Europe View: Aviation's new world order

Europe View: Aviation's new world order

The global airline industry is looking into the abyss as it faces losses of around $5 billion this year on international services alone, on top of a record deficit of $12 billion in 2001.

But even in the midst of this financial carnage, signs are emerging that the regulatory shackles and protectionist barriers that have prevented airlines from pursuing the consolidation that has rescued other sectors from cyclical and structural slumps are starting to unravel.

The unlikely catalyst for change is the immensely powerful European Court of Justice, the European Union's highest legal authority, which is poised to issue a landmark ruling that could trigger the biggest upheaval in international aviation in more than half a century.

The Luxembourg-based court is set to rule that eight European Union countries acted illegally in signing bilateral "open skies" accords with the United States, in effect transferring authority to the European Commission, the EU's executive agency, to negotiate future deals on behalf of the 15-nation bloc as a whole.

The Commission has long claimed open skies accords delayed and hampered the deregulation and consolidation of Europe's aviation industry by limiting trans-Atlantic traffic rights to carriers from one EU country rather than the entire EU. It accused Washington of pursuing a "divide and conquer " strategy to obtain one-sided deals massively favoring U.S. airlines, but European governments rebuffed its pleas to abandon U.S. agreements until they had agreed on a common position.

It sued the eight rebel countries - Austria, Belgium, Denmark, Finland, France, Germany , Luxembourg and Sweden - in 1998 and claimed victory in January when a judge at the European Court issued a preliminary opinion that the open skies deals breached the EU treaty - a finding the full court is almost certain to rubber stamp, probably before the end of the year.

The timing couldn't be better for the Commission, which may soon find itself negotiating to open up Europe's biggest trans-Atlantic aviation market, between the United Kingdom and the U.S. The U.S. decision earlier this month to reject the UK's proposal for a limited liberalization has probably dealt a terminal blow to the eight-year-long negotiations as the two sides are unlikely to revive the talks on the eve of the landmark ruling.

More important, the court's move likely will jump start the Commission's ambitious proposal for a so-called Trans-Atlantic Common Aviation Area that will remove current curbs on foreign ownership - 25 percent in the U.S., 49 percent in the EU - and write common anti-trust rules. The Commission says it will open up the entire EU market to American carriers in return for EU airlines winning cabotage, or the freedom to operate on U.S. domestic routes.

A common trans-Atlantic market would spell the beginning of the end for the regulations dating from 1944 that link a carrier's traffic rights with third countries to its nationality which, coupled with foreign ownership ceilings, prohibits cross-border mergers or takeovers.

These outdated politics distort the commercial life of airlines, not least in the U.S. and Europe. Thus British Airways dumped a planned merger with KLM Royal Dutch Airlines partly because Washington threatened to strip the latter of its valuable U.S. traffic rights if it was taken over by BA unless Britain signed up to an open skies agreement. The U.S. has also made approval of a planned alliance between BA and American Airlines conditional on progress in the open skies talks.

The leading U.S., European and Asian carriers have sidestepped the regulatory barriers by forming global alliances like Star, SkyTeam and OneWorld, but few executives pretend they are anything but a second option to full-fledged mergers and takeovers.

The U.S. has been lukewarm to the EU approach because it has won considerable benefits for its airlines through bilateral deals. But just as European carriers eventually came around to supporting negotiating authority for the EC, their U.S. counterparts are warming to plans for an open EU/U.S. airline market, even at the expense of surrendering long-cherished protection from foreign invasion of their home airspace.

Donald Carty, chairman and chief executive of American Airlines spelled out the new thinking in a keynote speech in May. "Let me be very explicit...it's time to lift the wraps on all investment restrictions. As for cabotage, I'm not afraid of it, and neither should anyone else be."

In normal times a radical proposal like the common airline market would move at a snail's pace through the Brussels and Washington bureaucracies. But these are not normal times, especially for U.S. carriers which are expected to lose up to $7 billion this year. The bulk of global airline losses are on routes to and from North America, particularly the North Atlantic, while U.S. domestic traffic is still suffering from the Sept. 11 fallout. US Airways has already tumbled into Chapter 11 bankruptcy protection and United Airlines says it could go the same way. And there's worse to come.

"Our industry is at a point where its viability is seriously in question, much more so than last year," Leo Mullin, chief executive of Delta Air Lines told a Congressional committee this week.

Europe is faring better, with its top three carriers, BA, Air France and Lufthansa still turning profits. But their rebound risks being deflated by a second Gulf War.

Against this menacing backdrop, the policy makers on both sides of the Atlantic might just conclude that rules drawn up in the first half of the previous century might be past their sell-by date.

Bruce Barnard is the European correspondent for JoC Online.