BA and Virgin reel as Bush bankrolls rivals

Virgin and BA are set to slash routes across the Atlantic as they are caught by the twin effects of the terrorist disruption and the $15bn of state aid announced for US airlines.

All the major British airlines have said that they do not believe there should be any state aid for the airline industry and are fuming at the apparent bail-out of the US carriers by George Bush.

He has given $5bn in cash and $10bn in loan guarantees in a move which could lead to a trade war between the US and Europe even as the coalition forms for the real war.

Sir Richard Branson, chairman of Virgin, said: "We should not get handouts to fly empty planes across the Atlantic."

His rival, Sir Michael Bishop of bmi, agreed. "We are against state aid and we are not seeking it. What this industry needs is consolidation."

And in a rare show of unity, British Airways sided with Virgin. "We want a level playing field, not a bail-out," said Martin George, BA's director of operations.

Chancellor Gordon Brown agreed to underwrite the war-contingency insurance for the airlines after a threat all flights would be grounded on Monday, but yesterday was holding out against the airlines' appeals for UK aid to match the US.

"We are looking carefully at what was proposed in the US, but it is not possible under EU guidelines to give generalised state relief."

He said the point made by Michael O'Leary, chief executive of Ryanair, the big airlines' low-price competitor, was 'taken on board'. Mr O'Leary warned that the flag carriers were using the crisis as an excuse to look for subsidies.

However, Mr Brown is facing growing pressure from the aviation-linked unions as well as business leaders for special measures in his pre-budget report in November.

An emergency motion has been tabled by Ken Jackson's AEEU union for Labour's conference calling for air passenger duty to be retained by the airline industry after job losses worldwide reached 100,000 last week.

More worrying for Mr Brown, Tim Congdon of Lombard Street Research this week warns that the drop in tax revenues from the slowdown in the economy will mean that Treasury expenditure is going to exceed receipts.

This could leave Mr Brown with a tough choice to make in the pre-budget statement – either he goes into deficit or he reins back spending. Cabinet colleagues said he would not cut public spending.

The Government is also looking at demands for extra funding for airport security and is likely to provide extra cash for the Metropolitan police to pay for higher security manning levels.

The airlines met with Stephen Byers, the Transport Secretary, on Thursday. The Independent on Sunday has learned that one of the main demands was for Mr Byers to ensure that Virgin and BA could cut flights without facing long-term damage to their businesses.

Flights across the Atlantic are covered by treaties between the UK and US, which guarantee "slots" for airlines such as BA, Virgin, United Airlines and American Airlines.

Both BA and Virgin want to cut costs by reducing the number of flights but fear that they would be forced to give up the slots forever, so missing out on the expected recovery when the anxiety about flying has died down.

Mr Byers is to meet with the European transport commissioner, Loyola de Palacio, who is also thought to oppose state aid. They are to push for a liberalisation of the market that would allow further consolidation among the airlines.

Experts in EU law raised the prospect of a dispute between Brussels and Washington over the $15bn of aid announced for the US airlines.