`Psst, Little Airline Have I Got A Deal For You'

Europe and the U.S. are slipping toward yet another of their periodic trade battles--this time over an American bid to deregulate transatlantic air service. But unlike disputes over such exports as bananas and Hollywood films, which focus on narrow, Europe-U.S. issues, this fight has broad implications.

The U.S. initiative is the crucial first skirmish in Washington's effort to free the globe's skies from the hundreds of agreements that tightly restrict access to key destinations. If the U.S. strategy works, Washington policymakers will first pry open Europe, then turn to Asia and Latin America. If, though, the Europeans derail the American initiative, U.S. airlines will find it a lot tougher to expand successfully abroad and forge profitable alliances with foreign carriers.

To push for transatlantic deregulation, Washington is recruiting an army of feisty stand-ins: Smaller European countries that are eagerly signing "Open Skies" treaties with the U.S. and thus threatening the cozy status quo that protects airlines in bigger countries such as France and Britain. With jetlike speed, the Americans have signed preliminary treaties with Switzerland, Austria, Belgium, Iceland, and Luxembourg. Now Finland, Denmark, Norway, and Sweden are likely to leap at the American offer: unlimited access for their airlines to U.S. cities if American carriers get similar rights in the other direction.

The big countries are angry. So are European Union officials. They're threatening to sue America's allies to kill their deals, on the grounds that European Union rules require a joint EU treaty. Many airline sources consider that an empty threat, since Britain and France oppose a joint approach for fear of losing control of their own markets.

America wants Open Skies for a simple reason: Its carriers are the world's most efficient and would gain clout in a free market. "It's not an act of charity," notes Neil Kinnock, the EU's transport commissioner, who is fighting the move. U.S. officials point out that small European airlines with global ambitions need American partners. Those whose governments accept Open Skies may win immunity from U.S. antitrust laws, letting them fuse operations with American allies. So far, only Northwest Airlines Inc. and KLM Royal Dutch Airlines enjoy this privilege--and they're growing rapidly as a result.

Delta Air Lines Inc. is the likely core of a new transatlantic grouping. It has loose alliances with Swissair, Sabena, and Austrian Airlines--all now Open Skies carriers. "We've very much been watching what the Northwest/KLM agreement has accomplished," says a Delta official. Now No.2 among U.S. carriers across the Atlantic, Delta could wrest the top spot from American Airlines Inc. with help from its European allies.

Washington hopes the prospect of such stronger alliances will scare Europe's big nations into opening their markets so as to allow their carriers similar transatlantic deals. Currently, Air France and American Airlines are negotiating an alliance. But unless France signs up for Open Skies, "any deal will come to naught" because Washington will put tight limits on it, warns a U.S. official. Air France, struggling to cut costs, can't accept Open Skies for at least two years, says an insider: "Before then, we'd just die," he says.

"MURMURS" IN THE AIR. Britain is the big prize for Washington. London's Heathrow Airport is Europe's largest gateway, with only modest service for U.S. carriers. Anglo-U.S. talks on a more liberal air treaty opened on Mar. 22. Washington has leverage: its annual right to renew or cancel connecting service between British Airways PLC and its U.S. partner, USAir Inc. A U.S. negotiator reports "murmurs" of a more liberal British attitude. Washington is also negotiating an Open-Skies deal with Germany, the most open big European country.

These are encouraging developments, but there are no signs yet of a quick American victory in Britain or Germany. Many Europeans doubt America's strategy will work. Signing up small countries "is not going to put any pressure on the main players," believes Austin Reid, managing director of British Midland Airways Ltd. Washington disagrees. "We think this will open things up psychologically," says Paul Gretsch, director of international aviation at the U.S. Transportation Dept. Before either view prevails, lots of new strains may mar relations across the Atlantic.

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