The collapse of the deal is a sharp blow to BA's global expansion plans and threatens to rob it of its long-cherished partnership with a US carrier.
But the refusal of the outgoing Bush administration to sanction the USAir tie-up may also seriously delay progress towards the full liberalisation of air services between Britain and the US.
The US government had been expected to announce its formal veto of the BA-USAir deal today following John Major's failure to persuade President Bush to back the link-up during talks at Camp David last weekend.
Anticipating this, BA yesterday withdrew from the agreement signed with the US carrier in July, blaming the 'unwarranted and unilateral concessions' the US government was seeking in return for approval of the deal.
'The UK government, quite rightly, was unwilling to concede in return for approval of this transaction immediate unlimited access to the UK and beyond to all US carriers while the US market - accounting for 40 per cent of all air transport worldwide - would continue to be restricted to US airlines only,' it added.
Under the agreement, BA would have emerged with a 44 per cent equity stake and a 21 per cent voting stake in USAir, creating an alliance of two carriers which between them fly 80 million passengers a year to 339 destinations in 71 countries with a fleet of 670 aircraft.
Most critically for BA, it would have given the UK flag-carrier access to USAir's domestic network serving 260 cities.
This would have strengthened BA's hand against competition from the big three US airlines - United, American and Delta - all of which vociferously opposed the deal.
Andrew Card, the US Transportation Secretary, said that no formal decision was now required on the proposed tie-up but he noted that the proposed investment 'aggressively pushed the envelope of legal precedent' concerning control by foreign citizens.
It was apparent on both sides of the Atlantic, however, that the deal foundered on the failure of UK and US negotiators to reach a compromise on access to the British market.
The sticking point was the insistence of the US that its airlines be given immediate and increased access to Heathrow - a concession that the British government was not prepared to grant until the US eased restrictions on foreign ownership of its airlines.
Despite the collapse of the deal, BA said that it and USAir intended to continue discussions on 'alternative relationships'. BA is understood to be examining whether to resurrect the link-up by agreeing to take a smaller voting stake and injecting less money.
However, even supporters of the deal say it is even less likely that such an arrangement would be approved under the Clinton administration, which takes office in a month's time.
Nor can the possibility be ruled out that USAir will turn to another suitor - with Lufthansa, the German national airline, suggested as a potential partner.
This appeared to be underlined when Seth Scofield, chief executive of USAir said that although discussions would continue with BA it would also 'evaluate other opportunities'.
Although both sides sought to play down the impact of yesterday's announcement on wider liberalisation talks, no further bilateral talks are scheduled.
The Department of Transport said that while the two governments remained committed to liberalisation of air services, the offer made during the most recent negotiations - unlimited access to UK regional airports for US carriers - would not be pursued further.Reuse content