Immunity from competition law:
BA/AA OK? May/Jun 2020

How times change. Airline alliances, especially where immunity from competition law was involved, were once the subject of intense review and debate. Competition authorities almost competed among themselves to highlight the potential for anti-competitive behaviour and to devise painful remedies (painful for the applicants at least). Now it seems that such applications hardly raise an eyebrow and are regularly approved almost routinely.

The experience of the alliance between British Airways and American Airlines, now expanded to include other carriers, is a good example of this development, and it is worth going back to its beginning to see the full impact. When first proposed in the mid-1990s, the BA/AA alliance quickly received strong support from both the UK and US Governments. On the US side this reflected the fact that anti-trust approval would be accompanied by UK acceptance of an open skies bilateral agreement, and in particular by increased access for US airlines to Heathrow.

For many years, the UK (and of course BA) had resisted reform of the Bermuda 2 agreement in the absence of concessions by the US to open up its domestic market to foreign competition. The benefits to be gained from a trans-Atlantic alliance with American clearly persuaded BA that allowing more access to its Heathrow fortress hub was a price worth paying. Like most national flag carriers at the time, BA had a very close relationship with its government (and especially the Transport Department — again how times have changed!) and it was far from a surprise that the UK indicated its support for this U-turn.

Everything was set, therefore, for a quick approval of the alliance, accompanied by the death of Bermuda 2. As was the norm at the time, it wasn’t thought necessary to consider in any real detail the competition implications, nor the interests of other airlines, let alone consumers. Except that Sir Richard Branson had other ideas. Realising that a BA/AA North Atlantic alliance would be a major threat to Virgin Atlantic’s prospects, he launched a well-financed campaign aimed at two separate audiences in Europe and the US: the general public and politicians on the one hand, and the competition authorities in London, Brussels and Washington DC on the other.

The publicity campaign, which included the famous “BA/AA No Way” slogan on the side of every Virgin aircraft, together with full-page, often amusing advertisements in national newspapers and even a blimp flying over Washington, attracted considerable attention. But the real battle was fought before the competition authorities, and their decisions were to prove decisive and disruptive for BA/AA’s plans.

Initially BA in particular paid very little attention to the UK Office of Fair Trading and effectively ignored the European Commission. The result was a disaster, with demands from the competition authorities for the divestiture of a large number of Heathrow slots in order to mitigate the perceived anti-competitive nature of the alliance. BA and AA walked away. They returned later to try again, taking the European Commission more seriously this time, only for the US Department of Transportation this time to take the initiative and demand the divestiture of numerous Heathrow slots. BA and AA walked away again.

It was only in 2010, following the signing of the EU/US trans-Atlantic open skies agreement (and therefore the replacement of Bermuda 2) and some 13 years after the original application, that approval was finally given at the third time of asking. This time the price for approval, particularly the divestiture of Heathrow slots for additional services on six routes from London, was acceptable to BA and AA. The alliance was later expanded, with its anti-trust immunity, to include the trans-Atlantic services of Iberia, Aer Lingus and Finnair, now known as the Atlantic Joint Business Agreement (AJBA).

BA/AA may have been the first international airline alliance to be subject to serious review by competition authorities, but it certainly was not the last. Such reviews have now become routine, following an established methodology. Usually they identify areas of concern from a competition point of view which the authorities then try to mitigate with a number of penalties, especially slot divestiture where congested airports are involved.

Unfortunately, such action has had only limited success in attracting new competition, possibly with the exception of Heathrow. With the slot-restricted airports invariably dominated by airlines with significant market power, it is often difficult for new entrants to establish themselves, even with the help of remedies imposed by the competition authorities.

In a joint paper issued in 2010, for example, the European Commission and the US DOT agreed “that one of the main challenges in the airline industry is to design a remedy that can effectively address the identified negative effects of the parties’ cooperation while giving consideration to the principle of proportionality,”

In at least one case, the European Commission even went so far as to make it a condition of approval of a joint venture that the applicants obtain an effective competitor on a route, an initiative which has not been noticeably more successful and one that hardly suggests that there is a lengthy queue of new entrants eager to take on the dominant players.

After the original application, the EU Commission took control of the BA/AA cases in Europe and was responsible for the eventual approval in 2010, when clearance was also obtained from the US DOT. It is worth listing the demands made by the Commission in 2010:

• BA/AA agreed to make slots available to allow non-stop entrants to operate or increase services on the London to Dallas/Fort Worth, Boston, Chicago, Miami and New York and Madrid to Miami routes. (Slot divestures were also required in 2013 in relation to the London — Philadelphia route, which facilitated the entry of Delta. Under the terms of this commitment, after three years Delta was able to withdraw from the route and use the slots for another service to the US. AA is currently challenging the legality of the Commission’s original decision in this case).
• They agreed to allow third party airlines to offer a return trip comprising a non-stop trans-Atlantic service provided by the third party airline and a non-stop service in the other direction by the AJBA partners.
• They agreed to allow third party airlines to conclude a bilateral Special Prorate Agreement with the AJBA partners on favourable commercial terms.
• They agreed to provide access to their frequent flyer programmes, when requested, to non-stop airlines that have commenced or increased services on the identified city pairs. However, this only applies to carriers that do not have a comparable FFP and do not participate in any of the parties’ FFPs.

The European approval of the alliance was granted for ten years and is due to expire this year. It is not surprising, therefore, that a review was launched in late 2018. What was unusual, however, was that the European Commission stood back and let the UK’s Competition and Markets Authority take the lead. Clearly a decision was taken that with the end of the Brexit transition period fast approaching, when the Commission will no longer have responsibility for competition policy in the UK, and with five of the six routes previously identified as being of concern involving London, the CMA was the appropriate body to act.

Interestingly, of the seven city-pairs where BA and AA services overlap, the CMA quickly decided to ignore London to Los Angeles and New York, noting that there were at least three independent competitors to BA/AA on these routes, including new entry since the 2010 Commitments were accepted. Presumably this is a reference to Norwegian’s operations, although it remains to be seen how significant a competitor Norwegian proves to be in the post-COVID world. The CMA also decided that there were sufficient competitive constraints from United and, again, Norwegian for the non-premium market on the London — Chicago route.

Probably the most significant change in the positions adopted by the competition authorities and the alliance applicants can be seen in the fact that, rather than resist concessions, the AJBA soon offered a series of commitments to address competition concerns, which the CMA readily accepted. The only changes in the identification of so-called ‘routes of concern’ were the dropping of London — New York and the non-premium segment of London — Chicago. Given the speed of agreement, it is perhaps understandable that at the time, IAG’s Chief Executive Willie Walsh commented that this process was not at the top of his agenda. What a change from the decade after the first BA/AA application.

Noting that “the AJBA has as its object and effect the prevention, restriction or distortion of competition”, the CMA acknowledged that there are significant barriers to entry and expansion of flights on the routes of concern. According to the CMA, the AJBA provides for the ongoing exchange of commercially sensitive information in relation to pricing, capacity, schedules and marketing. “The CMA’s current view is that the Commitments Parties have not demonstrated that the claimed benefits are sufficient to outweigh the CMA’s current competition concerns.”

Hence the slot divestitures (with applicant carriers having the choice of Heathrow or Gatwick) and a roll-over of the other commitments. This package differs only marginally from the commitments made ten years ago, although overall they probably represent some easing of the price, despite the wider coverage of the AJBA with the addition of more carriers. The CMA has also reserved the right, because of the exceptional circumstances created by the COVID-19 pandemic, to review the joint venture between two and five years after the commitments come into effect.

Comments from the competition authorities in both Brussels and Washington not long ago appeared to suggest that airline alliances might find it more difficult to obtain approval for anti-trust immunity. Unless the UK CMA is at odds with their Commission and DOT colleagues, which is unlikely given the co-operation and consultation that exists between these bodies, the interim decision on the AJBA would seem to suggest otherwise, which will be good news for alliances. However, the post-COVID world could produce a very different competitive environment and force the regulators to again adopt a more critical approach.