Airlines' alliance may hit a snag British Airways stake in USAir may hinder tie with American

June 12, 1996|By Abbe Gluck | Abbe Gluck,SUN STAFF

British Airways says it won't give up its stake in USAir Group Inc., but it might have to do that to get approval for its new alliance with American Airlines.

Yesterday, British Airways and American announced an agreement to coordinate passenger and cargo activities, introduce code-sharing and establish reciprocity between their frequent-flyer programs. The alliance, scheduled to begin in April 1997, would create almost 36,000 potential city pairings worldwide.

Code-sharing allows airlines to put their own codes on each other's flights, enabling passengers to fly across both carriers' networks as if they were one airline.

British Airways owns 24.6 percent of USAir, which handles nearly half the daily passengers at Baltimore-Washington International Airport. Officials of American and British Airways insist that USAir will not be affected by the deal.

"They are two very separate alliances," said Honor Verrier, a spokeswoman for British Airways. "We would hope to continue our relationship with USAir as it is."

Said Tim Smith, a spokesman for American: "Things already out there will not change."

Smith said the alliance will not affect any of the airlines with which either carrier currently has agreements. Nor will USAir travelers get the benefits of the alliance -- such as frequent-flyer reciprocity -- with American.

"This alliance is exclusively with British Airways," said Smith.

The American-British Airways agreement needs approval from the U.S. Department of Transportation, which will review the alliance to ensure it does not infringe on open-market competition.

A prerequisite to approval, in this case, is the negotiation of an "open skies" agreement between the United States and Britain, said Bill Mosley, a Transportation spokesman. Under an open skies agreement, Britain's airports would be open to all U.S. carriers and vice versa. Currently, only United and American can fly into London's Heathrow airport.

If an open skies agreement is formed, Mosley said, competition will be enhanced, because any airline could fly into Heathrow.

But open skies may not be sufficient. When the Department of Justice analyzed the alliance between USAir and British Airways, for example, it required USAir to shed its London routes to ensure a competitive market. Similarly, British Airways could be forced to shed some of its routes -- among them, those of USAir.

That would not be good for British Airways because, "the East Coast is the busiest aviation market, bar none," said Bill Mastoris, an airlines analyst at Mendham Capital Group in Roseland, N.J.

And USAir is the largest East Coast carrier, handling two-thirds of all North-South traffic.

Mosley would not comment on the chances of the Transportation Department forcing British Airways to sell its stake in USAir, noting that the petition for the alliance had not been filed.

FTC Some said USAir has much to gain from yesterday's deal.

"USAir will be a beneficiary," Mastoris said. Since American's strengths lie in the Midwest and its service to Latin America, he said, "it doesn't really overlap with USAir, and neither [USAir or American] overlap with British Airways."

British Airways' chief executive agreed. "The new alliance will build on our established and valued links with Quantas, USAir and other partners to establish us all as the undisputed leaders in world air travel," Bob Ayling said in a statement.

Some analysts disagreed.

The alliance will deprive "USAir of strategically important access to Europe through the British Airways routes," said Mark Ray, airlines analyst at John Hancock Financial Services in Boston.

"I would not be surprised to see USAir relegated to domestic carrier status," Ray said.

If British Airways were forced to cast off USAir, it could expedite the labor-negotiation and cost-cutting process currently under way at USAir, Mastoris said.

"There will be a sense that now you're on your own, and you'll have to be competitive," he said. "The perception that there's a gigantic sugar-daddy in London taking care of you will be gone."

And the airline could seek new ownership.

At USAir's annual meeting last month, Chairman and Chief Executive Officer Stephen M. Wolf said a merger or acquisition ++ would help reduce the airline's costs and significantly increase revenue. Over the last year, there has been speculation that UAL Corp., United Airlines' parent, or American might buy USAir or form some kind of agreement. Neither USAir nor United would comment on the speculation.

Officials at USAir also declined to discuss the significance of yesterday's alliance until they gave the matter further consideration.

"Today's proposal has the potential to provide USAir with the ability to pursue new and positive opportunities," the airline said in a short statement.

Shareholders held onto their stock. USAir shares closed up 25 cents at $20.25.

Shares of AMR Corp., American's parent corporation, fell 62.5 cents, to $93.375, and British Airways American depositary receipts were up $2.125, to $86.75.

Pub Date: 6/12/96

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