USAir move to revoke alliance hits BA shares

Shares in British Airways tumbled 6p to 573p yesterday on news that USAir was revoking its three-year-old marketing alliance with effect from March next year. Analysts expected the move to spell the final collapse of BA's relationship with USAir, in which it has a 24.6 per cent stake.

The breakdown of the BA-USAir passenger-sharing partnership has arisen from BA's quest to forge a potentially much more lucrative deal with American Airlines, the world's largest carrier in terms of sales. First hearings in a lawsuit filed by USAir against BA and American began in New York yesterday.

BA yesterday called USAir's decision "disappointing and puzzling". A spokesman said: "We remain of the view that a continued alliance between British Airways and USAir is in the best interest of both airlines."

Under the code-share agreement, USAir feeds its customers to BA's transatlantic routes while absorbing BA passengers into its US network, which is concentrated on the eastern seaboard. The airlines also mutually recognise each other's air miles programmes.

BA announced in June that it was seeking essentially to merge operations with American Airlines with effect from next April, although the deal will involve no swapping of equity. USAir and several other US-based airlines are virulently opposing the deal, which would give BA and American control of about 60 per cent of all traffic across the Atlantic. Virgin Atlantic is also campaigning to have the agreement blocked.

Officials at BA continued to insist yesterday that the carrier wanted to retain its stake in USAir. Analysts believe, however, that a sell-off of the USAir stake by BA, for which it paid $400m (pounds 250m) in 1993, is inevitable.

After years of losses, USAir, the sixth-largest in the US, has staged a profit turnaround and recently reported a 57 per cent increase in net income for the third quarter of this year. Its stock has also risen sharply, now standing at almost $18 a share, compared with as little as $4.50 in January.

For BA, the unravelling of its relationship with USAir makes consummation of its agreement with American all the more vital. "Their fall-back position isn't as secure as it was," said Guy Kenwick of Lehman Brothers. "It intensifies the need to get this BA-American agreement up and running."

The deal with American faces considerable hurdles, however. It is subject to anti-competitive scrutiny in Britain, the US and the European Union. It is also contingent on a breakthrough in talks between the British and US governments on an "open skies" agreement between them. Those negotiations broke down last August, however, and remain fraught with difficulty.

In the hearings that began yesterday, American and BA are attempting to have the USAir lawsuit dismissed. In the lawsuit, USAir asserts that BA "failed to act in good faith and breached its fiduciary duty to USAir as a joint venture partner".

American responded: "USAir's announced intention to terminate its agreement with BA confirms our statements that USAir is not so much an `aggrieved party' as it is a company that wishes to renege on a $400m deal it now regrets."