BA in talks with American and Continental

Reuters says that British Airways has acknowledged it is in discussions with two of its largest US rivals, American Airlines and Continental Airlines, which a source briefed on the matter said was about a potential alliance.

Such a collaboration would create a powerful force in the lucrative trans-Atlantic market, bringing Britain’s flag carrier into closer co-operation with American, the world’s biggest airline by traffic, and Continental, the US No 4.

“British Airways is exploring opportunities for co-operation with American Airlines and Continental Airlines,” the company said in a brief statement, without elaborating.

American Airlines, owned by AMR Corp, confirmed it was in talks with BA. “AMR is exploring opportunities for co-operation with British Airways,” a spokesperson said. A Continental Airlines spokeswoman declined comment.

The source briefed on the matter said earlier in the week that Continental Airlines Inc was in “advanced talks” with BA about an alliance, which would help the duo streamline costs while sharing revenues.

Continental said on Sunday it would not seek a merger with another airline, calling off talks with UAL Corp’s United Airlines, saying instead it would carry on reviewing its alliances with other carriers.

American Airlines and BA already have an alliance through the 10-member oneworld alliance, but have twice tried and failed to win antitrust immunity for it.

If Continental opted to join with BA and American Airlines, it would likely spell the end of its trans-Atlantic codeshare arrangement with BA’s bitter rival Virgin Atlantic.

Limited immunity from US antitrust laws permits air carriers to co-ordinate schedules, route planning, and services over international routes. It offers more seamless connections and other benefits that can maximize revenue. Alliances with immunity have been coveted and lucrative, and easier to pull off internally and with regulators than a merger.

Regulators have long been concerned that stronger American/BA ties would jeopardize competition at London’s Heathrow airport for other US carriers. But air travel restrictions have eased under a US/EU “Open Skies” agreement that took effect in March, creating new opportunities for trans-Atlantic air services.

Delta Air Lines Inc and Northwest Airlines Corp, which struck a merger deal earlier this month, received approval earlier this month from US transportation regulators to broaden their alliance with AirFrance-KLM, Alitalia and other overseas partners.

A full merger between BA and one of the US carriers is unlikely, given that US law caps foreign ownership of US airlines at 25 per cent of voting stock. European carriers are hoping that the second stage of “Open Skies” will lift those limits by 2010, but US labor groups and politicians are broadly against it.

Earlier this year German airline Lufthansa bought a 19 per cent stake in US discount carrier JetBlue Airways Corp, but no full-scale trans-Atlantic mergers have been attempted.

The BA spokesman would not comment on the possibility of a full-blown merger. ABN AMRO analyst Andrew Lobbenberg said that it would not be allowed by regulators.

BA Chief Executive Willie Walsh told a conference earlier on Wednesday that restrictions barring the possibility of a merger with a US rival should be lifted.

“Airlines may be more sympathetic to consolidation than in other eras (due to the tough climate),” he told the Institute of Directors conference in London.

A Report by The Mole from Reuters