Is This Any Way To Deregulate An Industry?

The Europeans are at it again. Since late July, the European Union has approved government aid to several very sick national airlines. In one deal, Air France gets $3.7 billion in French government handouts. In another, Greece gives Olympic Airways $2.3 billion in cash and debt forgiveness. All told, in the past eight months, the Europeans have approved $7.4 billion in aid to state-run carriers (table).

Such largesse has some airline executives and government negotiators asking if Europe really wants unfettered competition among its airlines. The European Commission, the EU's executive arm, defends the payments as a needed cushion for companies that are firmly committed to overhauling themselves before 1997. At that point, the plan is for European airlines to compete freely in each other's markets.

FRESH THREAT. To skeptics, the subsidies certainly look like major roadblocks to deregulation. And there is no certainty that the current rash of favors will be the last. Yet deregulatory forces still have momentum. Nimble, private carriers are already popping up in markets such as Greece and Spain, while British Airways has set up affiliates in Germany and France. These new competitors are not going away. So the subsidies only postpone the day of reckoning for overweight carriers such as Air France, which will find it increasingly difficult to cope with the restructuring of Europe's airlines.

Of course, the latest bailouts anger the predominantly northern European carriers--British Airways, Lufthansa, and KLM Royal Dutch Airlines--that have relied a lot less on their home governments. British Airways Chairman Sir Colin Marshall vowed to fight the Air France decision, and U.S. executives are grumbling, too. "We have long opposed state aid because it distorts competition so substantially," says Robert A. Britton, managing director of regulatory affairs for American Airlines Inc. Adds Federico F. Pea, U.S. Transportation Secretary: "[The aid] is unfair and cuts against all the efforts to make sure there is a level playing field."

LIMITED CLOUT. But Brussels may have had little leeway to do otherwise, at least until 1997. Burdened with the job of cutting European governments' ties to national airlines, the commission has only limited leverage to impose its free-market notions. The latest bailout for Air France does represent progress in some sense because it requires the French to open up Orly Airport, sell off shares in a hotel chain, and pay back an earlier $250 million aid package.

For now, the airlines that already manage to live without state aid can do little more than protest Brussels' actions. Their hope is that the subsidies will finally run out and that the airlines that still rely on them will have to learn how to compete the hard, aid-free way. And that day will surely come--unless the French and other like-minded governments can figure out a way to soften the blow.


AIR FRANCE Gets $3.7 billion, provided it cuts 5,000 jobs and sells its stake in a hotel chain

OLYMPIC AIRWAYS Receives $2.3 billion, but must end monopoly on routes to Greek islands

TAP AIR PORTUGAL Wins $1.1 billion, but must meet profit goals and will lose its tax exemption

AER LINGUS Gets $263 million in return for freezing its fleet size until 1997


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