A consultation document setting out the case for a big expansion of airport capacity at Liverpool rather than Manchester is expected to be issued in the autumn.
The new airport would be built on the site of Liverpool's existing Speke airport next to the Mersey estuary. BAe took over the airport two years ago by buying a controlling 76 per cent stake from the five Merseyside district councils that owned the site.
The aim would be to extend the airport by reclaiming land from the mudflats of the estuary and bringing in other private-sector companies to finance the development.
Support for the project is also likely to be sought from the European Commission, which backs the concept of developing regional airports, and Michael Heseltine, President of the Board of Trade.
As Environment Secretary, Mr Heseltine spearheaded the inner- city regeneration of Liverpool in the early 1980s.
Mr Heseltine's backing in Cabinet could be critical since BAe would need public funding from the Treasury to build up the road infrastructure in the area.
Liverpool is facing tough competition from Manchester, however, in the battle to expand regional airport capacity in the North-west.
Manchester's airport already handles 11 million passengers against Liverpool's 500,000, making it Britain's third-biggest airport after Heathrow and Gatwick.
The first phase of a new pounds 570m international passenger terminal will open at Manchester next spring, increasing its capacity from 12 million to 18 million passengers a year.
The local authorities that own Manchester have also submitted proposals to build a second runway, which would lift its capacity to 30 million passengers a year.
The application is due to go to a public inquiry next year. If Manchester gets approval, the pounds 100m construction of the runway would begin in 1996 and it would enter service in 1998.
If Liverpool can put forward a credible alternative then both proposals might be called in for examination at the same time.
Manchester is supporting its case for a second runway on the grounds that it serves more domestic destinations than any other UK airport and is already an important international hub, with British Airways, Qantas, American Airlines, Delta, Singapore Airlines and Cathay Pacific among those operating scheduled intercontinental services.
However, the planned second runway is facing fierce opposition from local residents on noise and environmental grounds.
In an effort to placate local opposition, the authorities at Manchester have extended sound insulation grants to another 700 households and promised to cut the number of night flights using older, noisy jets from 1,500 to 950 next year.
The case for expanding Liverpool is that since the airport would be built next to an estuary it would have environmental and safety advantages.
Rod Hill, managing director of Liverpool airport, said: 'Liverpool is on Manchester's doorstep and clearly we have the capability to take its traffic. From an environmental and safety point of view it is better to take off and land over water and there is a lot of land available here.
'Reclaiming land from the Mersey would mean we would not have problems with the green belt or housing or having to bite into prime agricultural land.'
Manchester argues that once the new terminal comes on stream its existing runway will reach full capacity. There are also plans to expand the terminal under a second phase, taking airport capacity to 24 million passengers, which would necessitate a second runway.
A spokeswoman said: 'We know they have development plans for Liverpool and we are watching what they are are going to do along with Birmingham airport, which could be a bigger threat.'
She added that increasing capacity to 30 million passengers by the turn of the century could create 50,000 jobs in the region.
A BAe spokesman said: 'Manchester has the lion's share of airport traffic in the North-west and to win any of that will be quite a challenge. We have already spent several million pounds looking at ways Liverpool airport could be developed and we are continuing with that. But all this is still at study stage.'
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