One World, One Giant Airline Market?

It's being billed as a rare window of opportunity for the airline industry. Act now, and a whole new world order comes into view. Fail to act, and the window could slam shut. What window? No less than the chance for U.S. carriers to blast their way into coveted foreign markets.

Access to other markets has been a hot issue in aviation for some time. But suddenly, a rash of consolidations has given it new urgency. Following an unprecedented open-skies accord between the U.S. and the Netherlands, Dutch flag carrier KLM Royal Dutch Airlines and Northwest Airlines Inc. are seeking a merger of operations. Now, British Airways PLC is looking to hook up with USAir Inc. But before it will approve any such deal, the U.S. will pressure Britain to liberalize its market. British Transport Secretary John MacGregor, in Washington to promote approval for BA's deal, agreed on Sept. 23 to put liberalization talks on the fast track, moving negotiations up a month to Oct. 6. If those talks lead to action, says transportation consultant John Pincavage, it "may very well be the hammer to crack the nut." And as Europe goes, so Asia could go one day.

Progress will come in fits and starts. In considerable disarray over political and monetary questions, the European Community isn't ready to tackle aviation matters. It would be nearly impossible to do so anyway: The various European countries are all at odds over what they want. Some see phasing in open skies as the way to go. Others are dead against it, and are trying to negotiate even more restrictive air treaties with the U.S. than they already have (table).

Both Germany and France are retrenching. In Washington, Jeffrey N. Shane, an Assistant Transportation Secretary, attacks the two countries for their "ironic" stance in seeking restrictions while the EC is liberalizing its internal market. In a recent speech, he charged those countries and others with "unwittingly placing their carriers on the path to oblivion" by trying to avoid competition.

DOUBLE STANDARD. But even as Germany and France pursue these policies, their flag carriers are rushing to position themselves for greater rights to fly within the U.S. Just days after KLM and Northwest announced plans to merge their operations, Lufthansa announced a bid for Continental Airlines Inc. Presumably Lufthansa would hope for the same antitrust immunity that the KLM/Northwest deal is expected to win. For now, Germany insists it will press for a more restrictive treaty "no matter what happens between Lufthansa and Continental," says a German transportation official. But some observers believe the purchase of Continental could become a wedge to pressure Germany toward open skies: no open skies, no antitrust immunity.

Air France, too, has made a play for further access to the U.S. market. On Sept. 23 it announced a "strategic alliance" with Air Canada, which is also bidding for Continental. Once Canada and the U.S. complete their open skies agreement, Air Canada will have nearly unlimited access to the U.S. market. And should Air Canada's bid for Continental beat Lufthansa's, Air Canada's even greater freedom in the U.S. market would benefit Air France.

The Europeans are likely to proceed in stages. One European airline executive suggests that a two-step method is best. "Step A is, you get allies for open skies by offering a phase-in," much like the period the Europeans are using for their own internal liberalization. "With that in hand, you then go to the EC to get a fast-track approach," he says.

For now, the action centers on BA/USAir. The deal would make BA competitive with U.S. carriers on their home turf. But current air treaties between the U.S. and Britain block U.S. carriers from similar broad access to the British market. The Big Three U.S. carriers -- American, United, and Delta -- are lobbying frantically for the U.S. to get them some access to Europe's markets before the BA/USAir deal goes through.

CRYING FOUL. Whether the government will be able to do enough to make the Big Three happy is another story. Even among themselves, the U.S. airlines have different points of view. An executive at one major U.S. carrier sees the Dutch deal as a "strategy to break down Fortress Europe," and says his company can live with a piece-by-piece approach. American Airlines Executive Vice-President Donald J. Carty says that's not enough. "While we wait years and years to see those other markets open up, the American carriers will be competing with their hands tied behind their backs." He predicts that most big U.S. carriers will be foreign-owned or dominated within a decade if the BA/USAir deal rolls forward without concessions.

But Washington insiders say the White House will make sure the deal is ultimately approved. And with that, says MacGregor, "I believe the liberalization process will gain new momentum." If he's right, foreign skies should brighten for U.S. carriers.

      BRITAIN Pressured by the U.S. to loosen its tight restrictions in exchange for 
      approval of the British Airways/USAir deal
      NETHERLANDS Agreed to landmark agreement, giving U.S. and Dutch carriers 
      unlimited access to each other's airports
      CANADA Close to an accord, but wants temporary protections for key markets 
      FRANCE Renounced its transatlantic treaty with the U.S. last June and proposes 
      a new treaty with more stringent limits
      GERMANY Proposed tightening may be undercut by Lufthansa bid for Continental 
      JAPAN Wants to shelter domestic airlines from increasing U.S. competition 
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