USAir Still Needs a Friend in the Sky

December 23, 1992

British Airways' decision to withdraw its proposal to invest $750 million in USAir is a serious setback, but not necessarily fatal. The two airlines are going to talk again about some form of cooperation, presumably short of the virtual merger that would have accompanied the much-needed capital infusion for USAir.

From USAir's viewpoint, money was the crucial issue. The airline is staggering under a huge debt while struggling with the same revenue problems as all U.S. airlines. The airline's viewpoint is necessarily Maryland's, since USAir is the dominant carrier at Baltimore-Washington International Airport. The airport's health depends on USAir's health, and Maryland's economy requires a strong, heavily used airport in the heart of the state.

Clearly the Bush administration was not going to approve the deal between the two airlines, which would have resulted in what amounted to a merger -- at least not without some major alterations. One obstacle was British refusal to grant other U.S. airlines greater access to London's Heathrow Airport in return for British Airways' penetration of the U.S. market through USAir's network.

The other was the extent of British Airways' control over USAir. U.S. law prohibits foreign control of domestic airlines. Although British Airways would have held less than 25 percent of USAir's stock, it would have held veto power over some major decisions by the local airline's board.

The issue of foreign control was less imposing than USAir's principal competitors -- American, Delta and United -- alleged. But the stubborn British stance on landing rights was a major complication for an administration that has strongly -- and correctly -- favored untrammeled competition among international airlines.

A new landing-rights agreement is not going to come soon. President-elect Clinton will not be in any more of a hurry to approve a merger than was the Bush administration.

But British Airways and USAir say they will discuss "alternative relationships" in the interim. One model is a deal in which Royal Dutch KLM invested a large sum in Northwest Airlines without insisting on more than token representation on the board of Northwest's holding company. Then, after the U.S. and the Netherlands agreed on "open skies," a virtual merger was effected. USAir and British Airways could cooperate closely to their mutual advantage in joint marketing and selling a single ticket for use on both airlines, for example. Or USAir could talk to a different suitor -- Lufthansa for example. It isn't over yet.

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