Could the two Bobs - Ayling and Crandall - have had an inkling of the amount of controversy they would raise when they first aired their plan to forge an alliance between their airlines?

That controversy took yet another turn in March when Robert Ayling, chief executive of British Airways, and Robert Crandall, chairman and CEO of American Airlines, found themselves once again defending their alliance proposal at a Senate hearing. This time, however, the sights of the senators spilled into the much wider question of whether any international alliance is good for the passenger. As such, the testimonies of Gerald Greenwald, chairman and CEO of United Airlines, and Leo Mullin, president and CEO of Delta Air Lines, were as much under the spotlight as those of Ayling and Crandall.

Antitrust subcommittee chairman Senator Mike DeWine called the hearing to examine international aviation agreements and antitrust immunity in general - not the specifics of the two-year-old AA/BA proposal. It is, however, that proposal which has forced Congress to take a closer look at an issue it had little interest in two years ago. Delta, Northwest Airlines and United each put in place their immunised alliances with almost no Congressional interference. The message of this latest Senate hearing is that those days may well be over.

Surveying before him no fewer than seven airline CEOs packed uncomfortably close around a table, DeWine could not resist the opportunity to quip: 'Gentlemen - welcome to coach!'

The reason they were there was then spelled out. In the last 12 months, Washington has become increasingly concerned about what it sees as anticompetitive behaviour stemming from the hub-and-spoke system that is now central to deregulated US airline operations. Some senators believe that what has happened in the US - each of the major carriers becoming dominant at its own hubs - will now occur on a global scale. Alliances are creating a giant hub-and-spoke system, some argue, and they question the effects on competition.

'International airline alliances produce some tangible benefits for consumers, such as more direct routes,' concedes DeWine. 'But what is the long-term effect of such a consolidation? American business and leisure travellers may face higher fares if alliances lead to a handful of megacarriers that dominate the industry. Such dominance could prevent other US carriers from entering international markets, thereby limiting competition for air routes.'

Such hearings have a theatrical air about them. Greenwald, with the confidence of one who has his alliance glued together, chomped on peanuts - this was coach class, after all. Gordon Bethune, chairman and CEO of Continental Airlines, managed to keep a straight face even as his aides held up a giant advertising poster showing him and new codeshare partner Virgin Atlantic's chairman Richard Branson, each doing bunny ears over the other's head. Branson himself reminded the senators of the battles Virgin has fought against BA and labelled the BA/AA proposal the 'merger from hell'.

The CEOs struggled to make the point that deregulation has made them more, not less, competitive. But with personal agendas clouding the hearing - Senator Herb Kohl in particular would not let go of the point that short-haul services from Milwaukee, in his home state of Wisconsin, are more expensive than long-haul routes - it came down to Stephen Wolf, chairman and CEO of US Airways, to keep the senators focused. Wolf has an uncanny knack of sounding like the unbiased voice of authority. In his written testimony he puts his finger on the conundrum. 'The challenge that global alliances pose for airline regulators is how to facilitate those alliances that expand customer choices, reduce fares and increase competition, while preventing those that simply increase the market power of some competitors at the expense of rivals and consumers,' he states.

Wolf makes it clear that the BA/AA plan falls into the second category. 'Alliances have evolved from Northwest/KLM - two disparate companies with very little overlap,' he says. 'The alliance we are talking about today - American and BA - is a quantum leap from anything we have ever known. Mr Crandall and Mr Ayling are not doing this because they want to see their market share go down. They believe their market share will go up.'

The US Department of Justice is on to the same thing. 'There is no question in anybody's mind that this deal [can] go through as is,' says assistant attorney general, antitrust division, Joel Klein. The DOJ, Klein points out, has concerns about the proposed codeshare between American and the Taca Group, whose combined market shares with American range from 88 to 100 per cent. The DOJ is now reviewing the BA/AA proposal with similar concern, especially because of constraints at London's Heathrow Airport. 'You can be sure that, unless we conclude that effective conditions can be imposed to ensure competitive airline service between the US and the UK, we will urge DOT to disapprove the alliance,' says Klein.

Department of Transportation assistant secretary for aviation and international affairs, Charles Hunnicutt, sheds some light on how matters stand. 'It is clear that the British Government has no intention of proceeding with open skies until there is a clear direction towards an immunised alliance, and the US Government would not go forward until there was an understanding about [Heathrow] slots,' he says.

If all of this left Ayling and Crandall with heavy hearts, they might at least reflect that the senators' concerns are general. They might not get the alliance they want, but if all alliances are now under the Congressional spotlight - as well as under scrutiny by the European Commission - BA and AA might prove winners in a different strategic game. This one could see their competitors stand to lose their antitrust immunities. Stalemate or checkmate?

Source: Airline Business