Single EU-US air market could take off

Date: 03/08/00

By Bruce Barnard

THE planned merger between British Airways and KLM has the potential to kick-start stalled Union plans for a single EU-US air transport market that would free airlines from a 50-year old protectionist regime which is stunting the industry's response to globalisation.

The biggest obstacle facing the two carriers is not agreeing on their respective shareholdings in a combined airline or addressing the European Commission's competition concerns, but a US threat to block the merger.

Washington has warned that it will torpedo the deal, which would create the world's third largest airline after United Airlines and American Airlines, if the UK does not sign up to a bilateral 'open skies' accord by the end of this year. Once it had been taken over by BA, KLM would become a British carrier and could be stripped of its unrestricted traffic rights to the US under a 1992 US-Netherlands bilateral aviation agreement.

The BA/KLM merger has given Washington extra leverage over the UK in current negotiations on a new bilateral air agreement to replace the 23-year-old Bermuda II Treaty. "The US will not allow British Airways to use a merger with KLM as a backdoor to achieve greater access to our market," said senior White House official Dorothy Robyn.

The airlines are attempting to get round the US threat with a plan for KLM to remain under Dutch national ownership, but with BA having economic control over the new carrier. But this ruse is unlikely to get past US regulators, forcing the UK to cede ground in the open skies talks when the two sides resume negotiations in September.

There is no denying the importance of the BA/KLM talks. "This is really the case that will change the industry once and for all," says KLM's chief executive Leo van Wijk.

Washington's strong-arm tactics recall warnings by former Transport Commissioner Neil Kinnock that the US was playing off one Union country against another when it pushed for bilateral open skies deals with member states in the 1990s. Arguing for a united EU stance, Kinnock claimed Washington's aim was to secure access to the Union market for its airlines while restricting the freedom of European carriers in its domestic market.

EU governments ignored Kinnock's plea for a mandate to negotiate air traffic agreements on behalf of all member states, and signed bilateral deals with Washington which the Commission is now challenging in the European Court of Justice.

But sentiment in most European capitals is swinging in favour of a single EU-wide approach which will give individual member states more leverage in forthcoming negotiations, especially with the US - the world's biggest domestic air transport market - which remains largely out of bounds to European carriers. On the eve of the latest round of UK/US open skies negotiations in July, the UK's Civil Aviation Authority (CAA) told the government that the only way to achieve genuine liberalisation was to negotiate through the Union.

Meanwhile, leading European airlines are pressing for the politics to be taken out of the industry. They argue that rules and regulations dating back to the 1940s and outright protectionism in otherwise open markets like the US have trapped the industry in a time warp, thwarting efforts to consolidate with carriers in America and Asia.

"Airlines have not yet been allowed to become an industry like any other," says Lufthansa chief executive Jurgen Weber. The EU has a single market in aviation, but its airlines cannot exploit its benefits because of restrictions on foreign ownership of carriers in the US and most other countries.

Politics still overshadows consolidation within Europe. KLM's far-reaching joint venture with Alitalia, which was cleared within days by Commission competition officials last summer, collapsed earlier this year because the Rome government failed to meet a deadline to privatise the Italian airline and botched the transfer of flights to Milan's new Malpensa airport, one of the key attractions of the partnership for the Dutch carrier. And Swissair had to wait for a 'yes' vote in the Swiss referendum on closer economic ties with the Union in the spring before it could proceed with plans to take control of Sabena, a deal which did not worry Washington as it has signed open skies deals with Belgium and Switzerland.

While the US pioneered deregulation in its domestic market back in 1978 and has signed around 40 open skies accords around the world, its home turf remains off limits to outsiders even as every other all-American business, from Hollywood studios to fast-food chains, falls under foreign ownership. At present, foreign ownership of a US airline is limited to 49%.

The airline industry's isolation was put into sharper focus in July when the €2.01-billion acquisition by the UK's BAE Systems of Lockheed Martin's Aerospace Electronics System business put a large part of the US' most sensitive electronic war technology into foreign hands. Yet US airlines are still protected from foreign take-overs, their domestic routes are safe from foreign competition, foreign airlines cannot lease their planes and crews to US carriers, and federal employees must 'fly the flag'.

As a result, "DaimlerChrysler-type mergers are unthinkable", according to Lufthansa's Weber. However, the big players are no longer content to make do with loose alliances as a second-best to cross-border mergers, prompting speculation that they may push for changes after current merger negotiations on both sides of the Atlantic - American Airlines has approached Northwest about a merger following United Airlines' recent €4.63-billion agreed bid for US Airways - are completed. Significantly, BA built up a sizeable holding in US Airways and KLM bought into Northwest, but both deals soured.

The latest flurry of merger talks could set the stage for a political initiative in Washington and Brussels to dust off the Commission's blueprint for a Transatlantic Common Aviation Area, which would create a free-trade air transport zone between Europe and the US similar to the EU's single aviation market. There would be no limits on ownership, traffic rights or licensing of airlines provided they met common agreed minimum safety and operating standards. Moreover, anti-trust law would be applied consistently across the Common Aviation Area.

The timing for a joint initiative could not be better. Barring a last-minute deal killer, BA and KLM are likely to file their planned merger with the Commission's competition authorities by the end of August and do not anticipate any major problems, although they will probably be told to hive off their low-cost, no-frills carriers Go and Buzz, and cede slots to rivals and newcomers on the UK/Netherlands routes.

Meanwhile, the first full meeting of the Commission following the summer break is scheduled to discuss controversial proposals for new rules to govern the allocation of airport slots, preparing the ground for a broader discussion of the industry against the backdrop of the BA/KLM deal. At about the same time, British and US officials will resume their open skies negotiations amid rising expectations of agreement on a mini-deal which will allow two more US carriers to service London Heathrow. Bermuda II limits transatlantic services from Heathrow to two airlines from the US (United Airlines and American Airlines) and two from the UK (BA and Virgin Atlantic) in exchange for British Midland, the UK's second largest airline, getting the green light to launch transatlantic operations.

There is no chance of movement in the US in the run-up to the presidential election in November, but the new administration which will be in place next January will be free to take a fresh look at initiatives to 'normalise' the airline business.

Major feature. The planned merger between British Airways and KLM has the potential to kick-start stalled Union plans for a single EU-US air transport market that would free airlines from a 50-year-old protectionist regime which is stunting the industry's response to globalisation.