REGULATORS NEED TO STOP THIS GAME OF MONOPOLY

By Sir Richard Branson, President, Virgin Atlantic

Daily Telegraph - 5th September 2008

I have a clear message for any competition regulators reading this column - don't be fooled into thinking British Airways is poor and needs propping up. In the last financial year, BA made £883million in pretax profits. The year before, it made £611million. It has huge cash reserves of £2billion.

Yet, the very profitable BA is now asking regulators to help it survive. The airline that was gifted Concorde, tens of thousands of slots, Heathrow's Terminal 4, Gatwick North, and more recently Terminal 5, is now begging regulators to allow it to effectively merge with American Airlines so it can thrive during a recession.

It is an economic slowdown which every carrier has to grapple with, without the financial or regulatory support of governments and competition authorities. Zoom, Maxjet, Eos, Aloha and Silverjet have all disappeared in recent months without producing a begging bowl. BA, no longer a flag carrier, has to compete like the rest of us and doesn't deserve special treatment. The interests of consumers, not BA's sense of entitlement and its contrived financial crisis, should be the guiding light for competition regulators in Brussels and Washington.

It is ironic that the UK's Competition Commission last month called for the break-up of one monopoly, in the form of airport owner BAA, yet British Airways is trying to create another one, with American. It wants to gain permission to collude with American, something which would normally be illegal, and fix ticket prices and schedules on US and European routes.

If their proposals were approved, BA/AA would have a monopoly, or near-monopoly, on some of the busiest and most profitable routes from Europe. The two airlines, effectively working as one, would operate 79% of all flights between Heathrow and Boston, 66% between Heathrow and Chicago and 63% between Heathrow and JFK. Not to mention the 100% pure monopoly between Dallas and Heathrow. They would also be highly dominant on several other Heathrow to the US routes.

Airlines such as Air France, part of Skyteam, and Lufthansa, part of the Star Alliance, also have very large and dominant market shares on routes from their respective hubs, Paris and Frankfurt. While those carriers have largely been able to pursue their alliances, let me explain why the BA/AA application is different and ought to be stopped.

Heathrow Airport, which accounts for nearly a quarter of all passengers travelling between Europe and the US, is totally unique. It is full, unlike Paris Charles de Gaulle and Frankfurt. Heathrow's owner BAA has confirmed many times the reality of what airlines face - the impossibility of getting slots there. The rare slot that does emerge is usually at a time of day that does not work for transatlantic carriers or is snapped up for huge sums of money, as US carriers have discovered to their cost. This situation makes it physically and financially impossible for any carrier to offer any meaningful level of competitive service, let alone attempt to replicate the network that BA/AA would have.

It's already impossible to get anywhere near the 42% of slots that BA holds today, even before you consider the 47% it would have with American and Iberia. Frankly, there is no free and unfettered access to Heathrow. Nor is there at New York JFK, another BA/AA stronghold, where government restrictions mean it's very difficult for carriers to start new services. The Open Skies accord, which was introduced in March, has barely opened up Heathrow at all. The accord certainly hasn't created major new competition to rival BA's dominance.

BA argues that it needs to collude with American because rival alliances Skyteam and Star are dominant at their major European hubs. But the fact is that BA on its own is already bigger between Heathrow and the US, the biggest market in Europe, than Star is from Frankfurt or Skyteam is from Paris to the US - and that's before it gets together with American. If BA/AA were to receive clearance, UK consumers would soon find their fares to the US rising because there would be less competition. Why else would BA and AA want to collude at an airport pretty well closed to newcomers?

In addition, for the travel trade and large corporate accounts, BA/AA would be very damaging. A bigger airline, with less competition, would force up prices because it wouldn't face as much pricing pressure. You can be assured that travellers would pay higher prices in return for a poorer product. Bob Crandall, the former Chairman of American Airlines, told The New York Times in April this year: "The absence of competition never fosters better customer service."

The current economic malaise is no justification for regulators to let these proposals through. It is their job to assess the long-term impact of a BA/AA tie-up on competition, not to provide special protection from the immediate challenges of the economic cycle, which just yesterday claimed another casualty as Air India announced it would be ending its Heathrow-JFK service. What would the BA/AA monster monopoly be like when the economy recovers in two years' time? Anti-trust laws should not be ignored during an economic downturn for good reason because when the economy recovers, competition and consumers would be faced with a permanently changed market which certainly wouldn't work in their favour during an upturn.

So, big isn't always beautiful at Heathrow, where competitors cannot prevent BA's dominance. The key reason why BA wants to tie-up with American Airlines is to increase fares on the most lucrative air corridors in the world, where they will not be subject to any meaningful competition. Yes, this proposed alliance would impact Virgin Atlantic's ability to compete fairly on these routes but there is a much wider consequence. The regulators need to show more than ever that they are guarding the consumer's interest. We should all be saying no way to BA/AA.

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