Air Wars

By JANICE CASTRO Reported S.C. Gwynne/Washington and William McWhirter/Detroit

The British are coming! The British are coming! And this time, they're not coming by land or sea, but by air! That cry of alarm can be heard in Dallas, Chicago and Atlanta these days, as leaders of the top U.S. airlines wail about a threat to their hard-won global dominance. While on the campaign trail, Bill Clinton joined the chorus of alarm. In the final presidential debate, Ross Perot sounded the most impassioned warning of all. "We're getting ready to dismantle an airlines industry in our country, and none of you know it," he declared. "This deal is terribly destructive to the U.S. airline industry."

The deal in question is a proposal by British Airways to spend $750 million to buy a 44% ownership of Pittsburgh-based USAir. The transatlantic partnership would rank as one of the three biggest airlines in the world, linking 339 destinations in 71 countries. That powerful combination has prompted a vigorous protest from the Big Three U.S. carriers -- American, United and Delta -- which hope to discourage the government from approving the deal. Said American chairman Robert Crandall: "What will happen is that the good jobs will go to London, and the baggage handlers will stay here."

After a 14-year dogfight of deregulated airline competition in the U.S., which has shot down nearly 130 carriers, including Pan Am and Eastern, the air war is going global. As carriers around the world mount new battles for international market share, they are forming alliances with other airlines and pooling resources. Before most of the new partnerships can get off the ground, though, they must navigate the thicket of trade restrictions that still restrain international airline traffic. Many governments fear that foreign carriers are gaining too great an advantage in their markets, undermining local jobs and revenues. Says Edmund Greenslet, publisher of the Airline Monitor, a trade publication: "National feelings about airlines obviously trigger more passion than TVs and automobiles. Airlines are a highly symbolic way of establishing national identity in the world."

Several foreign airlines have made connections with U.S. counterparts -- or ) have made proposals to do so. KLM Royal Dutch Airlines holds a 49% equity stake in Minnesota-based Northwest Airlines. The two airlines share caterers, computers, fares and maintenance facilities. Says Michael E. Levine, Northwest's senior marketing executive: "We are allowing two medium-size airlines to grow together as if they were a much larger global network. Our ultimate objective is to provide a seamless travel experience." Last week Houston's Continental Airlines, struggling to emerge from its second Chapter 11 bankruptcy proceedings in a decade, announced that it too had found a cross-border partner. A group of investors, led by Air Canada, will invest $450 million in the Texas carrier as soon as it clears bankruptcy, which it expects to do early next year.

The proposed British Airways-USAir linkup, the most controversial of them all, is seen by its U.S. partner as a move into the big leagues. After a decade of rapid expansion, USAir has stalled, losing $973 million since 1989. Says George James, an airline-industry analyst: "Their situation is desperate. They have grown into an airline the size of a global carrier without global routes. If they don't obtain the British Airways deal, they will have to reduce their size back down to that of a regional commuter airline."

If the deal goes through, the competitors with the most to lose would be American, Delta and United. The three sky kings have won the hard-fought deregulation war in the U.S., increasing their combined domestic market share from 38% a decade ago to 60% today and vaulting to the top ranks of global carriers. Their combined share of transatlantic travel, just 3% a decade ago, is now 69%. Each of the three top U.S. airlines carried more passengers last year than the entire European commercial-airline fleet combined.

This furious expansion has exacted a high cost. Since 1990, U.S. carriers together have lost nearly $7 billion, including almost $1.9 billion in losses accrued by the Big Three. Part of the current frustration is the timing of the British Airways-USAir deal, which comes just as the big domestic carriers were preparing to reap the rewards of surviving the long deregulation bloodbath.

British Airways, one of the largest and most profitable carriers in the world, is taxiing toward unlimited access to U.S. markets vital to the Big Three. USAir, with its concentration of hubs in the eastern U.S., the point of origin for much travel to Europe, can give British Airways crushing new clout in the critical transatlantic market. At the same time, the deal will make USAir a formidable domestic competitor once more. USAir chief executive Seth Schofield conceded, "It's their worst nightmare: competition that they did not expect and do not want. An amicable truce is literally impossible. There is no room for compromise."

The three carriers insist that the deal is wrong for America because Britain still restricts U.S. access to its markets. Until now, Bush Administration policy in airline trade negotiations has been aimed at winning bilateral "open skies" agreements, swapping equal access to markets one country at a time. The only such agreement concluded so far, though, is with the tiny Netherlands, a pact that followed Northwest's deal with KLM.

Britain is a far richer market, but it remains to be seen how much the British will be willing to relax their barriers to U.S. airlines in return for approval of the USAir deal. "To just open up the American airline market, the largest in the world, without extracting any return whatever would be crazy," asserts Neil Monroe, chief spokesman for Delta. The manner in which the question is handled is viewed as a test of U.S. toughness on free trade. The precedent created in the talks with the British may be critical in negotiations later with Germany, France and other nations. Members of the European Community, alarmed by the overwhelming strength of American, United and Delta, have begun to consider consolidating future talks with the U.S. on landing rights and routes in order to drive a harder bargain.

Bush Transportation Secretary Andrew Card, who completed a round of talks with British trade officials last month, is eager to consummate the USAir deal before Christmas, while he is still in charge. President-elect Clinton, on the other hand, has reservations about the deal. While he is eager to find a way to help USAir grow stronger (and protect the jobs of its 47,000 workers), he has said he is concerned about the implications for the U.S. airline industry. If negotiations are not completed before he takes office, Clinton is expected to press Britain for "open skies" concessions.

In contrast to the USAir agreement, the Continental deal is unlikely to touch off much controversy. For one thing, the Canadian market is not as hotly pursued as the destinations involved in other evolving partnerships. Air Canada and Air Partners, the Fort Worth-based investment group participating in the deal, will split their stake, each taking 27.5% ownership in Continental. American Airlines chief Crandall praised the Continental agreement last week as "a good, fair, free-trade-based, cross-border investment deal." Having satisfied Continental's creditors, the deal must now win the approval of the U.S. bankruptcy court overseeing the Houston carrier's restructuring. Said Robert Ferguson, Continental's chief executive officer: "This is the first of several possible alliances that will enable Continental to establish its global presence in the future."

Global presence? Those are big words from a company that was so hard up two years ago its officers told its pilots to taxi out to the runways on one engine instead of two in order to save fuel. In one swift maneuver, Continental may have swerved away from a penurious future as a second-tier operator and headed back toward the front ranks of major carriers. Within hours of Ferguson's announcement, the industry was buzzing with talk of other new partners that might extend the Houston airline's reach in Asian and other markets.

The key advantage of all such links is so-called "code sharing," a reference to the merging of the partners' reservations systems. This ticketing practice effectively steers travelers away from competing carriers by directing them smoothly to the partner. Air Canada would feed passengers into Continental planes on Continental routes and carry American passengers into its own. The richer the markets on each side of the partnership, the greater the competitive advantage these arrangements offer in effectively screening out other carriers.

Even the Big Three U.S. airlines protesting the British Airways-USAir deal are making connections of their own. Delta has quietly aligned itself with Singapore Airlines and Swissair, each of which own 5% of the Atlanta carrier's stock. American has held talks with Canadian Airlines International. The Airline Monitor's Greenslet expects six or eight key global alliances to take shape before the end of the decade.

Who will prosper? As long as nearly half the world's air traffic originates in the U.S., the American carriers that have built tough, lean systems will hold the trump cards in the new partnerships. U.S. consumers, for their part, will benefit from the arrival of foreign carriers to the domestic market because their arrival will assure a high level of competition. The challenge for the government in all this is to make sure that every time it opens another door to a foreign carrier, some equal opportunity is created overseas for one of America's flag carriers.

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CREDIT: [TMFONT 1 d #666666 d {Source: International Air Transport Association}]CAPTION: THE TOP 10 PLAYERS