BA stalls in mid-air over merger

BRITISH AIRWAYS' proposed dollars 750m tie-up with USAir remained on a knife-edge last night after a further crucial round of air liberalisation talks between Britain and the United States ended without progress.

It now seems likely that the negotiations on an 'open skies' agreement across the Atlantic will not be concluded before the deadline for regulatory approval of the BA-USAir deal expires on Christmas Eve.

BA and the British government continue to insist that approval for the USAir pact does not need to be made contingent on a liberalisation of the air treaty between the two countries.

However, US negotiators are insisting on greater access to the UK airline market for US airlines as a pre-condition for permitting BA to take a 44 per cent stake in USAir.

A BA spokesman said last night it remained confident that Andrew Card, the outgoing US Transportation Secretary, would approve the tie-up before the 24 December deadline.

But senior British officials in Washington involved in the talks are increasingly pessimistic about a positive outcome on the BA-USAir deal.

John MacGregor, Secretary of State for Transport, arrived back yesterday after talks in Washington with Mr Card saying that while the meeting had been constructive, 'difficult issues' remained to be solved.

This is a reference to Britain's insistence that the US should relax its controls on foreign ownership of US airlines. At present non-US citizens are limited to 25 per cent of the voting rights.

No further meetings have been scheduled, which means that Mr MacGregor will have to wait for the Clinton administration to be installed in January before talks on an open skies agreement can resume.

Although BA will come out of the USAir deal with only 21 per cent of the voting rights, rival US airlines argue that it will in effect have control over the airline, since all important decisions require an 80 per cent majority.

In a further twist to the row over whether control of USAir would pass out of American hands, a proxy statement from USAir was published yesterday that appeared to suggest the tie-up with BA would result in a 'change of control'.

It was also revealed that 10 senior USAir executives stood to share in a dollars 4.3m bonus if the deal with BA was approved as a result of the change in ownership.

USAir subsequently back-tracked, saying that the wording of the proxy statement had been unfortunate and that the controversial bonus plan had been dropped.

BA has maintained throughout that its agreement with USAir complies fully with US law and, on purely legal grounds, has no case to answer.

However, its growing anxiety over whether approval will be granted has been reflected in the full-scale battle being fought out between BA and the big US airlines through the advertising columns of heavyweight American newspapers.

Approval for its stake in USAir would be a key component in BA's strategy to create a global airline alliance. Another element in the plan is likely to be put in place next week when BA bids for a stake in Qantas, the Australian airline.

The Australian government is selling 49 per cent of the flag-carrying airline and has set a deadline for bids of next Wednesday.

The BA board met yesterday to consider a bid and decided to give the matter further consideration. But BA is firmly expected to make an offer before the closing date.

Linking with USAir would give BA access to the vast US domestic market - the biggest airline market in the world. A tie-up with Qantas would complete its global reach by giving it a connection across the Pacific.