Euro alliance threatens BA

RUNNING an airline is difficult at the best of times. But it could not have been any worse for British Airways in recent months.

It has been hit in quick succession by Sars, the Iraq war and July's wildcat strike by counter staff, which cost an estimated £40m and did enormous reputational damage.

Given this background, BA must be somewhat relieved by the August traffic figures with revenues per passenger mile, the key measure for the industry, up 4.8%.

But before anyone becomes overexcited, it is worth bearing in mind that August is an atypical month. In the peak summer season, passengers fly to Pisa on holiday rather than to the Big Apple on business.

Premium traffic, which is BA's specialist market, was up 1.1%. But this gain is from a very low base, down as much as 20% from the good years.

All this means that BA is still highly dependent on cost savings to preserve its future. Its latest frugal measure is to reduce the commission rates for travel agents who sell its tickets to a flat 1%.

As if BA does not have enough internal problems, it also is having to look over its shoulder at European rivals.

Its erstwhile partner KLM, which also reported a pick-up in traffic from a lower capacity base, is considering getting into bed with Air France.

At the very least an alliance is contemplated, but a full merger should not be discounted.

If this were to happen it might well usurp BA's position as Europe's largest carrier of passengers. This might give the merged group extra clout in future airline negotiations between the European-Union and the Americans. It is unlikely, however, to be Europe's most profitable carrier in view of the weighty cost base Air France carries.

The new combination would hurt BA because it would have access to one of Europe's most attractive hub airports at Schiphol in Holland, which would be a potential rival to Heathrow.

Students of French economic management might alternatively argue that no French government will happily see Air France diverting traffic from Charles De Gaulle in Paris to Schiphol, even if that means rolling out a new runway at CDG.

One only has to look at France Telecom's latest bid for full control of Orange to recognise that French business nationalism is alive and well.

BA seems for the moment to be using its alliance with American Airlines to drive growth, with a series of codeshare flights giving it access to new gateways from Nashville to New Orleans.

If there were to be a genuine uptick in North Atlantic premium traffic - given the improvement in the US and British economies - then this could be BA's salvation.

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THE World Bank looks considerably more gloomy about prospects for the global economy than the International Monetary Fund, its neighbour across the street in Washington.

The development bank's chief economist Nick Stern, soon to take over as Gordon Brown's economic guru at the Treasury, estimates that output for the industrial countries this year will grow by 1.5%, less than in 2002.

World growth will look a little better because of a pick-up in some of the developing countries, with East Asia lifting performance.

What is really important for the World Bank is a positive outcome to next week's trade talks in Cancun, Mexico.

One of the reasons global growth has been so subdued in the opening years of this decade has been the sluggish increase in trade.

Stern argues that it is essential for the industrial countries - accounting for two-thirds of the world's market - to end their petty squabbling on everything from agriculture to medicines.

The gains thrown up by even a relatively modest round of tariff cuts could be phenomenal. The Bank estimates that over a decade, developing countries would gain $350bn and rich nations up to $170bn. Benefits should not simply be counted in absolute numbers.

When even the strongest economies such as the US are struggling to lift output and living standards, the conclusion of a successful trade round, after the farce of Seattle in 1999, might be just the fillip for the international trading system.

We can almost date the slump of recent years, including the tech meltdown, from the failure of Seattle. This may well require euroland, the worst-performing region in the world, to give up its fortress mentality.

If that were to happen, Cancun could be a landmark for global growth and provide a surer underpinning for equity markets.

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