BA's merger with American Airlines faces collapse

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British Airways' merger with American Airlines was heading for collapse last night as fears grew that the terrorist attack on America will provoke a massive decline in trans-atlantic air travel and an even bigger slump in the domestic US market.

Analysts also warned that the "open skies" deal, which the US and UK need to sign as a prerequisite for approving the BA-AA deal was now almost certainly on the back burner.

BA has continued to put a brave face on the prospects of its alliance with AA going ahead by the end of this year. But industry observers believe that this is increasingly unrealistic given the huge contraction the industry faces and the shortage of time left to get the deal approved before the European Commission is expected to get the authority to negotiate air service agreements on behalf of member states. BA shares fell a further 5 per cent yesterday. Since Tuesday, they have dropped by a quarter.

Chris Tarry, of Commerzbank, said: "BA's desire had been to get the alliance to such a state of momentum by mid-November that it would be unstoppable. But the world has fundamentally changed and not just from the point of view of the airlines."

Last night, there were reports that US analysts had begun pencilling in a 50 per cent fall in domestic air travel this year ­ an unprecedented decline which could push some loss-making airlines to the brink of collapse. Analysts also think it quite likely that the transatlantic market will fall by much more than it did in the aftermath of the Gulf war in 1991. Then, the decline was 14 per cent but analysts believe Tuesday's attack could result in passenger numbers declining by 25 per cent or more.

Mr Tarry added: "This has been a cataclysmic event for the airline industry. Just think what could happen if check-in times are increased and airlines can no longer turn planes around to meet flight schedules. The whole economics of the airline business will change.

"The near-term priority is to increase security and restore passenger confidence. After that, airlines will want to protect their position in the face of what could be a steep and possibly long-lasting fall in traffic."

Last night, the International Air Transport Association warned that world airlines could face an immediate $10bn (£6.8bn) bill due to the US terror attacks plus additional costs in the future. This would leave the industry nursing far worse losses than even in the year of the Gulf war when combined losses reached $7.5bn. IATA's estimate for losses among international long-haul carriers was $2.8bn before Tuesday's attacks. But planes are still grounded and the US market alone is worth an estimated $1bn a day.