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AIR RAID

When Colin Marshall was 17, he ran away from home to see the world. He signed up as a cadet with the Orient Steam Navigation Co. and for seven years shipped out on voyages between Britain and Australia. Since then, Marshall's career has taken him from boats to cars to planes. He has run four companies in seven countries. Each time, he has made the globe seem smaller and traveling simpler.

Now, the prodigal son has set the world spinning a bit faster on its axis. Sir Colin Marshall, chief executive and soon-to-be chairman of British Airways PLC, last month nailed down an agreement with USAir Group Inc. to form a huge transatlantic alliance. It's a bold bid for global supremacy that challenges the Big Three American carriers in their own skies. After a decade of deregulation in the U.S., American, Delta, and United airlines have been toughened by fierce competition--and had expected to be the globe-girding pioneers. But Marshall may steal a march on them. What's more, he may try to pull Trans World Airlines Inc. into his orbit.

The BA-USAir combo, with passengers on both sides of the Atlantic feeding into the system, would create the world's largest carrier as measured by revenues: $16 billion altogether. Airline executives have long dreamed of moving seamlessly across boundaries to create global networks, but BA will do so, assuming Washington O. K.'s the deal. Add BA's American market share to its potential in a newly deregulated Europe, and it will be the closest thing yet to a global dynamo. Buying into USAir is "a major step in fulfilling our ambitions to be the airline of the future," says Marshall.

It's a pretty picture, if it all works. But Marshall faces tremendous hurdles. The USAir bid is stirring up a political maelstrom in a charged election year. Big American carriers, fearful of BA's onslaught, are whipping up anti-BA sentiment and furiously lobbying regulators with objections. Donald J. Carty, executive vice-president for finance and planning at American Airlines Inc., warns darkly that "we could become feeder systems of big global airlines." Washington concerns aside, Marshall could ignite vicious fare wars, as others fight to undercut BA. What's more, BA's prize has its share of problems. USAir has lost money for three years, and synergy between BA and the Arlington (Va.) carrier won't come easily.

BA's incursion into the U.S. marks the first global showdown in a fast-deregulating world. By pushing for a deal that gives it such an entree to the U.S., BA is provoking U.S. airlines to demand the same access in Europe--just as the European Community is preparing to dissolve its internal borders. In fact, the carriers insist that greater rights abroad be the quid pro quo for approving the BA purchase. Meanwhile, the Europeans, most of them inefficient and unprofitable, are vulnerable: Weaker carriers could well break ranks and tie up with the mighty Americans, causing a rush of transatlantic alliances that could bust up markets on both continents. Says Tim W. Walden, industry affairs manager at London-based British Midlands Airways Ltd., a BA competitor: "It could turn into the biggest free-for-all we've ever seen."

TROJAN HORSE. It's not the first time Marshall, 58, has tried such a stunt. He helped turn BA from "bloody awful" into bloody awesome, transforming a haven for civil servants into an airline with a world reputation for service. Using his American training from Avis Inc., which he made No. 1 in Europe, he got BA employees to "try harder," too. Now, Marshall relishes the sight of U.S. competitors squirming. In an interview at BA's glass-and-steel building at Heathrow Airport, he snorts: "I'm not at all surprised that the three majors are squealing like pigs because they see a fourth domestic competitor looming large."

Cocky as that sounds, there's a lot of truth to it. The new carrier, with 669 aircraft and 94,000 employees, will carry more passengers to more destinations than any other airline: 339 stops in 71 countries. In effect, USAir will be BA's Trojan horse. Although BA, by U.S. law, can't fly between American cities, USAir and BA can commingle operations to give passengers the impression that they are flying on the same airline. In papers filed with the Transportation Dept., BA says that in five years the two will "integrate all the core aspects of the airline business . . . to the point where they operate under one management structure." First to be harmonized are the network of flights and connections, ticket prices, catering, advertising, and purchase of aircraft. Within a year, the plan calls for the establishment of three brands: one each for North American, European, and intercontinental flights, so consumers know they are part of a single network.

`EAT OR BE EATEN.' On a trip, say, from Indianapolis to London, USAir will handle the domestic leg, and BA the international portion. But the crews will wear the same uniform and serve the same food, and cabin interiors will look the same. "Passengers won't know if their pilot is British or American," says Roger Maynard, BA's director of corporate strategy.

BA is banking on the day when it can fly passengers from any city in the U.S. to any city in Europe on a USAir or BA plane. The stateless carrier might even fly under a new logo: British-American Airways is one rumored possiblity.

Marshall may also deploy USAir on another mission: to make a run on the assets of TWA, now in bankruptcy. With USAir doing the bidding, he could snap up TWA's St. Louis hub, its facilities at John F. Kennedy International Airport, and its lucrative Paris routes. A source close to BA admits "TWA is very much in the picture."

Marshall's big gamble is also causing turbulence in Europe. The EC is poised to deregulate its skies starting on Jan. 1, 1993. For the first time, EC carriers will have the right to fly between any two European cities, without having to end up back home. That means fiercer competition--and painful consolidation, as happened in the U.S. Cosseted state-owned carriers such as Air France and Lufthansa will find their British foe strengthened by its new U.S. passenger base, which accounts for more than a third of all international flights. "It's eat or be eaten," says Lord White, chairman of Hanson PLC's U.S. operations and a BA board member.

EASTWARD HO. So Marshall is wasting no time in the New Europe. In April, he snapped up a German regional airline, renamed it Deutsche BA, and is fashioning it into a low-cost airline that could become BA's vehicle to build Europe's first hub-and-spoke system. Next on the agenda are more alliances. "In due course," Marshall deadpans, "one or two other airlines will be joining us." BA has a one-third stake in a Moscow-based joint venture, Air Russia, which will begin flying in 1994. And Marshall has his eye on booming Asia. He has a bid in for the Australian government-owned Qantas Airways Ltd., which could pit him against such Asian powerhouses as Singapore Airlines Ltd. and Cathay Pacific Airways Ltd.

While Marshall plays the global strategist, he is also keeping his eye on the fine print of the USAir deal. In the complex arrangement, BA will spend $750 million to buy a 44% stake, in the form of convertible preferred shares, in USAir. BA will have only 21% of the voting shares, however, in accordance with the U.S. limit on foreign ownership. But after five years, BA may wind up having to pay as much as $1.35 billion to prevent its 44% stake from being diluted. And that's more than USAir's total market capitalization, now $1.2 billion. "When you buy your way into the largest market in the world, you expect to pay a premium," says UBS Phillips & Drew analyst Richard Hannah.

VETO POWER. Still, the deal may be more favorable to BA than it appears. BA Chief Financial Officer Derek Stevens figures the company can borrow most of the $750 million in the U.S. at 6%, while USAir is paying out 7% on the preferred shares for five years. BA has also cannily protected its shareholders from USAir's $2 billion debt, giving the two companies a five-year engagement period before deciding whether to tie the knot. Meanwhile, BA will reap benefits from day one. James C. Halstead, an analyst at London's Hoare Govett Ltd., figures that if USAir funnels just three additional business-class passengers a day into BA's international routes, BA adds $1 million a year to its bottom line.

No matter what BA's stake, Marshall is likely to be the one calling the shots. USAir's Chairman Seth E. Schofield, who has worked at what is now USAir since he was hired as a baggage handler at 17, is a capable manager who has made tough cost cuts. But industry executives say Marshall's clout and money will prevail. Says Schofield: "I don't think Colin Marshall has any intention of trying to run USAir."

Indeed, the British chieftain's game plan is already taking shape. BA wants to name four of the 16 board members and to appoint two others who will sit on both companies' boards. And BA insists that any major financial or strategic decision must be approved by 80% of the board, which would give BA a virtual veto. "The British are asking for things beyond the pale," says an industry executive. Some experts expect the Transportation Dept. to balk at this backdoor form of control. But Marshall insists he won't back down on the 80% vote. "One doesn't make that size of investment without having a say in what goes on," he says.

Marshall's power grab isn't going over well with the airline lobby, but Washington seems inclined to welcome the invasion. The Bush Administration has sent out signals that it favors increased foreign ownership, to save jobs at USAir, TWA, and other carriers facing extinction. The White House is ready to seek legislation raising the limit on foreign control to 49%, up from the 25% allowed today. But the chairmen of the Big Three U.S. carriers insist that Washington should use the BA deal as a wedge into Europe. In an angry letter to the Transportation Dept., Chairman Ronald W. Allen of Delta Air Lines Inc. fumes that "if the transaction is consummated, USAir will essentially become the North American division of British Airways."

BAD CONNECTION. BA and USAir may have to finesse the issue of control a bit, but meanwhile, Marshall is moving ahead with plans to integrate the two carriers. His first big assignment will be to wrestle down expenses. "If they want to operate in the U.S. market, one of BA's biggest challenges in the '90s will be to get those costs down," says Liam Strong, who ran BA's marketing and operations division from 1988 to 1991 and is currently chief executive of Sears PLC, a London consumer-goods company. BA now operates in a relatively protected world, the result of Britain's cozy air treaty with the U.S. That has helped make transatlantic routes provide 50% to 75% of BA's total profits. But if Washington can open the British market further for U.S. carriers, the flood of new capacity could threaten those profits.

So Marshall is already looking for ways to lower outlays. He plans to combine purchasing, maintenance, and operations to reduce overhead. Analysts predict layoffs of about 4,500 workers, too, matching the number of jobs Marshall eliminated in 1991. Unions may scream, but a prolonged recession in Britain has sapped labor's will to strike.

BA must also find ways to meld USAir routes with its own. Many USAir flights land at New York's LaGuardia Airport, whereas BA services come into JFK, forcing passengers to transfer across Queens by taxi. For better connections, BA may have to build an efficient bus or train shuttle to ferry people back and forth. It may also seek more flights through Newark International Airport, where both airlines have gates.

Perhaps most important, Marshall will have to make service as important at USAir as he has at BA. USAir specializes in short-haul routes, often with little competition, and consumer advocates give USAir poor marks on service.

But image overhaul is Marshall's stock in trade. He brought to BA an attention to customer service rarely seen in Britain--and rarely surpassed to this day. Marshall says it was his days at sea that made him appreciate the importance of creature comforts. As deputy purser, helping passengers on long ocean journeys cope with boredom and cramped quarters, "I learned the importance of making travelers feel more comfortable," he says.

`COLD FISH.' Later, at Avis' European division, Marshal transformed it from an also-ran to first in its market by virtually inventing the European business-travel market. His success won him the top job at Avis' New York headquarters, where he stayed for six years. Marshall left in 1981 for a two-year stint at Sears PLC.

In 1983, he was recruited to help remake BA. Two years earlier, Prime Minister Margaret Thatcher had appointed industrialist John King as chairman of the airline. At the time, BA was a stodgy, loss-ridden state enterprise. King's mission: to clean it up and prepare it for privatization. By the time Marshall arrived, King had already done much to get there. He cut the work force by 22,000, chopped unprofitable routes, and got rid of aging aircraft. He also combined BA's marketing and operations departments--an extraordinary move that allowed marketers to drive such key decisions as aircraft purchases and flight schedules. The changes returned the carrier to profitability by 1983.

But it was Marshall who whipped BA into world-class shape. Industry insiders describe him as a stuffed shirt--some say "cold fish"--but Marshall wins credit for managing the difficult makeover. One of his first moves was forcing every employee to attend a two-day seminar on "putting people first." He sent managers of all levels from their sheltered headquarters to spend time in airport terminals, on the ramps, and in the catering kitchens to learn how other people did their jobs. He paid attention to sagging morale by buying new uniforms, redecorating cabins, and responding to flight attendants' complaints about broken equipment or schedules that left them fatigued.

Marshall saw that air travel was becoming a commodity and figured out how to promote the three classes of service better. Even people traveling in humble economy class, for example, are welcomed into their own "World Traveler" club and given perks such as complimentary wine with dinner. Business class passengers belong to "Club World." The come-on includes lounges complete with secretarial services.

LAST HURRAH? When the Concorde failed to win enough passengers using a luxury appeal, Marshall launched an ad campaign that played up the supersonic jet's speed: "Arriving in New York before you leave." It became a hit with the dealmaking set that traveled across the Atlantic throughout the 1980s, and it restored the Concorde to profitability.Insiders say Marshall deserves the lion's share of credit for the USAir alliance, too. In London, the deal is widely viewed as the piece de resistance of Lord King, the last hurrah for the outgoing BA chairman. Insiders, however, say it was Marshall who pushed hard for an American partner, while Lord King and others dragged their feet. One former aide says BA senior management was also divided: The opposing faction wanted to concentrate on preparing for EC liberalization. Then later, when the U.S. shakeout was over, they figured BA could move in to "pick the apples off the ground," the aide says.

But Marshall's pro-U.S. faction won the day. And soon, the onetime sailor is likely to be running the biggest travel armada the world has ever known. He has the industry scrambling toward a new era of transnational alliances and mergers. The question is whether he can stay one step ahead in the global race he started while at the same time tending to the myriad details of merging two behemoths into a smooth-running machine. Taking the whole world on your shoulders is a big job.Paula Dwyer in London, with Andrea Rothman in New York, Seth Payne in Washington, Stewart Toy in Paris, and bureau reports


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