A monopoly made in the heavens?

British Airways says it has sealed an alliance with American Airlines that will allow the two carriers to fix fares, routes and schedules together.

With aviation fuel prices near record levels and spending on air travel slowing, airlines are looking at ways to cut costs.  But the carriers will have to persuade the US that the deal does not break US rules on foreign ownership of airlines.

"We believe our proposed co-operation is an important step towards ensuring that we can compete effectively with rival alliances and manage through the challenges of record fuel prices and growing economic concerns," said Gerard Arpey, chairman and chief executive of AMR Corp, the parent company of American Airlines.

However, BA's rival Virgin Atlantic, owned by Sir Richard Branson, said the plan would reduce competition in the airline industry.

"What they're proposing is to create the world's biggest airline with American Airlines," said Virgin's Paul Charles.  "But we know what dominant players do - they snuff out competition, they raise prices and they become even more dominant."

The airlines said they planned to apply to the US Department of Transportation for immunity from US anti-competition rules and they would also notify European regulators.

They have previously failed to win an exemption from these laws because of their dominance at Heathrow, where BA and AA control nearly half of all the landing and take-off slots to the US from the airport.

If the airlines receive antitrust approval, they would serve 443 destinations in 106 countries with nearly 6,300 daily departures.

Gerard Arpey, the chief executive of the AMR Corporation, American’s parent, said Thursday that he did not expect American or British Airways to have to give up any of their rights to fly into Heathrow, a sticking point in the airlines’ two earlier bids for a waiver.

The industry’s shifting landscape was a crucial reason why American and British Airways decided to push again for antitrust immunity, which they first sought in 1996.

Even before they filed [this new] application, the alliance faced opposition from Sir Richard Branson, the owner of Virgin Atlantic, the main rival to British Airways and American on trans-Atlantic routes from London’s Heathrow Airport.

Sir Richard’s main argument is that British Airways and American would end up with nearly half of all take-off and landing slots at Heathrow. “Airlines everywhere are struggling with the current price of oil, but the solution to their problems should not lie in an anti-competitive agreement which will inevitably lead to less competition and higher fares.”

Indeed, the airlines said Thursday that the treaty was a major change since they last applied for antitrust immunity. They noted 20 new flights a day, equal to 280 weekly slots, had been added since the treaty took effect.

“If you just look at the math, you’ll see there is not a rational basis for taking slots from Oneworld at Heathrow in order to approve this deal,” Mr. Arpey said. In fact, the airlines delayed submitting a new antitrust request until competitors had begun their new flights from Heathrow, he said. That has made Heathrow a much less attractive gateway than when it was more exclusive, analysts said.

“BA knows that the writing is on the wall for Heathrow, that they will have to give up slots and their power base will diminish,” said Howard Wheeldon, an aviation analyst at BGC Partners, a London brokerage firm.

“BA has decided that the future is in being truly international, not international with a London as a hub.”