variety of airlines to fly between the US and the UK.

British Airways says this means that there is now more competition, and that BA and AA should be given a freer hand.

Dire outlook

“I think it’s a question of just how much is enough competition?”, says aviation analyst Peter Morris of Ascend.

“If you look out of the UK you’ve already got 21 carriers operating scheduled services at the moment across the North Atlantic.

“I think BA would argue that by reducing the number and synchronising services they could provide a more efficient operation and reduce costs.”

Regardless of the historical aspiration, the dire situation facing the world’s airlines provides an added spur for BA and AA to do the deal.

Look at it from the American side.

“Few of us thought that we would ever look back fondly at $90 a barrel oil,” American Airlines’ chief executive Gerard Arpey told his shareholders in May.

“But, as you all know, the rise in the price of oil – and by extension jet fuel – has accelerated during the past several months to extraordinary levels.

“The slowing US economy and our industry’s persistent overcapacity, have prevented us, or any other airline, from pricing our product in a way that reflects our skyrocketing costs.”

No quick answer

That is the problem in a nutshell.

Its not quite as bad for British Airways, which made profits of nearly £900m last year despite an air crash and a PR disaster at Terminal Five.

But BA is facing fuel bills of up to £3bn this year.

Sir Richard Branson has already written to America’s two presidential candidates, one of whom will end up making the decision, to persuade them to say no.

BA and AA have tried – and failed – twice before to have a tie-up.

The problem for BA and AA is that both Barak Obama and John McCain are pretty protectionist.

Will their desire to help a struggling American Airlines overcome their reluctance to give British Airways a foothold in a big American company?

The hiatus caused by the US election means the US authorities are unlikely to give a quick answer.

Uncertainty

And even if they do give the go-ahead, the deal would certainly involve British Airways and American Airways giving up slots across the Atlantic.

But which slots?

Answering that question is likely to involve lawyers, regulators and a lot of wrangling.

Yet the fate of this proposed deal is worth watching closely.

The basic rule of the aviation market is that when the going gets tough, airlines either consolidate by merging or finding allies, radically cut costs, or go under.

BA and AA now wait to find out how far they can go in protecting themselves from an uncertain few years.

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British Airways says it has sealed an alliance with American Airlines that will allow the two carriers to fix fares, routes and schedules together.

The move will also include Spain’s Iberia, which is merging with BA.

With aviation fuel prices near record levels and spending on air travel slowing, airlines are looking at ways to cut costs.

But the carriers will have to persuade the US that the deal does not break US rules on foreign ownership of airlines.

Challenges

Under the business agreement, the three airlines will co-operate on flights between the US, Mexico and Canada and the EU, Switzerland and Norway.

“We know what dominant players do – they snuff out competition, they raise prices and they become even more dominant” Paul Charles Virgin Atlantic

Wrangles over BA ambition

“We believe our proposed co-operation is an important step towards ensuring that we can compete effectively with rival alliances and manage through the challenges of record fuel prices and growing economic concerns,” said Gerard Arpey, chairman and chief executive of AMR Corp, the parent company of American Airlines.

However, BA’s rival Virgin Atlantic said the plan would reduce competition in the airline industry.

“What they’re proposing is to create the world’s biggest airline with American Airlines,” said Virgin’s Paul Charles.

“But we know what dominant players do – they snuff out competition, they raise prices and they become even more dominant.”

Competition

The airlines said they planned to file for anti-trust immunity from the US Department of Transportation and they would also notify European regulators.

They need immunity from US anti-trust rules, which prevent airlines working together to unfairly dominate the market.

BA says many of its rivals at Heathrow already have this immunity, but Virgin Atlantic argues BA controls nearly half of all the landing and take-off slots from the airport and already has too much power as it is.

However, BA chief executive Willie Walsh said: “This strategic relationship strengthens competition by providing consumers with easier journeys to more destinations, with better aligned schedules and frequencies.”

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Four current and former British Airways executives have been charged with involvement in fixing the prices of plane fuel surcharges.

BA’s head of sales Andrew Crawley and ex-commercial director Martin George are due to appear before City of London Magistrates Court on 24 September.

Also due up are former communications head Iain Burns and former UK and Ireland sales chief Alan Burnett.

If convicted, the men could face prison sentences of up to five years.

‘Unfounded’

Mr George and Mr Burns resigned from BA in 2006, while Mr Burnett retired in the same year. Mr Crawley remains in his role.

The charges have been brought by the Office of Fair Trading (OFT).

The men are accused of “having dishonestly agreed with others to make or implement arrangements which directly or indirectly fixed the price for the supply in the UK of passenger air transport services by BA and Virgin Atlantic” between July 2004 and April 2006.

In a statement, Mr George said that the allegations were “unfounded”.

“I have denied any wrongdoing from the outset and I remain totally committed to proving my innocence.”

Whistle blowers

The OFT has already fined BA £121.5m for colluding with Virgin Atlantic on fuel surcharges at least six times between 2004-06.

Under whistle blower protection rules, Virgin was granted UK immunity after bringing the matter to the attention of the OFT.

BA has also been fined $300m (£150m) by the US Department of Justice over the matter, after a guilty plea.

Passengers who travelled on long haul flights with either of the airlines during the relevant period can apply for a refund worth about one-third of the fuel surcharge, via a special website.

BA said that about 11 million passengers had been affected, including about seven million in the UK.

Competition policy

Under competition law, tipping off a rival about a price change is illegal, as is agreeing prices.

Competition between companies is supposed to lead to cheaper goods and services for customers.

Colluding with rivals also goes against what BA describes as its “long-standing, clear and comprehensive competition compliance policy”.

Earlier this year, the airline’s chief executive Willie Walsh said that any anti-competitive behaviour was “to be condemned at BA or at other companies”.

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