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British Airways Plans to Buy Big Piece of Struggling USAir : Transportation: The proposed $750-million investment would give the international carrier vital access to the U.S. market.

July 22, 1992|JESUS SANCHEZ | TIMES STAFF WRITER

In the largest airline alliance in history, British Airways on Tuesday said it will invest $750 million in USAir, giving the British carrier a long-sought foothold in the U.S. market while providing its struggling partner with a badly needed financial boost.

The deal, which requires the approval of the U.S. and British governments and company stockholders, would create the most formidable entry so far in a worldwide race among airlines seeking growth and profits through international expansion.

"Our proposed alliance with British Airways will position USAir to be an even stronger competitor," USAir Chairman and President Seth E. Schofield said in a statement. "This arrangement also ensures the long-term viability and strength of USAir as a major U.S. carrier."

The partnership proposal could not have come at a better time for Arlington-based USAir. High labor and operating costs, savage air fare wars and a painful retrenchment have led the carrier to post massive losses in recent years--$305 million in 1991 alone.

USAir has also failed to build a substantial international route system that is considered necessary to effectively compete with the likes of American, Delta and United, which have pursued aggressive global growth campaigns. Now, USAir can feed domestic passengers into British Airway's international route structure--the world's largest.

The $750-million infusion would allow USAir to pay off debt and follow through on reported attempts to buy portions of Trans World Airlines, which is operating under bankruptcy protection. TWA has said it has discussed the sale of assets to USAir.

"It was becoming increasingly clear that (USAir) was not at the level of the largest U.S. carriers," said Dan Kasper, director of the transportation practice at Harbridge House, a Boston-based consulting firm. "British Airways will give them considerable strength, at least across the Atlantic."

Investors also appeared to view the alliance as a boost for USAir and British Air. On the New York Stock Exchange on Tuesday, USAir's stock rose $1.25, to $14.25, while British Air American depositary receipts rose $1.50, to $51.125.

For its money, British Air would gain access to the mammoth U.S. airline market through USAir. That would improve its competitive position against the ever-expanding U.S. mega-carriers--American, Delta and United--that have threatened British Air's dominance of the lucrative U.S.-British routes.

Under the agreement, British Air would end up with securities that can be eventually converted into a 44% ownership stake in USAir. In addition, the London-based carrier would own 21% of USAir's voting stock and the right to nominate four of the U.S. carrier's 16 directors.

The stake in USAir also leaves British Air well positioned to take advantage of any U.S. move to relax restrictions on the foreign ownership of domestic carriers. U.S. laws limit foreign investors to owning no more than 49% of a domestic carrier's common stock and 25% of its voting shares.

"It preserves and gives British Air a preemptive position for a point in time when the markets really do open up," said George Pearson, vice president of information services at Avitas, a Washington-based aviation industry consulting firm.

Other U.S. carriers said they hoped the U.S. government, in considering the deal, would also push for greater access to British airports for all airlines.

"The British Airways-USAir proposal presents the Bush Administration with a singular opportunity to achieve a competitive breakthrough in air services between the United States and Great Britain," said a statement by United Airlines.

Several U.S. airlines have entered into global partnerships since the 1980s. KLM Royal Dutch Airlines owns 49% of Northwest Airlines; Scandinavian Airlines Systems purchased a nearly 17% chunk of Continental Airlines; Delta Air Lines is part of an alliance with Singapore Airlines and Swissair, and an Australian company purchased an interest in America West Airlines.

All of these alliances, however, have failed to live up to initial expectations, say industry analysts. SAS and Continental have gone further than any other team feeding passengers into each other's systems. But SAS saw its investment in Continental disappear after the Houston-based carrier filed for Chapter 11 bankruptcy protection.

"The North American (airlines) were driven by the need for equity and the Europeans were looking for access," said one industry consultant. "What happens is that they get into it with a lot of hoopla. But with a few exceptions, they have been less than stellar."

How They Stack Up

British Airways has announced that it will invest $750 million in USAir, the largest airline alliance in history.

USAir British Airways* Employees: 46,000 48,500 Destinations served: 160 150 1991 Passenger count: 55.6 million 25.4 million 1991 Revenue: $6.5 billion $9 billion 1991 profit (loss) ($305 million) $444 million

* Financial figures for British Airways are for fiscal year ending March 31, 1992. USAir financial figures are for calendar year 1991.

Source: British Airways and USAir

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