Unless progress is made by the middle of next month, the Clinton administration intends to place curbs on British Airways' link-up with USAir.
Britain has said it will retaliate by cutting flights by US carriers into Heathrow.
After three days of negotiations in London, the two sides remained divided over Britain's insistence that US airlines will get more access to Heathrow only when restrictions on the foreign ownership of US carriers are lifted.
In an apparent attempt to push the talks forward, the UK negotiators yesterday came up with a new and unexpected 'mini-offer'. But after consultation with Federico Pena, the US Transportation Secretary, in Washington, this was rejected. A further round of talks is scheduled to start in Washington on 18 January.
According to British sources, the offer involved granting US airlines a limited increase in access to regional UK airports and Heathrow, in return for the US government allowing BA to extend its code-sharing arrangements with USAir and increase its stake from 24 per cent at present to 44 per cent.
However, US sources interpreted the offer as signalling that BA was prepared to freeze its investment in USAir provided the code-sharing could continue.
Code-sharing is the mechanism by which an airline can offer flights to a destination it does not serve as if it were a single service. It is the means by which BA plans to connect its transatlantic flights into USAir's domestic network.
Last month Mr Pena gave BA and USAir authority to code-share on a further batch of destinations, but the approval lasts only until 12 January.
Britain immediately retaliated by warning that unless the approval was extended it would cut the number of flights United Airlines and American Airlines can operate from Washington and Chicago to Heathrow by one a week.
BA has so far paid dollars 368m for its 24 per cent holding in USAir, and has agreed to pay a further dollars 450m to raise its holding to 44 per cent. Until and unless US ownership laws are relaxed, however, it cannot go above 25 per cent.
Sources close to BA vehemently denied last night that the airline had offered to sacrifice further investment in USAir in exchange for being allowed to extend its code- sharing agreement.
BA remained committed to raising its stake in two stages to 44 per cent.
The US continues to insist that the code-sharing dispute and the wider liberalisation talks are inextricably linked. Britain maintains they are separate issues.
A Department of Transport spokesman said last night that there were still a 'number of major obstacles to overcome' but that Britain looked forward to continuing the dialogue. It also looked for a 'positive resolution' of the code-sharing dispute before 12 January.
Michael Harrison, page 31Reuse content