Will the British Airways / American Airlines joint venture be broken up if Virgin Atlantic goes bust?

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However good your hearing is, you will have struggled to pick up the sound of British Airways demanding that Virgin Atlantic and Norwegian must not receive Government support and be allowed to fail.

Have you wondered why?

After all, Willie Walsh – CEO of BA’s parent company IAG – couldn’t keep himself out of the newspapers and TV studios earlier this year when Flybe was looking for Government help.   IAG even filed an official complaint with the European Commission.  And so it came to pass ….. Flybe failed, allowing British Airways to pick up – for free – a package of 12 daily Heathrow Summer slots worth at least £100m.

If Willie was angry about Flybe getting help, despite the fact that the number of routes where it competed with British Airways was minimal, you would expect that he would be apoplectic by now at the idea that Virgin Atlantic may receive support.

And yet, silence.

british airways american airlines joint venture ending?

Here’s an idea …..

Back in 2018, the Competition & Markets Authority launched an investigation into the transatlantic joint venture between BA, American Airlines, Iberia and Finnair.

What you might not know is that, when it comes to flying between Europe and North America, these four airlines are literally the same business.  There is no competition between them.

When you book a flight to New York on British Airways, British Airways does NOT get your money.  It goes into a big pot, together with all the money that American, Iberia and Finnair receive for selling flights between Europe and North America.  This money is then shared out between the airlines using an unknown formula.

This removes most incentives for competition between the airlines.  I imagine the only real competition is working out how to juggle the formula in order to take more than your fair share from the overall pot …. after all, if you agreed to pool your salary with everyone else on your street and split it later, you wouldn’t be queuing up to do any overtime.

The 2018 investigation was not unexpected.  The original 2010 joint venture agreement was due for renewal.  What IS unexpected was that it has not been resolved.  Observers believe that something is ‘up’.

The CMA has been getting more aggressive in recent years.  As you may have seen in the press, it recently tried to stop Amazon investing in Deliveroo.  This is NOT because Amazon has its own food delivery business and so it would reduce competition.  It was blocked because Amazon MIGHT IN THE FUTURE have gone back into UK food delivery but wouldn’t bother if it had a share in Deliveroo.

(This deal was eventually rushed through last week after Deliveroo said that it would go bankrupt without the investment.)

This sort of high-level economic thinking, whilst sensible, is not what you usually expect from competition regulators.

british airways american airlines joint venture ending?

If the CMA was already unhappy about the BA / AA / Iberia / Finnair joint venture …..

Let’s assume that the CMA was unhappy about the BA / AA / Iberia / Finnair joint venture before coronavirus.  This is back in the good old days of 2019 when Virgin Atlantic was still in good shape and Norwegian was alive, if not well.

Now imagine what the CMA will say if Virgin Atlantic and Norwegian disappear from the scene.

London to New York alone generates ticket sales of over $1 billion per year.  British Airways and American Airlines would suddenly have an unsustainable market share of the most valuable airline routes in the world, between London and the United States.

A handful of United Airlines and Delta Air Lines flights per day would not offer much competition, especially given the lack of onward connectivity into Europe.

Here is the bizarre situation where we find ourselves.  The financial hit to British Airways of having to dismantle the transatlantic joint venture and compete with American Airlines may be bigger than the financial hit it currently takes by competing with Virgin Atlantic and Norwegian.

Are we about to see British Airways actively encouraging the UK Government to SAVE Virgin Atlantic?  Given the choice of losing competition from Virgin Atlantic or losing the money from the transatlantic joint venture, I think that British Airways is more scared of the latter.

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Comments

  1. I mean for the CMA to still press on the venture being dismantled while airlines are struggling is a bit stupid. No issues attacking it when things are back to normal. But now? The CMA should actually relax

  2. “This sort of high-level economic thinking, whilst sensible, is not what you usually expect from competition regulators.”

    As a competition lawyer who’s job it is to fend off competition enforcement, even I find this a bit too harsh! You may be surprised to learn how much effort, scrutiny and debate go into merger control (whichever the form of the tie-up, even non-full function JVs), antitrust and abuse of dominance cases.

    • mr_jetlag says:

      LOL. the IB/PE attitude to regulators – fwiw I think it was meant as a compliment for the CMA

  3. Flychi says:

    Quick question. Why do you never mention who previously owned the Flybe slots?

  4. Journeying John says:

    Given BA’s inherited dominance of slots in the UK and recent absolute exploitation of this with increased charges, reduced service, etc I’d HATE to see, let alone experience the service they deliver if the Cartel isn’t broken up in a world without Virgin and Norwegian.

  5. It will be interesting to see if the CMA does continue its investigations and what might happen if Virgin disappeared. I do think it would be a shame if Virgin does fail but I still do wonder about the idea of bailing out an airline just to keep competition for BA/AA.

    I assume BA/AA is dominant on all the routes between the UK and the USA but I was intrigued by your statement that:
    “London to New York alone generates ticket sales of over $1 billion per year. British Airways and American Airlines would suddenly have an unsustainable market share of the most valuable airline routes in the world, between London and the United States.”

    A quick search reveals that there are currently 6 airlines that fly direct from London to New York. There are 32 daily direct flights between New York and London; 3 flights on Norwegian, 5 on Virgin, 3 on Delta, 6 on United, 11 on BA and 4 on AA. This is between both Newark and JFK in the US and Gatwick, Heathrow in the UK (The BA001 London City flight no longer appears in the schedules. I searched on ITA Matrix for nonstop flights on 2 November 2020). That means 17 flights are operated by other competing carriers vs the 15 on BA/AA. So, while BA is dominant it’s not as dominant as I thought. Assuming Virgin and Norwegian both disappear that still leaves 2 other airlines competing directly against AA and BA. I also think Jet Blue would take up the slots given up by Norwegian and Delta would take over any slots lost by Virgin.

    • Why would anyone freely choose to fly with any of the US Airlines if there’s an option with a European/Asian/Middle Eastern airline?

      • I’d choose Delta over a few European airlines.

        But not as or United for sure

      • Nick_C says:

        Paying to fly in Business Class, AA every time for me. Far better than BA.

        BA only for redemptions with a voucher.

    • ChrisBCN says:

      I agree with this, and whilst I am not a big fan of the JV, I don’t see that there is ‘unsustainable market share’

    • There is more to competition than just how many flights operate between a city pair. It’s about network, frequent flyer programmes, credit cards and a myriad of consumer benefits that just don’t exist in the UK. There is no AA credit card, indeed no mass market card for anyone other than VS as even BAs is amex.

      The cartel has not been good for uk originating flyers and needs to go

  6. David J Wilson says:

    Don’t forget to mention that Virgin has a lucrative code share operation of it’s own on the North Atlantic with its own shareholder Delta.

    • Spaghetti Town says:

      I agree this is slightly anti competitive but it’s a drop in the ocean compared to BA’s JV which effectively operates as one airline across the Atlantic

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