The Treaty of Heathrow

By Janice Castro.

The negotiations must have been successful: each side thought the other guy got the better of the deal. That was the reaction among industry officials last week when U.S. and British negotiators finally completed a new transatlantic airlines accord, settling a major dispute over access to London's Heathrow Airport and for the moment keeping poor Pan Am alive by the skin of its fuselage.

The battle was joined last fall when Pan Am, surviving only by auctioning off pieces of itself, agreed to sell its valuable gates and landing slots at Heathrow to United Airlines for $290 million. Ailing TWA soon followed suit, accepting a $445 million offer for its spots at Heathrow from American Airlines. British Airways, the world's largest international carrier (20 million passengers last year) took one look at the two giants setting up shop at the next terminal and squawked. Says Matthew Stainer, a London airlines analyst: "Its only U.S. competition was Pan Am and TWA. Both are good people to compete with because they are walking disaster areas." British officials pointed out that the bilateral treaty governing air travel between the two countries did not allow Pan Am and TWA to sell their Heathrow rights to another carrier.

As part of the deal struck last week, United and American will be allowed to go ahead with their plans. American will then control 17% of the transatlantic market. United will have 14%, while BA has only 11%. United also wins the right to fly to several European cities from London. U.S. officials agreed to restrain the two carriers at first, limiting them this year to the number of flights to London previously approved for Pan Am and TWA. In another concession, Washington will allow a second British carrier, most likely Virgin Atlantic Airways, to fly from Heathrow to the U.S. Virgin reacted to this news by slashing all its transatlantic fares 15%. For its part, Pan Am gets to stay in business, at least for now. Already in Chapter 11 proceedings, the carrier might have been grounded without the cash that will enable it to meet a $100 million debt payment.

British Airways won several major concessions for ceding ground to such formidable new competition. Perhaps most important, it will be the only foreign carrier allowed to carry passengers to the U.S. without passing through its home country. In practical terms, this means that BA will have an edge on other European transatlantic carriers. BA also won fly-through rights, which means that it will be permitted to land in the U.S., pick up other passengers and continue to South America, the Caribbean or even Asia. The profitable English giant may expand its U.S. web by taking advantage of new Department of Transportation rules that allow foreign carriers to own as much as 49% of U.S. carriers. Reportedly tops on its shopping list: troubled USAir.

With reporting by Anne Constable/London and Jerome Cramer/Washington