WSJ BLOG: Can British Airways Save American Airlines?

By Daniel | June 20, 2008

WSJ BLOG: Can British Airways Save American Airlines?

Last Update: 6/20/2008 3:36:22 PM

(This story has been posted on The Wall Street Journal Online’s Deal Journal blog
at blogs.wsj.com/deals.)

Posted by Heidi N. Moore

The answer to that question, by the way, is “probably not.”

Call it the consolidation that wasn’t.

After Delta Air Lines Inc. (DAL) and Northwest Airlines Corp. (NWA) took the
merger plunge, other airlines are taking a pass on boarding the consolidation
express. Continental Airlines Inc. (CAL), for instance, has decided to become a
partner of UAL Corp.’s (UAUA) United Airlines in the Star Alliance, and so the
two have scrapped their merger talks, to the chagrin of investors. Shares of AMR
Corp.’s (AMR) American Airlines fell 4%, while UAL shares were down over 12.9% to
$7.06, and Continental shares were down over 9.3% to $14.15 in recent trading.

In the U.S., that leaves American Airlines still the odd man out when it comes to
finding a partner for an alliance or merger.

Earlier Friday, Morgan Stanley airlines analyst William Greene suggested that
American may feel confident enough from the Continental-United arrangement to
seek antitrust immunity, or an ATI, from the U.S. Department of Transportation
for an alliance with British Airways PLC (BAIRY). Greene wrote, “We expect that
an ATI between AMR and British Airways, members of the oneworld Alliance, is
likely to face less resistance from the DOT than in the past.” British Airways
said in early June that it was “exploring opportunities for cooperation with
American Airlines and Continental.”

It makes sense. As long as you aren’t going to merge, you might as well not-merge
overseas.

A British Airways alliance with American has advantages that the
Continental-United one doesn’t. Still, many of the advantages go to British
Airways, as it gives British Airways better access to the U.S. Under the Open
Skies initiative - an aviation treaty between the European Union and the U.S.
that went into effect in March - American can fly to Heathrow outside London and
within Europe, but BA, though it can fly to the U.S., can’t fly within the U.S.

Alliances are easier to structure than mergers. But the effect is much weaker,
which means in many cases alliances can’t do what mergers can. Alliances help
increase revenue by enabling airlines to sell tickets on each other’s flights.
But alliances don’t help cut costs, and that is arguably the biggest problem
facing airlines right now. That may be why investors pushed down shares of both
Continental and United this session when the two airlines announced they were
scrapping their merger plans.

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