GÜNTER ENDRES LONDON After intensive talks with all the major alliances, with the obvious exception of oneworld, British Midland has opted to team with Lufthansa and the Star grouping. BM is expected to join in spring or summer of next year.

The alliance signing is backed by Lufthansa taking a 20%equity holding in BM - acquiring half of the 40%stake that Star founder member SAS has long held in the UK independent. BM chairman Sir Michael Bishop, together with his fellow investors in the BBW holding company, will retain the majority holding in the airline with 60%. The deal is reputed to be valued at close to $150 million, based squarely on BM's position at London Heathrow.

The price agreed was on the high side, but reflects a clever stratagem by Bishop, says Chris Avery of JP Morgan Securities. By making the other two alliance groupings bid, he was able to realise his preferred choice and increase the value of his airline.

For the German flag carrier, which has largely tried to avoid the purchase of equity stakes to cement alliances, the price plays a secondary role to the potential prize. The big attraction was BM's valuable 60,000 slots at Heathrow airport, where it is the second biggest operator after British Airways.

Share of slots at Heathrow

British Airways 39% British Midland 14% Lufthansa 4% Aer Lingus 3% SAS 3% Air France 3% American Airlines 2% United Airlines 2% Iberia 2% KLM 2%

Share of slots at London and Frankfurt hubs Heathrow Gatwick Frankfurt oneworld 47% 70% 4%

Star 23% <2% 65% Note: OAG schedule data March-April 1999

Alliance shares relate to those held by main airline partners

However, the real strategic promise is comes from positioning in the long term, giving Lufthansa future options at Europe's premier long-haul hub. BM is battling to obtain transatlantic route authority and if moves towards a full Europe/US open skies agreement ever materialise that could lead on to a scenario where Lufthansa and partners could one day fly transatlantic services out of London.

The announcement has drawn a stinging attack from British Airways, which complains that the European Commission (EC) appears to be treating other alliances more favourably than its own oneworld. BA says that, after examining the BM deal in detail, it will "seek appropriate action" if it feels discriminated against.

Avery also feels that BA may have been treated unfairly, highlighting the EC's tough conditions for approval of the BA alliance with American Airlines, and its decision to single out BA over its incentive scheme for travel agents. He adds that the EC is tardy in imposing unified rules and regulations throughout Europe, and that "the playing field is, as yet, anything but level".

BA adds that the oneworld alliance holds less than half the slots at Heathrow, while Star has almost two thirds of those at its Frankfurt fortress. Even taking Gatwick into account, the combined oneworld share of slots within London falls below those of Star at Frankfurt. With BM's membership, Star overall will hold just under a quarter of Heathrow slots. BA says that no other alliance would be given such access at any Star hub.

Source: Airline Business