LONDON, JULY 16 -- British Airways will buy its smaller rival, British Caledonian Group, for about $382 million in a move aimed at blunting increased foreign competition.
The planned combination, announced by the two airlines today, will assure that a British carrier remains the biggest airline outside the United States and the Soviet Union, an expert said.
The proposed deal between British Airways PLC, which was denationalized this year, and closely held British Caledonian PLC would give the combined company a virtual monopoly in the United Kingdom. The deal also sparked an immediate political row.
The Conservative government said the combination, for which a name hasn't been chosen, will be studied to determine whether it is in the public interest.
British Airways, the self-proclaimed "world's favorite airline," is Britain's largest carrier. British Caledonian, whose advertising campaign features tartan-clad "Caledonian Girls" and the slogan, "We never forget you have a choice," is No. 2.
Britain's other airlines, including Britannia, British Midland and the flamboyant discount carrier Virgin Atlantic Airways, are much smaller players.
The merger mania that gripped the U.S. airline industry in recent years created fewer but more powerful competitors for Britain's airlines. In addition, more American airlines are flying to the Britons' home turf -- including Continental Airlines and Piedmont Airlines.
"The new combine will provide Britain with its own mega-carrier operating a route network unrivaled in the world with the inherent strength to challenge and beat the most aggressive competition," said British Caledonian Chairman Sir Adam Thomson.
The airlines said the directors of the two companies believed the merger "was necessary and in the best interests of the shareholders and employes as well as of the traveling public."
The stock market seemed to believe it was good for investors. British Airways' stock jumped 10 pence (16 cents) to 170 pence (about $2.74) on the London Stock Exchange.
But critics of the deal warned that air fares will rise and service might decline.
Some European air fares recently have been cut because of increasing competition, but they are still generally higher than those in the United States. Many of Europe's airlines are state-owned and many governments traditionally have resisted efforts to cut fares and deregulate the industry.
Michael Ramsden, editor in chief of Flight International magazine, said the merger could lead to higher fares, lack of choice and complacency on the part of the airline.
Jennie Wootton, an aviation analyst with the investment firm Kleinwort Grieveson Securities Ltd., said the combination will be able to operate more efficiently, but will lead to job losses.
British Airways intends to operate British Caledonian as a subsidiary, and "in essence, it will remain as it is," said a spokesman for British Caledonian, who asked not to be identified further.
British Airways is the largest airline, not including top U.S. and Soviet carriers, and the deal will assure its ranking, Ramsden said. British Airways Chairman Lord King said earlier that the route networks of the two companies complement each other and there is no corresponding British Airways service on more than half of British Caledonian's present network.
The deal was a surprise even though British Caledonian has been struggling and was linked to a reported effort to combine some of Europe's smaller airlines.
Thomson said the airline had talked to others, including American carriers, about a combination. But, he said, "The one with British Airways makes more sense."
British Caledonian Airways had a pretax loss of 25.5 million pounds (about $41 million) in 1986, compared with a pretax profit of 21.7 million pounds ($35 million) in the previous year.
It was hit by the loss of its route to Libya after the U.S. bombing of that country in the spring of 1986.
For years British Caledonian battled head-on with British Airways -- a competitor many times it size -- while other British airlines chose instead to carve out small niches for themselves. It fought with British Airways for routes and sometimes undercut its fares.
British Airways had a pretax profit of 162 million pounds ($261 million) last year. Its shares were sold to the public in January as part of Prime Minister Margaret Thatcher's drive to sell state-run companies.
British Airways said it will issue 108 million new ordinary shares, which would represent 13 percent of its total outstanding stock, to fund its cash-or-stock offer for British Caledonian.