British Airways calls off $750 million USAir deal Foreign carrier expected U.S. veto

December 23, 1992|By Suzanne Wooton | Suzanne Wooton,Staff Writer Ian Johnson of the New York Bureau contributed to this article.

British Airways PLC yesterday scrapped its plan to invest $750 million in USAir, saying the U.S. government was ready to veto the deal, which would have created a global alliance and given struggling USAir badly needed cash.

The alliance -- fiercely opposed by the Big Three domestic airlines, American, United and Delta -- had become entangled in a dispute over British restrictions that govern how often U.S. airlines may fly into London and where they may go from there.

Both British Airways and USair vowed yesterday to explore alternatives. But the future of the alliance clearly depends on the ability of U.S. and British officials to alter agreements governing flights to London.

"The deal is dead right now," said John Lampl, a spokesman for British Airways in New York. He blamed its collapse on political pressure from U.S. airlines who feared competition.

Still, analysts said Arlington, Va.-based USAir is in no immediate financial danger. "A consolidation is taking place in the airline industry, and USAir is only a niche player, but they aren't in such a critical situation that they'll collapse," said David Pizzimenti, of the Nomura Research Institute in New York.

During the past three years, USAir has lost $700 million, prompting the airline to cut flights, furlough workers and seek pay and benefits concessions from most of its 46,000 employees. Since 1990, the number of daily USAir flights at Baltimore-Washington International Airport has dropped from 249 to 192.

But David Shipley, a spokesman for USAir, said the deal was not necessary for USAir's survival, nor is it likely to mean further cutbacks at BWI.

"We still have cash and credit well over half a billion [dollars]. We're not a [bankruptcy] candidate," Mr. Shipley said. "The cash would have made us a much more viable competitor, but it was not critical to our survival."

Among the possible partners mentioned for USAir is Germany's Lufthansa. USAir has previously discussed an alliance with the airline.

The deal's collapse triggered a strong reaction from Gov. William Donald Schaefer. He and other state officials have monitored the deal closely, because USAir is the largest carrier at BWI, handling more than half its 27,000 daily passengers.

"It's a serious, serious, if not devastating, blow to USAir and very bad news for BWI," the governor said.

But according to Theodore E. Mathison, administrator of the Maryland Aviation Administration which operates the airport, USAir already has made the kind of cuts at BWI that other financially troubled airlines are making at other major airports.

"The real question is USAir's role in competing with other carriers in the international arena, and that is some concern to us," Mr. Mathison said. "It doesn't mean we can't attract other carriers, but certainly, USAir is the feeder airline for us."

Indeed, BWI's future is linked to growth in its international traffic. In 1994, it plans to build a $130 million international terminal.

The alliance would have given USAir access to a global market and would have linked British Airways' trans-Atlantic flights to USAir's large domestic system.

The Big Three -- which have invested billions to expand international systems -- insisted that the alliance would have given British Airways access to the largest commercial market in the world without expanding U.S. airlines' ability to land more planes at London, a gateway to Europe.

"British Airways apparently believes that permitting more competition on its routes to and from Heathrow would be more costly than walking away from this deal," Robert L. Crandall, American's chairman and president, said yesterday.

And U.S. Secretary of Transportation Andrew H. Card Jr. agreed that any deal must hinge on a genuine "open skies" agreement. "The U.S. has been unsuccessful for some time in its attempts to obtain better access to the U.K. for U.S. airlines," he said in a statement.

In contrast, the Transportation Department looks favorably on an alliance between KLM Royal Dutch Airlines and Northwest Airlines now that a treaty has been signed giving both carriers the right to build up systems in the United States and Europe.

As recently as Monday, British Transport Minister John MacGregor and Mr. Card talked about the British Airways deal. But differences were still too great for an agreement to be reached by tomorrow -- the date both airlines said the proposed deal could expire.

"We're obviously very disappointed that the investment agreement was caught up in the bilateral negotiating process," USAir Chairman Seth Schofield said yesterday.

Analysts who follow USAir and British Airways said the decision was a blow to both companies, but not fatal. While USAir will have to find a partner at some point, it is healthy enough to continue for another year, they said.

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