Sky Anxiety

We're not your sugar daddy. That was the message British Airways PLC had for its U.S. partner, USAir Group, on Mar. 7. The British carrier, which has invested $400 million in USAir since last year, decided it wouldn't pay another farthing of a promised $450 million until the American carrier reversed its losses, which could total more than $350 million for 1994. Joint marketing and purchasing will continue, says BA Director of Strategy Roger Maynard, "but we're not sure we want any further investment."

Things do look grim for USAir, which suffers from high costs, fierce competition, and a total of $2.4 billion in losses since 1989. But overlooked in the turmoil is equally troubling news for British Airways. That carrier's network of global alliances, which have cost the carrier $1 billion so far, has gone awry. Each of its partners is weighed down by difficult labor negotiations, overcapacity, and unprofitable routes. The stalled strategy, forcing capital injections and write-offs, is already hurting BA profits. And BA's struggles offer a warning to other carriers bent on foreign romances of their own.

"CODE-SHARING." Under Chairman Colin Marshall, the $9.2 billion British carrier has concluded a clutch of deals since 1992 (table). Besides the USAir deal, BA has bought 49.9% of TAT European Airlines, France's largest independent carrier, and launched a low-cost German carrier, Deutsche BA. To serve the Pacific, it bought 25% of Qantas in Australia.

The big payoff is supposed to come through coordinating schedules and other tactics--especially "code-sharing." That's where a computer reservation system lists, say, a single BA flight from Cleveland to Rome but automatically books a passenger on USAir for the first leg of the trip, from Cleveland to a BA gate in Pittsburgh.

So far, the costs to BA have far outweighed the benefits. Take France's TAT, a $330 million carrier. BA's stake cost it only $22 million last year. Yet TAT expects to lose $60 million in 1994. Part of the problem lies in a canceled contract between TAT and Air France, which resents BA's incursion. Worse, BA has had to inject $103 million in new capital this year to cover the losses and help TAT restructure.

The other legs in BA's global stool are shaky as well. Deutsche BA is losing money; BA won't say how much. Qantas lost $260 million in the year ending June 30, though BA expects it to show a profit this year. Air Russia, a venture between BA and some Aeroflot veterans, "has no immediate prospect of starting up," says Maynard, adding that BA's investment has been minimal.

It's good for BA that its core operations remain relatively strong. Thanks in part to healthy bookings on its flights from Britain to Asia, profits for the nine months ended Dec. 31 increased 31%, to $657 million. Revenues rose 13%.

Yet since early February, BA's stock, a winner in 1993, has dropped 14%, to some $6.18 a share. The market jitters reflect the tough stretch the carrier now faces in the U.S. Especially worrisome are government talks over the Britain-U.S. air-services treaty. BA's code-sharing rights with USAir expire Mar. 17, and both carriers are pressing for an extension. But U.S. Transportation Secretary Federico Pe a is holding the extension hostage until Britain frees up more space at London's Heathrow Airport for U.S. carriers. And American Airlines Inc. Chairman Robert L. Crandall is lobbying the U.S. to scrap all talks and code-sharing extensions and start all over again.

EQUITY LOSS. Then there is the crisis at USAir. BA's toughness could shock the USAir unions into concessions. "If I were USAir, I would not be upset at all with BA's announcement," says Duff & Phelps Corp. analyst Robert Decker. "USAir can use it as a bargaining chip with labor." Perhaps so--but restive unions have been known to wreak havoc on U.S. carriers.

Such labor turmoil, as well as a loss of code-sharing, would seriously undermine the value of BA's USAir link. For now, executives at both airlines are confident this won't happen and that BA's vision of ententes mondiales will prevail. Says Maynard: "This is a long-term strategy. The whole purpose of the global alliance was to secure BA's future by the year 2000."

The pressing question is whether global alliances, anchored by equity stakes, can offer security in a turbulent industry. SAS lost its equity in Continental Airlines Inc. when the U.S. carrier filed for bankruptcy, while KLM wrote down its investment in Northwest Airlines Inc. A proposed alliance of KLM, SAS, and two other carriers never even got done. BA has plenty to do before it shows this much-battered strategy is a winner.

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