British Air move could fuel Euro-mergers

Unless the bid to take over its smaller competitor, British Caledonian, is shot out of the air in the next few weeks, British Airways, already by far the country's No. 1 air carrier, will soon hold more than 90 percent of the British market. The heavy monopoly this would represent is suddenly a source of controversy in the European airline industry and a cause of potential embarrassment for Margaret Thatcher.

The British prime minister is an apostle of commercial competition. She would like Britons to enjoy more freedom of choice when they fly in Europe and beyond. Now she is being strongly urged by her advisers to allow British Airways, which was privatized earlier this year amid great fanfare, to become, thanks to the merger with British Caledonian, one of the strongest airline groups internationally. It would carry nearly 20 million passengers a year over a global route network of 670,000 kilometers (415,000 miles).

Lord King, chairman of British Airways, has said the merger deal presents British aviation with an ``unrepeatable opportunity'' to create an airline ``capable of taking on the world.''

Mrs. Thatcher's advisers are saying that with Caledonian under its belt, the big airline will be in a better position to compete with other large international carriers - particularly airlines based in the United States, which it battles for passengers on the North Atlantic route. But although the pressure on Thatcher to agree to the merger is acute, it is the impact on Western Europe that may prove the most significant aspect of the deal.

Even after the merger, British Airways will not really enjoy the ``megacarrier'' status of its American rivals. In terms of the number of passengers it carries, it is now still only No. 6 in the world, with 17 million passengers a year. With the merger, this figure would rise to 19.5 million.

This, however, compares with United Airlines' 50 million and American Airlines' 46 million. So if British Airways wants to acquire the muscle of a genuine megacarrier, it will have to become even bigger. The only way to do that in the short term would be to pursue linkups with other airlines, probably in Europe.

So the question now being asked is where British Airways, assuming that it clinches the deal, will turn for further growth.

Even before the merger plan was announced, SAS of Scandinavia and Sabena, the Belgian airline, held talks about closer links. There was also a suggestion that Austrian Airlines might do some kind of deal with West Germany's Lufthansa.

Caledonian, whose route network extends into West Africa, the Middle East, and North America, has been in financial difficulty for the past two years (last year it had losses of 19 million, or $28.5 million, and a few months ago it received a private approach from Alitalia of Italy). Alitalia is another airline that has come to feel that its relative smallness is a handicap.

All these maneuvers are seen by the airline industry as an indication that the British deal may turn out to be the first of many similar ones in Europe. Lufthansa and Air France are likely to be privatized soon, and if this happens, they too are virtually certain to begin searching for ways of restructuring their worldwide networks.

Lufthansa now flies 15 million passengers a year, and the British merger would make the German airline look relatively small and weak by comparison with a revamped British Airways.

According to one highly placed airline source, the longer-term effect of the British deal might be to reduce the number of major airline groups in Western Europe to five or six by the end of the century.

On the other hand, national sensitivities are involved, and even with the European Community it is not easy to imagine national airlines being prepared to surrender, or even fudge, their separate identities without a struggle.

In the meantime, there may be a political battle royal before the British deal becomes official. To reach that point, it must be approved by the Thatcher government.

Already senior executives of the two airlines are preparing submissions to the Office of Fair Trading, which then has to report to Lord Young, the secretary for trade and industry. Lord Young may wish to refer the deal to the Monopolies and Mergers Commission - a governmental watchdog that is supposed to examine and - and often prevent - the creation of huge monopolies in the commercial world.

Lord Young and Thatcher have to decide whether the virtual domestic monopoly created by the merger would outweigh the advantages of creating a more powerful national carrier to compete with the big US airlines.

Several Conservative members of Parliament have expressed opposition to the merger. Their main line of argument has been that the deal would mean the end of independent airlines in Britain.

The Labour opposition's trade spokesman, Tony Blair, insisted that the takeover be referred to the Monopolies and Mergers Commission. He said that as recently as 1984 the Thatcher government had said it favored an airline industry with a strong competitive element.

The trouble about these arguments is that if Caledonia, which has only 27 aircraft, is not merged with British Airways, it will become fair game for foreign ``predators.''

It will take some weeks for the government to make up its mind. It is likely, however, that the merger will go through, which in turn would put pressure on other European airlines to look for strength in alliances of their own.