BA talks to Iberia about joining alliance

British Airways and American Airlines are believed to be in negotiations with Iberia to include the ailing state-owned Spanish carrier in their proposed alliance.

The surprise news could threaten to undermine the latest conciliatory moves over the alliance by the European Commission, which is understood to be seeking a compromise with the UK government over the number of lucrative runway slots which the two carriers would have to give up at Heathrow Airport.

Iberia has hovered on the brink of collapse for years, but sources suggested its relatively strong position at Heathrow, coupled with its dominant role in the market between Europe and South America, would make it a useful ally for the alliance partners.

American Airlines is expanding its flights to the growing markets of South America and could take advantage of Iberia's substantial operations at Miami.

A British Airways spokesman last night declined to comment. "We talk to a whole range of airlines on a whole range of different subjects. It's our long standing policy not to comment on speculation."

However, the disclosure comes at a highly sensitive time for British Airways, as it attempts to persuade regulators in Europe and the US that it should be compensated in cash if it is forced to give up take-off and landing slots at Heathrow. Relations between the UK and European Commission have slumped to a new low over the past few weeks, with both sides claiming they have the final say over whether the deal can go ahead.

Karel van Miert, the Competition Commissioner, has threatened to take the UK to European Court over the issue.

So far British Airways has insisted the Commission has no right to regulate the link-up, because it is solely a transatlantic partnership. However, if Iberia were later brought into the alliance it would mean Brussels would have a much stronger case for intervening. "This could blow the regulatory playing field right open," a source said.

Despite the acrimonious public rhetoric, the Commission is talking informally to the Department of Trade and Industry and had raised the possibility of a compromise. One suggestion is that under Brussel's proposals the alliance would have to give up around 200 slots at Heathrow, higher than the 168 suggested by the Office of Fair Trading in the UK, but far less than the figure of 400 which had previously been linked with Mr Van Miert.

However, the biggest stumbling block remains the issue of slot trading, which Neil Kinnock, Transport Commissioner, has recently admitted is illegal under European rules. Industry experts have estimated British Airways could earn pounds 180m if it gets cash for the 168 slots under the OFT proposals. Though Mr Kinnock is now seeking to change the Commission's policy, it is now clear this process is unlikely to reach a conclusion before all the other regulatory investigations elsewhere are completed.

Yesterday the heads of five American carriers piled further pressure on the alliance by urging the US Department of Transportation to carry out a lengthy formal investigation into the link-up. Their letter said the US regulators should put "open skies" talks with the UK, aimed at liberalising access to Heathrow, on hold until the new investigation was over.

Separately yesterday, three British Airways directors, including Bob Ayling, chief executive, resigned from the board of USAir as the UK carrier moved a step closer to severing the remaining ties with its former partner.

A USAir spokesman said that the move "clears another obstacle in USAir's path toward becoming an effective competitor in the US-UK market".

USAir said no decisions had been taken on whether to buy out British Airways' stake in the company of almost 25 per cent. British Airways has given until 15 February before offering to sell the stake elsewhere.

USAir pledged to continue its law suit against BA. It claims that the UK carrier violated US competition laws.