AEROPOLITICS GROUNDING MULTINATIONAL DEALS

AEROPOLITICS GROUNDING MULTINATIONAL DEALS

So it's official. A foreign company can now take over a U.S. firm working on a Star Wars project but it still can't buy an American airline.

Britain's BAE Systems's recent $1.67 billion acquisition of Lockheed Martin's Aerospace Electronics Systems business was a watershed because it transfered a large part of the U.S.'s most sensitive electronic warfare technology to a foreign firm. But British Airways isn't free to take over, say, Southwest Airlines thanks to a law preventing a foreign company from acquiring majority control of an American airline.BAE Systems has become the sixth largest contractor to the Pentagon, but Defense Department officials have to fly the Atlantic with American carriers.

Welcome to the crazy world of aeropolitics, which has barely changed since governments started signing bilateral air agreements reserving traffic rights to their (mostly state-owned) national carriers half a century ago. To this day, an airline's rights are tied its nationality. In that sense, there's little difference between Third World countries who regard their airlines as symbols of prestige and industrialized nations that protect their carriers from foreign infection.

While almost every industry, including defense, is free to merge across borders, air transport, probably the most global of businesses, is limited to unsatisfactory loose alliances.

Aeropolitics, not economics, will decide the fate of current negotiations to merge British Airways and KLM Royal Dutch Airlines into the world's third-largest airline after United Airlines and American Airlines. The carriers have resolved most issues, including their shares in the new company, and European Commission regulators likely will clear the deal, with modifications, by summer's end.

But Washington warned this week it will move to block the merger in the absence of an 'open skies' deal between the US and Britain to replace the restrictive 23-year old Bermuda 11 Treaty. 'The U.S. will not allow British Airways to use a merger with KLM...as a back door to achieve greater access to our market,' said to Dorothy Robyn, a senior White House official. KLM risks losing its unrestricted traffic rights to the U.S. under a 1992 'open skies' accord if it becomes British-owned before London and Washington sign their own deal. Washington, however, has no problems with Swissair taking over Sabena because it has open skies agreements with both Switzerland and Belgium.

The carriers are taking the U.S. threat seriously, with a leaked memo from KLM chairman Leo van Wijk this week outlining plans for the carrier to remain under Dutch national ownership. BA, though, would have economic control of the merged airline.

That's unlikely to wash with U.S. regulators, leaving Britain with little choice but to make compromises to achieve an 'open skies' accord by year's end: after all, London's negotiating position has always been based on 'what's good for BA is good for Britain.' That's why it has stubbornly resisted Washington's demand for greater access for American carriers at London Heathrow, BA's lucrative hub stronghold. The two sides have met twice this year and are scheduled to resume negotiations in September.

The nationality issue has also infected the deadlocked negotiations over cargo. FedEx chairman Frederick Smith has spoken of the distinctly un-British registration of a number of aircraft, pilots and crew in the British Cargo Airlines Alliance, the organization of independent all-cargo carriers which is part of the British open skies delegation.

The entanglement of the BA-KLM merger in the 'open skies' talks could yet prove beneficial as it may encourage new thinking on both sides of the Atlantic. It has already helped to build up a headsteam of support among carriers for the European Union to take over negotiations with the U.S. on behalf of its 15 member states. The European Commission, the EU's executive, claims it is legally entitled to do this anyway which is why it is taking legal action against nine countries that have signed bilateral deals with Washington.

Britain has traditionally been loathe to cede more sovereignty to Brussels, especially the previous conservative government which unsuccessfully tried to stop the Commission from having any say in international air transport negotiations. But Britain's influential Civil Aviation Authority has told the government that an EU-wide approach is the only way to achieve genuine liberalization.

The EU already has a blueprint for a Transatlantic Common Aviation Area which would create a free trade air transport zone between Europe and the U.S. similar to the EU's single aviation market. There would be no curbs on ownership, traffic rights, or licensing of airlines provided they meet common agreed minimum standards of safety and operation. Anti-trust law would also be applied consistently across the Common Aviation Area.

With a new administration taking office in Washington next January there's never been a better time to rethink the old rules that are stopping American and European airlines from taking part in the record-breaking merger and acquisition activity that is reshaping all other 'normal' industries around the globe.