Washington acts to avert USAir crisis

THE UNITED STATES government is trying to restart cost-cutting talks that could save USAir, the airline 24.6 per cent owned by British Airways, from seeking Chapter 11 protection against creditors.

A Department of Transportation official will meet representatives of the Air Line Pilots Association (Alpa) this week in an attempt to bring it back to the table with the management.

Alpa walked out of talks earlier this month after USAir said it proposed to sell 37 aircraft, including all the 767s currently flying the Atlantic in BA livery. 'We thought that was a terroristic negotiating ploy,' a union spokesman said.

USAir, which last week announced a higher-than-expected dollars 180m (pounds 112m) loss for the third quarter, has said it needs to cut dollars 1bn in annual costs to compete with low-cost rivals such as Southwest Airlines and Continental Lite. It has never recovered from a merger with Piedmont Airlines in the late 1980s, which was not followed by the rationalisation needed, and has lost dollars 2.8bn in the past four years.

Half the cost cuts must come from labour savings, the airline has said, and in July Alpa suggested all employees should take a 20 per cent pay cut in exchange for a 25 per cent shareholding and other benefits. Other airlines, including United, have already traded a union stake for pay cuts, but USAir rejected the proposal and talks finally broke down a month ago.

Analysts believe USAir will survive, whether or not it goes into Chapter 11, but say that BA's stake will be diluted. Either the unions will be given equity, or a wholesale restructuring will inject extra capital. Both are likely to lead to lower wages for the staff: it was a Chapter 11 restructuring that allowed Continental to launch its low-cost 'Lite' operation. Glenn Engel, analyst with Goldman Sachs in New York, does not believe the airline will reach Chapter 11, however. 'There is too much at stake for them not to come to terms,' he said.

BA has invested dollars 400m in USAir since the beginning of 1993, but said last week that it would not contribute the extra dollars 450m it had planned for this year until a satisfactory restructuring had been arranged. Last month USAir said it was postponing the dividend it paid its two key preference shareholders, BA and the investor Warren Buffett.

Apart from its financial problems, the airline's reputation has been undermined by two plane crashes in July and September, which killed 159 people.

Despite the series of disasters, BA says the USAir link-up has brought it the operating benefits it wanted, including pounds 70m in extra revenues and reduced costs, and that its plans to become the world's first global airline have barely been affected. The 'code sharing' arrangement allows BA to sell one ticket that will take a passenger from London to any USAir destination.

It has similar shareholdings and arrangements with other airlines, including Qantas of Australia and TAT of France, and aims to provide worldwide coverage through a network of link-ups.

BA originally wanted to take a 44 per cent stake in USAir. This was blocked by the US government, which demanded greater access for American carriers into Heathrow. Ian Wild, analyst with BZW, says that a restructuring could reduce its stake to below 15 per cent, but that it will build it back up as soon as it can. 'British Airways would still like to get to 40 per cent plus,' he said.

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