AVIATION: With its international strategy in tatters, it is imperative that BA puts its existing operations in order writes Kevin Done

British Airways knows where it wants to go but appears to have very little idea of how to get there.

Time and again its ambitions have been thwarted, most recently by the collapse last Friday of its plan to form a transatlantic joint venture with American Airlines.

BA is caught in a web of regulatory barriers and intensifying competition, from which successive managements have found it impossible to break free. Investors are getting fed up: BA's share price has plunged from a peak of 770p in 1998 to 217 1/4p last Friday.

Buffeted by the slowdown in the global economy and the impact of the September 11th terrorist attacks, the airline faces a loss of £600-£700 million sterling (€982- €1146 million) in the financial year to April, its worst performance since privatisation 15 years ago.

BA's strategic goals have been clear enough but Rod Eddington, the experienced Australian airline manager drafted in as chief executive nearly two years ago, has got no nearer to fulfilling them than Robert Ayling, his predecessor.

The group has failed to take a leading role in the consolidation of the European airline industry, despite a history of on-off talks with KLM, the Dutch national carrier. Takeover negotiations were abandoned by Mr Eddington in late 2000 amid regulatory opposition, despite the fact that both groups believed - and still believe - that they are logical partners for each other.

Efforts to secure BA's position as the leading force on transatlantic routes have fared no better. A decade ago it held abortive talks with United Airlines. It then moved on to the USAir Group, now renamed US Airways, where it took a minority stake - but failed to achieve a strategic breakthrough.

In 1996 it abandoned USAir and teamed up instead for the first time with American Airlines. But its attempt to gain the regulators' backing for an alliance, filed in 1996, ran into the sand in 1998.

During 2000 when the KLM negotiations were running in high gear, BA held secret talks with Northwest Airlines and Continental Airlines, the Dutch group's US partners, about another transatlantic alliance. The talks ended fruitlessly when the KLM takeover was abandoned.

With that brief BA dalliance over, the new managements at BA and American filed a second application for antitrust approval for a transatlantic joint venture in August last year. They believed the competitive landscape had changed sufficiently for the regulators to take a more lenient view.

Last Friday's announcement by the US Department of Transportation that it was demanding the surrender by BA and American of 224 highly prized take-off and landing slots at Heathrow as the price for agreement was a rude awakening.

The partners wanted antitrust immunity to act as one airline across the north Atlantic, sharing profits and revenues and co-ordinating schedules, capacity and fares. Code-sharing - selling seats on each other's flights - would also have opened up access to the huge networks emanating from each other's main hubs, with through ticketing and luggage clearance.

The regulatory price remained impossibly high for BA. "The conditions laid down by the US government do not make sense for either company," Mr Eddington and Don Carty, chief executive of American, said in a hurriedly agreed statement. "We will not acquiesce to unrealistic and, in our view, unnecessary demands. For us, the price is just not right."

Failure to secure a partner in the US has undermined BA's other goal of making itself the keystone of the Oneworld alliance formed in 1998 with American and six other carriers.

The main partners in the rival Star and SkyTeam alliances - led respectively by Lufthansa and United Airlines, and Air France and Delta Air Lines - already hold US antitrust immunity.

BA faces an increasingly uphill struggle to put together the sort of integrated travel arrangements sought by big corporate customers to compete with these alliances.

So what now? The lack of a strong core built around a partnership between BA and a US carrier threatens to weaken the entire Oneworld alliance. It is difficult to see where else BA can turn, unless it yet again revisits the idea of a link-up with KLM, Northwest and Continental.

With its international strategy in tatters, it is imperative that BA puts its existing operations in order. Mr Eddington signalled last week that the group must seek operating margins of 10 per cent.

That looks like a tough target, given the increasingly tough environment. BA faces stiff long-haul competition from Virgin Atlantic and must defend its short-haul business against BMI British Midland and, more worryingly, the burgeoning low-cost carriers led by Ryanair and EasyJet. None of BA's big flag-carrier rivals, such as Air France and Lufthansa, faces such an array of competitors in its home base.

BA has embarked on its so- called "Size and Shape" review that is expected to lead to a wholesale restructuring aimed at achieving sustainable profitability.

It is expected to take action to eliminate loss-making routes and products and to cut costs and reduce capacity, in order to stem years of losses on its short-haul operations in Europe.

Its annual presentation to investors, fund managers and financial analysts is due on February 13th. Mr Eddington will be expected to produce a convincing case that the company knows what it needs to do and how to achieve it.

This week, BA was bravely trying to play down the disappointment of its failure with American Airlines. "Our immediate focus is on finalising the future Size and Shape review," Martin George, marketing and communications director, said.

"Rod always says that the core business is the cake - and the alliance strategy is only the icing."

Investors will want reassurance that Mr Eddington has at last found the right recipe. - (Financial Times Service)