Setback in US for BA alliance with American Airlines

British Airways proposed alliance with American Airlines suffered a setback last night after the US Justice Department said the American government should reject the deal unless the airline gave up to its rivals a number of prized landing slots at Heathrow.

The department said in a submission that the deal would "likely result in higher air fares and reduced service". It said the Transportation Department – which must approve or reject the deal – should say no unless the airlines gave up nine daily return flight slots to its rivals.

American Airlines (AA) and BA currently compete head-to-head in the market for non-stop flights to London from several major US cities. The proposed alliance – for which they are seeking antitrust immunity – would let the carriers set fares and routes and sell each other's tickets.

The Justice Department said the deal would give the alliance more than 50 per cent of the flights in many markets and an even higher share of the business travel market. R Hewitt Pate, the deputy assistant attorney general in the department's antitrust division, added: "This proceeding offers an opportunity to transform a market that has been severely restricted for decades into one where significant new entry can occur." BA and AA have argued that the industry has changed a great deal in the five years since 1996 when the Justice Department blocked a similar proposed alliance. They say transatlantic travel is less concentrated at London's Heathrow, where BA has its hub.

In addition, they have argued that the deal would be no different to that operated by Northwest Airlines and KLM, which gives the two carriers a transatlantic hub in Amsterdam, or the United Airlines-Lufthansa alliance that operates through Frankfurt. Both deals received antitrust immunity. Delta Airlines is also trying to form an alliance with Air France.

There was no official response from BA last night. Company sources pointed out, however, that when the Justice Department blocked the 1996 deal it demanded the airlines give up 24 landing slots.

BA and AA have to make their final submissions to the Department of Transportation by Friday. The department could indicate its decision within days.