'Open skies' hitch threatens BA alliance

British Airways' proposed alliance with American Airlines was dealt another serious blow yesterday after US government officials pulled out of the next round of "open skies" talks with their UK counterparts, accusing the British government of shifting its negotiating stance at the last minute.

The US civil servant leading the talks, Paul Gretch, described the rift as "a serious hitch". He said US officials had unexpectedly received what amounted to a full-scale draft agreement on Friday from the UK Department of Transport which was "way off the open skies mark". Clearly frustrated, Mr Gretch explained: "The document fell so far short of what we see as a true open skies agreement in so many ways that it did not form a basis for productive discussions. It was not appropriate to continue."

Though the talks, which are aimed at freeing up access to Heathrow Airport, have not broken down completely, the US side said their resumption depended on a change in the attitude of British negotiators.

"It is not going to be too easy," Mr Gretch said. "We remain ready to talk if we can make tangible progress. The UK side has to mull this one over." An agreement is essential if the US authorities are to grant regulatory approval for the BA-American tie-up, which will combine revenues and timetables and give the two airlines 60 per cent of flight UK-US flights.

The final decision on anti-trust immunity for the alliance lies with the US Department of Transportation, which is also leading the open skies talks. According to Mr Gretch, "if there's no open skies agreement then there will be no anti-trust immunity and the deal will fail".

UK Department of Transport civil servants involved in the talks were not available yesterday, but a spokeswoman said officials were "genuinely surprised" at the US move. "We thought our proposals did go some way towards an open skies arrangement," she added.

BA, whose chief executive is Bob Ayling, attempted to put a brave face on the latest set-back in its plans, which have met with unprecedented opposition from other US carriers. "We are sure the delay is only temporary," a spokesman explained. "Both sides have committed on the right terms to delivers an open skies agreement. It is a bold and imaginative objective and given the scale of what is being attempted, some complications were inevitable."

The company faces legal action from its existing partner, USAir, in which BA has a 24.6 per cent stake, on the grounds that the tie-up with American is anti-competitive.

The UK Office of Fair Trading is also investigating whether the deal, which involves no equity stake by either company, should be referred to the Monopolies Commission.

According to US negotiators, a gulf remains on fundamental issues about how to liberalise access to Heathrow airport. The US has insisted that UK authorities grant so-called "beyond rights" to enable its carriers to fly from British airports to other European destinations. The latest UK document apparently confirmed British opposition to this, although the US reached a similar agreement in an open skies deal with Germany earlier this year.

However, according to Mr Gretch, the granting of similar rights for British airlines to fly on US domestic routes was "just not on the cards".

Another problem concerned how to liberalise the mechanism which agrees prices of air fares. The current arrangements, which date from a bilateral treaty signed in the late Seventies, allow the two sides to agree ticket prices, although these arrangements are rarely used for transatlantic travel.