The Yankee Invasion Has Foreign Carriers Running For Cover

Tensions are mounting in the international skies. With the gulf war safely past and the U.S. economy perking up, hordes of Americans are heading across the Atlantic this summer. Airlines are boosting flights to London by 12% and to Paris by 30%. That's good news for the tourist industry--but a nightmare for Old World airlines. Out to win bigger shares of transatlantic travel, feisty U.S. carriers are slashing prices and fighting for market share, causing most European airlines to lose money in this once-lucrative market.

European carriers worry that this summer's dogfight is just a foretaste of what's in store. Because deregulation led them to slash costs, U.S. airlines are in better fighting trim than the protected foreign carriers. The European Community itself has just taken a major step toward opening its skies--at least among member airlines. But for now, big, savvy American Airlines Inc.--whose fleet has as many jets as British Airways, Lufthansa, and Air France put together--especially frightens the Europeans. Chief Executive Robert L. Crandall "must be thinking: 'We've done it in the U.S. Now, we'll export our knowhow,' " says Robert Esperoux, head of air transport at France's aviation agency.

Esperoux and other Europeans are determined to block the U.S. onslaught. So they're taking the air war behind diplomatic closed doors. France has renounced decades-old air treaties with the U.S. that it considers too liberal. And Germany may soon do the same. They aim to negotiate tougher deals. Italy, too, seeks to limit U.S. flights. Talks that broke off recently are to resume in the fall--and Alitalia Chairman Giovanni Bisignani promises Italy will get just as tough as France and Germany.

`WACKO.' Such sentiments are terrible news for U.S. airlines. With markets growing slowly at home, they've been looking abroad for growth. New treaties could be more restrictive and could set worrisome precedents for other disgruntled countries. Canada, in current negotiations to expand air traffic with the U.S., is pushing to give its carriers the advantage in opening new routes. And Japan resents the "fifth-freedom" rights enjoyed by United Airlines, Northwest Airlines, and Federal Express, which let them haul passengers and cargo from Japan to other Asian destinations.

American's Crandall says his airline anticipated such protectionism--and beefed up its European presence in the late 1980s. Roughly 26% of its revenues will come from overseas in 1992--compared with just 12% in 1988. But now, American is being forced to scale back. U.S. negotiators, trying to temper the heat in recent months, have told U.S. airlines to limit capacity to France and Germany this summer. And Crandall now says earlier plans to boost service to France next summer will probably have to be scotched. "It's a wacko thing to do, when the French sacrifice their tourist economies for the sake of their airlines," grouses Crandall. "European airlines simply do not want competition."

Europeans deny that. They claim to want protection only until they, too, have been toughened by deregulation. The EC began deregulating gradually in the late 1980s. On June 22, EC countries agreed to the next steps, starting in January, 1993: Airlines will get greater fare-setting freedom and rights to fly domestic routes inside EC countries other than their own. Growing competition will undoubtedly mean a U.S.-style consolidation of Europe's 80 airlines--and perhaps some alliances with U.S. carriers, as the Europeans do everything they can to gain an advantage.

So long as shaky Pan American World Airways Inc. and Trans World Airlines Inc. were the main U.S. rivals, Europeans didn't worry. But stronger contenders have moved in--and there are more of them. In 1986, only two American carriers flew to France; now, eight do. Air France's share of the U.S.-to-France market has fallen from 50% a decade ago to less than 30% today.

The Americans have unfair advantages, in the European view. Strong U.S. hub-and-spoke systems feed Atlantic routes. With smaller domestic demographic bases, building hubs has not been a viable strategy for European carriers. Now, United Airlines Inc. and Delta Air Lines Inc. are building hubs in Europe. But the Europeans can't do that in the sprawling U.S. market, where they are barred from hauling passengers domestically.

JOINT TREATY? "We're only asking for equal opportunity," says Lufthansa CEO Jurgen Weber. Germany wants a guaranteed 40% market share for German carriers across the Atlantic and a reduction in U.S. "beyond" rights from Germany to other countries. The latter would hurt Delta, which bought Pan Am's North Atlantic system last year--largely to gain unlimited rights through Frankfurt. It now operates a major hub there. Germany also wants limits on airlines operating under Chapter 11. France wants similar measures, plus a cap on the number of U.S. airlines--something Britain won 15 years ago. The French claim that has helped British Airways PLC stay in the black in recent years. Most other EC carriers are losing money.

Instead of pressing such demands separately, Europe's governments should negotiate a joint treaty with the U.S., say EC officials. Although that may happen one day, European nations are still too far apart. The free-market British and Dutch want totally open skies, while most other countries cling to protection.

Over the long haul, globalization is "an economic trend that can't be reversed," says Cyril Murphy, vice-president for international affairs at United. But for the next few years, U.S. carriers may have to scale back their ambitions.

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