British Airways and Iberia Airlines say that they are on track to sign their merger agreement during the first quarter of 2010. The merged carriers would create the world's third largest airline in terms of revenue. What will this mean for competition and the proposed joint venture with oneworld® partner American Airlines?

Bigger is better for airlines, but not always for customers. Though alliances provide more choices and destinations for travellers, they aren't exactly a model for competition. Airlines within an alliance share resources and routes not available through one airline alone. Mergers take things further by eliminating a competitor entirely. Often, concessions must be made to regulators before a merger is approved. These give-backs often include coveted departure and arrival slots at airports and promises to continue serving airports disproportionately affected by a merger. BA's strong presence at London's Heathrow Airport gives its alliance partners access to many markets between the UK and the U.S. – among the most lucrative. This has kept them under regulatory scrutiny for quite some time. Given the objections to a BA-AA alliance from airlines like Virgin Atlantic, the trio of airlines (adding Iberia) has agreed to some concessions to appease regulators and improve the chances of a full sanctioning of a joint venture involving all three carriers. The details of these concessions have not been disclosed but it is widely speculated to include some slots at major airports like Heathrow.

If alliances are not the answer for some airlines, owning a piece of another might be the next best option. The problem with buying a stake in another airline is that many nations have protective rules that restrict foreign ownership of home-grown carriers. This is coming to light during the next phase of the EU-U.S. Open Skies agreement. The pact has allowed U.S. carriers to fly from any city in the U.S. to any EU member nation, and within the EU from there. For European carriers, the key benefit thus far has been the ability to fly to any U.S. city from any EU gateway. Rights to carry passengers within the U.S. have not been granted. This seems to have been a concession made by EU negotiators in the first phase of talks after the U.S. refused to change its stance against foreign ownership of their airlines. This is where it gets interesting. Perhaps the U.S. needed more time to consider this stance. That seems to be the thinking of negotiators who allowed the first phase of the agreement to pass while calling for a second phase of negotiations that would include talks of relaxing ownership rules. The EU has retained the right to terminate parts or the entire pact if the U.S. fails to open up its domestic market by the end of 2010. Calls to do so were recently made by Virgin Atlantic CEO Steve Ridgway as the next round of Open Skies talks begins this month.

Airlines and regulators are entering new territory with the emergence of alliances and the concern over lack of competition is high. The fact that an application to become immune from anti-trust laws has to be approved should tell you how unusual, and complicated, some of these airline agreements have become. At stake are the destination choices you will eventually have (which should increase) and the price you will have to pay (which will likely increase as well).