BA rocked by USAir suit to block alliance

British Airways' proposed alliance with American Airlines was dealt a severe blow last night when USAir, the airline in which BA holds a 25 per cent stake, began court action in the United States against the two carriers. The move threatens talks aimed at neogitiating an "open skies" agreement between the United States and Britain, which would enable the alliance to clear US competition rules.

The lawsuit, which has been filed in the New York federal district court, claims that the new alliance violates the existing agreements USAir has with British Airways. In addition, the suit alleges that the BA-AA tie- up was in breach of US anti-trust laws which ban conduct that could damage competition.

The legal challenge came as a complete suprise to BA, which had insisted only last month that the existing arrangement with USAir would "remain in place." BA said: "USAir did not provide us with a copy of its complaint or discuss it with us before making its announcement today. We have still not yet seen the suit it says it has filed against us and Amercian Airlines, so it is difficult for us to comment on it." However, USAir insisted BA had been informed beforehand.

American Airlines said: "We are astonished and mystified. Our proposed alliance with British Airways respects USAir's rights in every way and is extraordinarily pro-competitive."

But the news delighted other carriers who have fiercely lobbied against the BA-AA alliance on monopoly grounds. Though the deal does not involve an equity stake by either carrier, it would merge timetables, marketing, passenger facilities and revenues, and would give the alliance 60 per cent of seat capacity between the UK and the US.

Richard Branson, head of Virgin Atlantic, said: "If BA's own partner airline believes the deal is anti-competitive, then every regulatory authority in the US and Europe can only draw the same conclusion, namely that a merger between BA and AA would create the world's biggest airline monopoly."

Although its code-sharing arrangements with BA would not be severed, USAir is believed to be ready to compete with its former partner for transatlantic business if it can gain access to Heathrow Airport.

This demand puts a dramatically different complexion on the "open skies" negotiations which resume in Washington today. USAir is thought to be insisting on BA-AA giving up some of its most lucrative slots at the airport. This could be a serious block for BA, which has said "there is no reason why we should divest our slots". Two previous attempts to secure an agreement, in 1993 and 1995, broke down over the issue of Heathrow.

In its statement explaining the legal action, USAir said its existing agreement with British Airways, signed in 1993, "required both parties' best efforts to complete and advance their alliance.... The proposed accord between British Airways and American Airlines, as presently constituted, is inconsistent with British Airways' requirements and obligations under its existing contracts with USAir."

It continued: "British Airways, acting in concert with American Airlines, also failed to act in good faith and breached its fiduciary duty to USAir as a joint venture partner."

USAir explained that it had gone to considerable lengths to fulfil its side of the deal with British Airways. To comply with US anti-trust rules, US Air, which does not fly from Heathrow, had divested itself of its three routes between London Gatwick and the United States.

Asked whether USAir would be claiming damages against BA, a spokesman said: "The issue is not blocking the alliance, but remedying wrongs in the contractual relationship with BA."

The lawsuit came hours after the Commons Transport Select Committee gave its backing for the BA-AA alliance, on condition that an "open skies" agreement did provide real competition for access to Heathrow.

Comment, page 17

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