BA thinks small for the future

BA was not prepared to pay the price demanded by KLM without gaining control of the company. KLM argued that coming under British ownership could jeopardise its route licences to other countries, in particular the United States.

BA is now looking at taking large enough minority stakes to have an influence over the way the industry consolidates - but not so large that it runs into ownership obstacles.

Germany's Lufthansa is adopting this approach and has acquired a 20 per cent stake in British Midland, Britain's second biggest scheduled airline. Observers expect Lufthansa to take full control eventually. Singapore Airlines, another member with Lufthansa in the Star Alliance, has a 49 per cent stake in Virgin Atlantic.

BA has a 9 per cent shareholding in Iberia, the Spanish flag-carrier and code-sharing agreements with other European airlines, including Aer Lingus, Finnair and Iberia - all members of its Oneworld alliance.

Analysts believe BA could take an equity stake in KLM as part of its strategy of cementing alliances throughout Europe. But BA's short-term priority is to strengthen links with its other partners in Oneworld.

The other priority of Rod Eddington, BA's chief executive, is to consolidate the group's core operations. This is likely to result in subsidiary airlines being brought directly into the BA network.

It has two separate airline operations at Gatwick: European Operations Gatwick and CityFlyer Express - which fly out of different terminals. CityFlyer Express will no longer fly separately.

Mr Eddington would also like to rationalise BA's franchises, starting with the acquisition of British Regional, which runs its services through its British Regional and Manx Airlines divisions.

BA is still undecided on whether to incorporate Deutsche BA, its German operation, back into the main airline. Deutsche BA has struggled against Lufthansa on German routes in the face of fierce price competition.