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British Airways, which admitted on Friday that profits plummeted by nearly 90% last quarter, says that it’s making good progress in its negotiations with American Airways, the US carrier that it’s been flirting with for years. After revealing last week that it’s planning to merge with Spanish carrier Iberia in the coming year, this would be BA’s latest attempt to bolster its position in the face of the cross-winds currently buffeting the airline industry.

It’s no surprise that BA has been compelled to take drastic action. Reporting quarterly profits of £37m last week, down from nearly £300m last year, CEO Willie Walsh couldn’t have been more downbeat about the current situation for big airlines: ‘We are in the worst trading environment the industry has ever faced,’ he moaned, blaming ‘the combination of unprecedented oil prices, economic slowdown and weaker consumer confidence’. The ongoing troubles at Terminal Five probably haven’t helped, either.

As with Iberia, BA and AA already work together as part of the One World alliance, a co-operation deal on flight routes and airport facilities. But the recent discussions have been about extending this tie-up so the two carriers basically operate as a single airline, allowing them to cut costs more substantially – although a full merger would probably be too complicated from a regulatory point of view (which is a shame, because BAAA has a nice ring to it).

Indeed, those pesky regulators remain the biggest barrier to closer co-operation between the two airlines – they’ve been trying to hook up officially for years, but on two previous occasions the US authorities have volunteered a lawful impediment even as the pair stood at the altar ready to tie the knot. However this time round, BA is hopeful that it will get a more sympathetic hearing in Washington: the EU-US Open Skies aviation pact (which abolished BA and Virgin’s duopoly over flights between the UK and the US) may have relaxed the rules sufficiently to get this deal through.

On the other hand, although a BA-Iberia-AA tie-up might please shareholders of the three airlines, it’s unlikely to go down well with rivals. Old enemy Virgin Atlantic has already promised to fight any joint venture between BA and AA on the grounds that it would create a ‘dominant mega-power’ on the lucrative EU-US routes, suppressing competition. The deals might also provoke the wrath of unions, since cost-cutting will presumably mean job-cutting (despite BA’s protests about keeping the brand identities separate).

So Walsh still has a lot to do if BA is going to ride out this storm...

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