British Airways Prepares for U.S. Rivals on Its Turf : American, United to Offer Nonstop Service From Los Angeles to London

By ROBERT E. DALLOS

July 6, 1991 12 AM PT

TIMES STAFF WRITER

NEW YORK —

In the past when Fred Tully flew to London from Los Angeles on business, British Airways was his only choice. But the Tarzana resident is about to make a change.

Tully, who is in the surgical supply business, has booked a seat on American Airlines’ new nonstop service between Los Angeles and London that begins later this month.

“For years I have flown American domestically,” says Tully, who flys about 100,000 miles annually. “British Airways has been fine, but I had no alternative. I really enjoy the American service. I intend to switch.”

Tully’s change in travel plans is a small but symbolic defeat for British Airways. After dominating weaker competitors over the North Atlantic, British Airways now finds itself battling two strong U.S. carriers--United Airlines and American--as it trys to recover from a decline in travel linked to the Gulf crisis and recession.

Despite these and other problems, British Airways is expected to survive and remain one of the world’s major carriers, industry analysts say.

“British Airways is our choice for the European carrier most likely to successfully compete on a global basis over the long term,” says Michael Derchin, airline analyst with County NatWest USA.

Analysts agree that British Airways has enough resources to compete against United and American, which began flying between New York and London earlier this week. The London-based carrier has a healthy balance sheet, strong management, a young, fuel-efficient fleet and an excellent service image. It also enjoys good labor relations in a country noted for management-worker strife.

Sir Colin Marshall, the deputy chairman of British Airways and its chief executive, isn’t worried. “In 10 years’ time, I envisage British Airways as one of the relatively small number of truly global airlines that will be around,” he said in a recent interview.

But Marshall’s optimism is tempered by a number of woes.

For one thing, the carrier has not fully recovered from the effects of the Gulf War and the recession, both of which greatly cut ridership and profits. Analysts predict that the company will be only marginally profitable in the current fiscal year and that earnings in the next fiscal year are uncertain at best.

Another disappointment for British Airways was its failed attempt at buying into the U.S. market. Back in 1988, the airline joined the pilots at United Airlines in an attempt to buy out the Chicago-based carrier. But the deal fell apart when the pilots union failed to get financing, leaving British Airways out in the cold.

Meanwhile, many of British Airways’ European competitors bought portions of U.S. carriers. Scandinavian Airlines Systems purchased a part of Continental, KLM acquired a stake in Northwest and Swissair owns a piece of Delta Airlines.

British Airways is looking for an American partner and was heartened by a recent suggestion by Transportation Secretary Samuel K. Skinner to allow foreign airlines to purchase up to 49% of voting equity interest in U.S. carriers. However, British Airways will find it harder to find an available mate when so many domestic airlines already have foreign partners.

British Airways has also had a difficult time winning government approval to serve more U.S. destinations and international travelers while bilateral agreements allowed American and United to land at Heathrow. Furthermore, government transport authorities have tentatively taken away some of the carrier’s landing rights in Tokyo and contributed to delays in begining service to Germany.

United and American replaced Pan American World Airways and Trans World Airlines, both of whose financial troubles made them weak sisters in the battle for passengers on the North Atlantic. Britain’s fledgling carrier, Virgin Atlantic Airways, also began flying several routes to Heathrow, London’s more popular and heavily traveled airport.

“American and United are stronger competition,” concedes British Airways spokesman Sandy Gardiner. But “we see this as more of a challenge than a threat. Over the years, we have taken all comers from every part of the world.”

But, it is the opening of Heathrow to American and United that poses the most serious problem for British Airways, which depends on the U.S.-London routes for 50% of its operating profit and $1 billion in annual revenue. More Americans fly British Airways to London than on any other carrier.

United, which began flying to Heathrow earlier this spring, and American probably will gain a larger share of the North Atlantic market by virtue of their greater marketing clout, sophisticated computer reservation systems and perceived superior service, analysts say.

But there is a bright side to the new competition. Despite Virgin Air’s recent move to cut some fares on North Atlantic routes, American and United are not as likely to introduce discount fares as were cash-strapped Pan Am or TWA. As a result, there will be less pressure for British Airways to cut fares as well.

“Neither American nor United is given to giving away seats,” says Helane Becker, airline analyst with Shearson Lehman Bros.

And British Airways can count on passenger loyalties and preferences to help it compete against newcomers.

Eric Callender, an Ontario computer analyst, had booked a flight on American’s upcoming Los Angeles-to-London service before switching back to British Airways. The main reason: British Airways uses larger aircraft--Boeing 747-400 jumbo jets--than American on the route.

“It’s a long flight, and I wanted some more comfort,” said Callender. “Besides, though I am an American citizen, I was born in Britain and there was a bit of partiality here.”

Seats to the United Kingdom

The number of seats between United States and United Kingdom destinations

British Airways: 39%

American Airlines: 16%

United Airlines: 11%

Virgin-Atlantic Airways: 11%

Others: 23%

At a Glance

Headquarters: London

Employees: 47,500

Destinations: 163

Countries served: 76