EU Likely to Clear Alliance of American, BA, Iberia

By DANIEL MICHAELS And P KIVINIEMI

European Union competition authorities are likely to approve Tuesday a long-debated commercial alliance among AMR Corp.'s American Airlines, British Airways PLC and Spain's Iberia Líneas Aéreas de España SA, according to people familiar with the case.

A green light from the EU for the linkup could be the first of several positive events in coming weeks for BA, which has been battered for two years by falling traffic, labor strife and other woes. BA may be poised for breakthroughs in its relations with cabin-crew employees, funding its huge pension deficit and finalizing its planned merger with Iberia.

If BA manages to resolve these issues favorably, the British carrier and its chief executive, Willie Walsh, would achieve a degree of certainty in critical business areas that has eluded the airline for more than a decade. Last week, Mr. Walsh told a gathering in London that he was confident the alliance and the merger "will be confirmed in the near future, [and] will be massive strategic landmarks for British Airways."

BA's flight operations posted their biggest loss ever for the financial year through March 31 amid weak demand and plunging business traffic. In April, BA was one of the carriers hardest hit by the closure of European airspace due to the eruption of an Icelandic volcano. And a string of strikes this year by cabin-crew employees has cost the airline £204 million ($307 million), BA says.

One sign the worst may have passed: BA says it is seeing a pickup in passenger revenue, particularly in high-margin trans-Atlantic corporate bookings. The carrier said it expects to break even this fiscal year at the pretax profit level and predicts a 6% rise in revenue.
For a bigger boost, Mr. Walsh is looking to regulators and unions. EU competition authorities have said they could decide this month on the alliance among BA, American and Iberia. The European Commission, the EU's executive arm, meets Tuesday, and the case is on its confidential agenda, a copy of which was seen by The Wall Street Journal.

People familiar with the case expect the commission to clear the alliance if the carriers meet certain conditions. The current effort marks the third time since 1998 that BA and American have attempted to get closer. U.S. regulators, who in February granted provisional approval for the alliance, are likely to finalize their consent in coming days, according to people familiar with the discussions.

The application for immunity from antitrust prosecution would let BA, American and Iberia join their commercial operations, such as marketing and network planning, in ways normally forbidden as collusion.

Big rivals, including Air France-KLM SA, Germany's Deutsche Lufthansa AG, Delta Air Lines Inc. and UAL Corp.'s United Airlines already have such immunity, and so have been able to compete more aggressively across the Atlantic than BA and American.

The Iberia merger, meanwhile, would give BA heft to compete better with Lufthansa and Air France-KLM.

EU regulators have said they will either approve the merger plan by Thursday or push their review to a second phase of deeper analysis. People familiar with the process said the EU is likely to green-light the deal, in part because the duo since 2005 have had an EU-sanctioned joint venture involving flights between London and Madrid.

Executives from BA and Iberia say they expect the deal to close by year end. Each carrier will maintain its brand identity within a new British-Spanish holding company, International Airlines Group. The structure mirrors those used by Air France and Lufthansa in their European acquisitions.

One of the last big hurdles in the merger has been sorting out BA's £3.7 billion deficit in its retirement plan. In a mark of progress on that front, BA last month submitted to Britain's Pensions Regulator a blueprint for closing the gap. Staff and external trustees of the program have already approved the approach.

BA Chief Financial Officer Keith Williams said in a statement that the regulator's initial response was positive. A spokeswoman for the regulator declined to comment on the plan or when a final ruling might be delivered.

Apparent progress on the pension deficit comes as Mr. Walsh may finally be cracking one of BA's toughest nuts: labor costs. The airline and Unite, the union representing its cabin crews, have been locked in a bitter fight for roughly 18 months over Mr. Walsh's efforts to change staffing practices and work rules that predate the carrier's privatization in 1987. Unite has opposed Mr. Walsh's moves, fighting BA in court and calling several strikes.

After a recent round of negotiations, Unite agreed to let its members review BA's latest offer, potentially a first step toward resolving the conflict. Unite leaders are remaining neutral on the proposal. Responses to the "consultative ballot," which Unite's mailed to members on July 5, are due next week.

A Unite spokesman said the union will use the vote to guide its next moves.
Unite joint general secretary Tony Woodley said last month that although the new offer marked an improvement, "acceptance of the offer [is] uncertain" because it didn't address some key concerns. Mr. Woodley accused BA of trying "to beat its employees into submission" by imposing contract terms and hiring new, less expensive staff.

Mr. Walsh said last week the proposal is "a fair and reasonable offer."