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Why the Competition & Markets Authority won’t renew the AA / BA transatlantic JV until 2024

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2020 was to be an important year for British Airways and American Airlines as their transatlantic joint venture (together with Finnair and Iberia) was up for renewal with competition regulators.

It’s difficult to overstate just how important this joint venture is for both BA and AA. London to New York brought in revenues of over $1 billion for BA alone in 2018.

American Airlines is likely to earn a similar amount from the route, as all transatlantic profits are shared proportionally between British Airways, American Airlines, Finnair and Iberia.

And this is just one of the routes covered by the joint venture ….

How do Joint Ventures work?

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 (and soon Aer Lingus) receive for selling flights between Europe and North America.  This money is then shared out between the airlines using an unknown formula.

Clearly, this removes most incentives for competition between the airlines.  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.

For obvious reasons, joint ventures like this must be approved by competition regulators. In addition to revenue sharing, JVs allow airlines to co-ordinate schedules and pricing.

The AA/BA Joint Venture is up for renewal

The transatlantic Joint Venture was originally approved in 2010 for a ten year period. In 2018, the Competition & Markets Authority began its investigation into a possible renewal.

In May, it published its provisional findings and found that there was not sufficient competition on select routes between Europe and the US.

The CMA proposed that that the joint venture would have to surrender slots if a competitor wished to launch flights to selected destinations. These included Boston, Dallas, Miami and Philadelphia.

If no other airline wanted to launch flights to these destinations then the joint venture would have to fly a minimum required number of seats per year on the routes. It could not cut capacity in order to force up fares.

This plan has now been junked

Given the disruption caused by the coronavirus pandemic, the Competition & Markets Authority has now decided to extend the current joint venture for another three years until March 2024.

It is concerned that its original findings are now worthless. It is very likely, for example, that Norwegian will never return to long-haul flying from London Gatwick. The presence of Norwegian was one of the reasons that the CMA was relatively lenient in its preliminary findings.

There is also no guarantee that JetBlue will still launch its promised services between London and New York / Boston.

Current ‘remedy’ flights operated by Delta and Virgin Atlantic to Boston, Dallas and Miami will continue for an extra year until March 2022. A tender will then go out which would allow another airline to bid for the right to operate, in competition with BA and AA, until March 2024.

An additional tender will take place this year to receive slots from BA or AA to compete against them on the Boston route. Norwegian has surrendered its slots and a three year deal, from March 2021, will be on offer.

The CMA said in a statement this week:

“The CMA cannot be confident that its assessment of competition concerns, and any remedies that might address them, would adequately reflect the post-pandemic state of competition in the longer term. It has therefore decided not to accept the proposed 10 year binding commitments.“

Delaying the decision for three years will let British Airways and American Airlines off the hook in the short term. In the medium term, the deferral is more of a threat. The CMA will come down harder in three years time if it looks like competition on transatlantic routes has reduced.

You can read more on the CMA website here.

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Category

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Comments (23)

This article is closed to new comments. Feel free to ask your question in the HfP forums.

  • Mr(s) Entitled says:
    19 Sep19 September 07:06

    I am astound that this practice is allowed in the first instance. I can see what is in it for the airlines but it is not immediately apparent how the consumer benefits.

    • Mr. AC says:
      19 Sep19 September 07:29

      I think there’s some benefit and it makes intuitive sense when airlines in the same alliance are operating on the same route. When I booked connecting flights through London on BA to the US, I had a large number of convenient connecting option, all priced the same if the same fare class was available (even though in practice it might be BA / AA / Finnair metal). As long as there’s enough competition to keep the prices in check (and IMO there was, you could always fly Virgin / Norwegian / Star Alliance), it’s a net benefit to a customer of oneworld and the airlines save effort on not trying to cannibalize each other’s market share, so can focus on something else.
      Compare to almost any other route – e.g. when BA operated LHR – HEL, the prices on BA metal were typically lower than on Finnair, forcing me to choose between an inconvenient time (even though nominally it’s the same alliance) and saving some £. But I’m assuming they weren’t allowed to just equalize the pricing, since even though they’re in the same alliance, in the eyes of market competition authorities they’re separate entities so “should” “compete”.

      • Mr(s) Entitled says:
        19 Sep19 September 08:01

        This Joint Venture applies to all transatlantic flights. Do Virgin, or Norwegian with their small networks (as was) really add competition to AA and BA from the UK?

        One must also differentiate between a code share and what we have here, independent companies agreeing not to compete and to split all revenue.

        • insider says:
          19 Sep19 September 10:23

          Virgin, Delta, Norwegian, United + one stop options vis Frankfurt, Paris etc. Yes I would say there is competition.

          • Rob says:
            19 Sep19 September 10:56

            Most travellers are not willing to go indirect. Even if you do, AF and KLM are in the Virgin JV. Lufty is in the United JV. Iberia is in the BA JV. Who is left?!

            Norwegian is gone. Virgin and Delta have a JV.

            It’s an oligopoly of three effectively on a business worth billions per year.

      • Chrisasaurus says:
        19 Sep19 September 14:26

        You’re mostly describing the benefits of a codeshare though – not a JV

        Are there examples on other markets where this kind of antitrust-exemption is formalised?

    • Nick_C says:
      19 Sep19 September 07:37

      The consumer benefits because they can mix and match flights on a variety of airlines and have a greater choice of flights and timings.

      The AA flight might be more convenient for my outward journey, but the BA flight is more convenient for the return.

      I could choose to fly on AA’s superior Business Class going out, but return on BA’s inferior product in order to get EC261 protection.

      If all direct flights from London to Miami are sold out, I can travel via NY or Philly.

      If flying from France or Germany to the US, you can throw IB and AY into the mix and route via Madrid, Helsinki or London.

      Competition still exists. You can choose to give your custom to One World, Star Alliance, or Sky Team. Perhaps the CMA should be looking at why the price hardly varies regardless of which alliance you choose to fly with.

      • Rhys says:
        19 Sep19 September 07:52

        Mixing and matching flights is possible with a codeshare, which is NOT the same as a joint venture.

    • AJA says:
      19 Sep19 September 10:06

      But it’s really the logical extension of code sharing and global airline alliances. How often have you flown on BA outbound and Delta inbound on one cash ticket because it’s cheaper or more convenient? I will bet it’s never happened.

      We are also more likely to stick with the airline alliance or frequent flier loyalty program than choose particular flights on specific airlines because it’s cheaper.

      And while there is the possibility that a JV might push prices up and reduce competition the reality is that the same thing could apply to codeshares where you buy a ticket on Virgin stock but actually fly on Delta. And it’s further complicated by the cross ownership between airlines – Qatar owns part of BA, Delta owns even more of Virgin. That also leads to reduced choice for the consumer, more than a JV to my mind though I am happy to be corrected on that.

      The true competition is between airline alliances not the airlines themselves although hard and soft product on individual airlines and routes and schedules offered do also play a part along with headline price.

  • marcw says:
    19 Sep19 September 07:19

    I’m surprised the CMA expects to be back to regular operations by 2023.

    • callum says:
      19 Sep19 September 09:21

      Did they specifically say they expect it to be normal? To me it looks like a bit of a placeholder to reassess closer to the time.

      Though assuming we get the vaccine next year (big if, I know!), I’d be surprised if there wasn’t some semblance of normality by then. Most likely not at the same volume as before, but although I really hate the phrase, it should be the “new normal” by then.

      • Chrisasaurus says:
        19 Sep19 September 14:36

        Indeed – first off the CMAs intent is to have a better picture which they might have by then

        Second, I think it’s fair to say every one of us is invested in a return to normalcy as soon as possible so once finally a vaccine (or other reliable treatment) is available the pent up demand will be there

  • David says:
    19 Sep19 September 07:58

    There will be parallels with the mobile phone business. There’s a big difference in competitiveness between a cosy structure with 3 big players and what happens when you add a fourth. Lots of economic analysis on this.

    • QwertyKnowsBest says:
      19 Sep19 September 08:09

      Interested to read more on this David. Any suggested articles or studies ?

      • Andy says:
        19 Sep19 September 09:07

        If you do a search for Oligopoly and Pricing you will come up with some articles talking about how having only a few large competitors stifles price competition. Monopoly and Oligopoly not always a bad thing, for instance when building a network is costly (we have 1 national electricity grid and only 2 mobile networks (O2/Voda and Three/EE). Happy reading.

    • Lady London says:
      19 Sep19 September 12:05

      I think they said that was why they blocked the merger of O2 and Three – which had good complementarity – as it would leave only 3 majors in the UK market.

      • David says:
        19 Sep19 September 12:40

        That’s right – and lots of comparisons between U.K. with 4 players versus other countries where there are only 3.

        • Lady London says:
          19 Sep19 September 15:38

          Trouble is, that makes 5th entrant very hard to get anywhere. eg, I guess, Virgin mobile in the UK market. But looks like having 4 is keeping Three in check.

  • Matt says:
    19 Sep19 September 10:54

    BA and AA will claim that it allows them to offer more direct destinations. In 2010 they said the JV was the reason BA could launch to San Diego. QF and AA said the same when they were launching their JV…it allowed QF to fly to Chicago and AA to fly to Auckland.

    I guess because it makes it economical to free up planes that would have been used to compete with AA on hub routes and also facilitates domestic connections if they are sharing the revenue.

  • Lady London says:
    19 Sep19 September 11:34

    I never thought I’d say this as I am against cartels – even regulated ones like this jv – but I think a jv would benefit on the LON-SYD route.

    It would assure services on the route could be more stable for a longer period and benefit the UK economy.

    But this time I’d like the jv participants to include airlines from Asia as well as UK, ME and Oz.

  • James says:
    19 Sep19 September 19:52

    “It is very likely, for example, that Norwegian will never return to long-haul flying from London Gatwick” – I’m really intrigued as to where this info has come from. I was under the impression that Norwegian was resuming flights to the US in spring from Gatwick, estimating a more full service by 2022?

    • ChrisBCN says:
      19 Sep19 September 22:51

      I read that as they are scaling back long haul to be smaller, which makes sense. ‘Norwegian is about to die’ has been a common trope for many years.

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