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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 (106)

  • Oarar80 says:

    Rob
    It would be *really* interesting to get an article from you that looks at the proportion of overall % flights from each of BA’s London airports, and what they would be most likely to do as they downsize by 30%. Will they entrench to Heathrow and buy up the spare slots as the come up from failed airlines? Will they abandon Heathrow T3, and keep a presence at Gatwick for leisure and to long term spike other airlines. Is London City safe? Will they go into the domestic market now flybe out the way? It’s just fascinating to get an insight of what *could* happen for us all to look back in a year or two 🙂
    I guess BA not taking the government bailout gives them their own options for the future (esp if buy Heathrow slots!). Suspect Willie is thinking 20 years from now

    • ken says:

      The 3 airports BA care about are;

      1) Heathrow
      2) Heathrow
      3) Heathrow

    • Novice says:

      I don’t think Rob is a prophet or seer 😂 Nobody really knows what’s going to happen.

    • ChrisC says:

      Willie isn’t thinking about much at the moment as he’s about to retire.

      What Luis Gallego things is of far more importance.

  • Jake M says:

    Apologies for my ignorance in advance but the CMA is a UK regulator and this is a European-wide JV (between IAG and others, not just BA). I presume Iberia, Finnair and AA would be allowed to continue?

    Would the CMA not worry that removing BA from that would make it v. difficult to compete against the remaining ‘cartel’ or is BA too big of a slice of pie such that the JV would not hold much weight post BA?

    Also, more of an accountancy question here, would it not just be feasible for BA to transfer the flight revenue internally to IAG to pool the money but operate ‘independent’ flights and prices?

    • ken says:

      The issue specifically is BA and AA on direct routes from London to North America.

      All very well to reposition to Helsinki if its a cheap business flight for leisure you want.

      Less useful if you are flying for work.

    • Rob says:

      Post Brexit the CMA will decide if BA can be in the JV. EU may allow the other 3 to carry on.

    • guesswho2000 says:

      BA has direct access to the most slots at the biggest airport in Europe, and a huge European feeder network. It’s got a significant advantage over either IB or AY in that respect.

  • Reeferman says:

    Perhaps more of a concern for the CMA should be “why is it that we constantly see significantly favourable prices for long-haul airfares from Europe (with major airlines) compared with those from the UK”?

    We are always seeking and talking about “ex-EU” fares on this blog – fares which are never matched by those from the UK – with price differences in the £000s for Business Class fares.

    • Cal says:

      UK having one of the highest departure taxes, APD, is one of the obvious reasons, and you don’t have to pay that if you are connecting through the UK.

      • The Original David says:

        Except APD is something like £140. I’ve saved more than £1500 per ticket by starting ex-EU, so APD is negligible. I’m not complaining though – I’d rather that people wanting to fly ex-LHR pay extra to keep my ex-EU fares cheap!

        The real reason for the fare difference is that people attach a big premium to being able to fly directly into and out of London. Not so many people are keen to fly from the arse-end of Scandinavia.

        • Lumma says:

          It’s also highly likely that London to New York via Paris on Air France will be cheaper than Paris to New York direct, although APD will bake the difference less pronounced.

          Direct flights will always command a premium, although I’ve never understood why Qantas’ London to Perth is nearly double than any route with a stop in the Middle East or Asia. A flight that long, I’d rather get off and stretch my legs, even in business

          • Reeferman says:

            My point was more that a flight from pretty-much any EU origin point, direct to a given long-haul destination (or via DOH etc) is far cheaper than the same flight direct (or via DOH etc) from the UK.
            Flight prices in Business Class from UK are substantially higher than those from other European origin cities – often by £000s as The original David says.
            Why is it that, even in sale times, flight prices ex UK are substantially higher? There must be some form of cartel among operators to prevent the need for matching prices – not only from Scandinavia but also Belgium, Germany, Spain etc etc

          • guesswho2000 says:

            Re QF9/10, I agree with you, I’d rather have the break, but pre this QF’s loadings were very strong – seems people are willing to pay the premium.

            I live in the eastern states, so have to connect somewhere, and PER isn’t my first choice given the choice of boring Australian airports or SIN/HKG/DXB…

        • Marcw says:

          It’s the market. Qatar, in order to fill C class from Norway (2-3 daily flights), they need to lower the prices. The UK demand is just very high.

          • Spaghetti Town says:

            is it though? The same applies for economy tickets generally (excluding east coast USA).

          • guesswho2000 says:

            I believe so yes, and it works ex-LON too, on a smaller scale…flying to OAK in J was cheaper than LAX or SFO. Low demand where there’s options even slightly less convenient means the prices need to compete.

            This can work amazingly well for SC/TP runs – why fly direct, when you can connect.

  • Tony says:

    Once the world is on top of this pestilence fresh ideas and thinking will be needed.
    We are goi g to see a very different scenario for flying in the next few years.
    Personally I don’t like cartels as they srtificially keep prices high, just look at oil over the years.
    I hope both Virgin & Norwegian survive.
    This pestilence has, in my view put an end to expansion at Heathrow Airport.
    Government ideas are certainly on greater connectivity within the region’s of the UK but that doesn’t really include flying, as they are or were three months ago, to gain this, via expansion of rail services.
    As always in times like this you have winners and loosers so be fascinating to see who these are.

  • David Cohen says:

    Surely if the CMA are looking at the oneworld JBA, they need to take a look at the SkyTeam and Star Alliance ones?

    United and Air Canada have (had?) a substantial presence at T2.

    If/when Virgin folds, then I’m sure Delta will scale up to fill the gaps that they have left.

    Ultimately is there a substantial enough difference between the models of AA/AY/BA/IB and AC/LH/LX/OS/SN/UA and the AF/DL/KL/VS ones?

    To my mind no, as from London, the majority of big destinations are served non-stop, or there’s a choice of hubs to connect with on either side of the atlantic.

  • Mark Woodason says:

    Those BA slots were not free they have just been returned. Fact. Ok

    • Rob says:

      That’s nonsense. Flybe got them permanently if it operated them for 3 years. BA was about to lose them for good (as it lost the Winter slots) but it just collapsed in time. Had it lasted another 12 months they would have vested. Ot was crucial that Flybe collapsed this year.

      • Baji Nahid says:

        What happened to the winter slots rob? are they now assets of flybe?

      • Spaghetti Town says:

        slots that they’ve now got that they probably won’t want for the next 3 years!

        • Rob says:

          Yes. The Heathrow slot rules are going to get very interesting now. That said ….. it is only 80% usage required. If they cut flights by 20% then they can retain all their slots as long as the schedules are carefully juggled so that each slot which is 100% utilised is allowed to drop to exactly 80%.

      • byflea says:

        it is not nonsense – BA paid for those slots when they acquired bmi. However they had to be made available for European travel if anyone applied. BA, Virgin and bmi have all operated these slots at various points since 2012. And even if flybe picked these slots up, they would not have been worth anywhere near £100m as they were ringfenced to European flying.

      • byflea says:

        and when did BA lose the winter slots? I missed that one

  • Opus says:

    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

  • Mike says:

    “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