EUROPE VIEW: AS HEADS ROLL, REAL FIGHT FOR EUROPEAN AVIATION SUPREMACY YET TO BEGIN

EUROPE VIEW: AS HEADS ROLL, REAL FIGHT FOR EUROPEAN AVIATION SUPREMACY YET TO BEGIN

The gathering crisis in Europe's airline business claimed another big scalp this past week with the departure of Alitalia Chief Executive Domenico Cempella coming just days after the resignation of SairGroup boss Philippe Bruggisser. The attrition continued on Sunday with the announcement in Zurich that Paul Reutlinger, the Swissair executive charged with integrating three French carriers into Switzerland's national airline, will leave the company at the end of the month.

All three are paying the price for failing to institute credible strategies to ensure the survival of second-tier carriers in the accelerating consolidation of Europe's aviation industry.Consolidation in Europe is faltering just as it is taking a major step forward in the United States, where United Airlines is acquiring US Airways, American Airlines is taking over the assets of TWA and Delta Air Lines and Continental Airlines beginning preliminary merger talks.

Today's script was written more than a decade ago when Europe's airline executives realized that only half a dozen carriers would emerge as global players after the deregulation of their business. The first three slots were already booked by British Airways, Lufthansa German Airlines and Air France simply because they could use Europe's three biggest domestic markets as leverage into the global arena.

The fight for fourth, fifth and sixth places would be between KLM Royal Dutch Airlines, Swissair - both of which operate far beyond their domestic markets - and Iberia and Alitalia, airlines that are long on potential but short on performance. SAS, which was the first to realize the dangers and opportunities of deregulation, was condemned to stay outside the magic circle following the failure of early alliance talks.

The rest of the carriers were doomed to surviving as regional operators feeding traffic into the long-haul networks of the big players.

KLM and Swissair, which have struggled to overcome the disadvantage of a small home market, are still far from claiming their place as global carriers, while Alitalia and Iberia are only now getting serious about staying in the major league.

The next few months could decide the fate of all four. Cempella's exit has raised hopes that Alitalia can revive its promising joint venture with KLM. Their alliance was the most ambitious partnership between two major European carriers before the Dutch airline walked away last April. KLM has to return to the negotiating table because it has run out of partners. A merger with British Airways was nearly in the bag last September until the Dutch balked over ceding control to the Brits.

The two factors that sunk its alliance with Atitalia still remain: problems at Milan's new Malpensa Airport and delays in selling the Italian state's 530lding in Alitalia. But the logic behind the alliance, which was being primed for a full merger, also remains: wedding KLM's global network to Alitalia's domestic market of 58 million consumers.KLM also boasts one of the most successful trans-Atlantic alliances, with Northwest Airlines.

KLM's strategy is still in place. The Italian Treasury has opened preliminary talks with Alitalia without informing the hapless Cempella. Which is more than can be said for SAirGroup, whose grand plan of buying stakes in unprofitable carriers in France, Italy and Portugal as well as chronically unprofitable Sabena Belgian Airlines, LOT Polish Airlines, Austrian Airlines and South African Airways, is in tatters.

Rather than join a global alliance, it opted to build its own partnership to challenge is bigger rivals.

Many analysts say SAirGroup should have focused on its rapidly growing and profitable airline services businesses such as flight catering, airport shops and cargo - SAirLogistics operates the world's fifth-largest freight network. And it soon could decide to do just that: Following Bruggisser's departure, SAirGroup said it will examine all its equity airline stakes. Most immediately it has to deal with a worsening situation at Sabena, whose militant unions have rejected a restructuring program. SAirGroup is committed to boosting its 49.5take in Sabena to 85% by year's end, but it could walk away if there is no sign it will make a return from its troubled Belgian venture.

Europe's second-tier carriers have to move fast or risk being left out of the global consolidation that will gather pace after dust settles on the reshaping of the U.S. industry. Until now, outdated regulatory restrictions, particularly curbs on foreign ownership, have hindered consolidation, but the super carriers emerging in the United States and Europe can be expected to pressure Washington and Brussels to treat airlines just like any other business.

Bruce Barnard can be reached at 011-44-1223-840-461 or brucebarnard@compuserve.com.