'What the bloody hell is going on?'

HE had more to lose than anyone. Yet Rod Eddington, British Airways' chief executive, learned the news that his plans for a £5bn alliance with American Airlines were ruined in the same way as everyone else - from a news agency screen.

No phone call from the US Department of Transportation. No tip-off from Whitehall. Just an 11-word Reuters flash at 14.39 on Friday.

Even Eddington, famous for his laconic Australian cool, was stunned. As one close colleague said: 'He could not believe what he was reading.'

Reuters said the DoT in Washington would approve tie-ups between BA and AA and a further deal linking British Midland with United Airlines - but only if they gave up 238 landing and take-off slots to other carriers. Of the 238, all but 14 would be sacrificed by BA and AA. Eddington's reaction was a blunt: 'Just what the bloody hell is going on here?'

Eddington knew that the DoT was about to make a decision. He had been tipped off, inaccurately, that news would come at the end of the day. A team of 10 executives had been on stand-by at the chic Waterside HQ at Heathrow airport.

But never in his worst nightmares had he imagined that five years' work would be destroyed by what looked like a rogue decision from the US authorities.

Eddington had reason to be confident that his planned tie-up with American Airlines would be given the green light. The Prime Minister had raised the subject with President Bush. American Airlines, based in the President's home state of Texas, was confident that Bush had taken its message on board - a deal with BA was good for Britain and good for America.

Both airlines knew they would have to cede valuable take-off and landing slots, but never on a scale contemplated by the DoT.

With these thoughts rushing through his mind, Eddington knew he had to react fast. At 3pm he called a meeting of the 'leadership team' in his third-floor office known as The Hub. The team included John Rishton, finance director; Rob Webb, BA's legal chief; Andrew Cahn, director of government relations; and Roger Maynard, director of alliances - the man charged with responsibility for the American Airlines negotiations.

For 30 minutes in a room overlooking bleak windswept fields, the team skimmed the 64-page document that had, by then, been faxed from the DoT. The more they looked, the more their options dwindled. It was clear that they simply could not do a deal on such punitive conditions.

The loss of tens of millions of pounds worth of landing and taking-off rights and the sacking of 200 BA pilots was a price they just could not contemplate.

Eddington knew he had to call in the whole board, including the BA chairman Sir Colin Marshall, for a phone conference. Their reaction and decision was the same. The deal with AA was off. It was the end of thousands of hours of negotiation. More importantly, the major plank of the strategy to rescue BA, which is heading for a £600m loss, was in tatters.

As the BA directors digested their failure, events moved swiftly. Calls were made to the Department of Transport in London, to American Airlines' chiefs in Dallas, and to 10 Downing Street. Then in BA's communication room, a statement was written for the press and the stock exchange with the co-operation of the American Airlines press office.

It was a brutal sentence: 'The conditions laid down by the US government do not make sense to either company. We will not acquiesce to unrealistic and, in our view, unnecessary demands.' By the end of the day, Eddington knew he had made the right decision. He told the team: 'There are lots of chief executives with deals in the in-box that they should not have made. Better no deal than a bad deal.'

What Eddington did not then realise was that the decision to kill the deal was never taken to President Bush, even though he was known to be keen to cement his friendship with Tony Blair. It is not clear whether it was a conscious decision by the President's staff to shield him from a political hot potato, or whether the matter was judged insufficiently important to take to the Oval Office.

The crucial decision on how many slots at Heathrow would be sought for American's rivals was decided by 'mid-level department employees, technocrats', an official said. 'The decision was composed and passed up the chain to Transportation Department Secretary Norman Mineta,' he said.

Once the civil servants had sketched their solution, it was taken to Andrew Card, Transportation Secretary under George Bush Senior and now Chief of Staff at the White House. He simply shrugged his shoulders and said: 'Go ahead.' When news reached the British Embassy in Washington, staff who had worked side-by-side with both airlines over the past year were 'stunned'. 'We are still reeling,' one diplomat said. 'We just had not expected it to be so tough.'

One British official in Washington said there was no way the DoT did not realise it was imposing totally unacceptable conditions. 'Either that or they miscalculated,' said the British official. 'Perhaps they thought we were so desperate for free competition between airlines over the Atlantic that we would pressure BA into accepting it. Whatever, this deal is dead.'