EUROPE'S OPEN SKIES STILL FACE REAL TEST

EUROPE'S OPEN SKIES STILL FACE REAL TEST

European air transport, for long rigged by airline-owning governments, has an air of the Wild West about it these days as a 10-year ''open skies'' campaign finally starts to sort out the winners and the losers.

The last six months have seen a dramatic change in the fortunes of the major players. British Airways, once a free-market icon, is being shunned by investors. Lufthansa has been transformed from a lumbering, high-cost, state-owned carrier to a nimble private operator. And Air France is no longer synonymous with strikes and subsidies.But nothing compares with Alitalia's metamorphosis. Italy's national airline was conspicuously absent from the ceaseless rounds of negotiations over the past decade as most European airlines sought mergers, alliances, partnerships and share swaps to survive the coming shakeout in the market. Yet next week Alitalia will enter uncharted water by launching twin passenger and cargo joint ventures with KLM.

The very idea of the Dutch carrier, one of the world's top performing airlines, splitting costs, revenue, profit and losses down the middle with one of the industry's perennial underachievers would have seemed surreal. But then so would Daimler's purchase of Chrysler, Spanish and Portuguese membership in the eurozone, and Airbus booking as many orders as Boeing.

The changes in the airline business are all the more noteworthy because the industry is still hemmed in by a raft of regulatory barriers inherited from the pre-open skies era.

British Airways and Lufthansa may be privately owned, but their biggest assets - take-off and landing slots at Heathrow and Frankfurt, Europe's top two airports - were part of the dowry from their previous state owners. And the British government guarantees BA's grip on the Heathrow slots by shunning Washington's demands to open up the airport to American carriers.

But just two years after the final open-skies legislation came into effect, the European market is largely free from government intervention. Private ownership is becoming the rule, and barriers to new entrants are being lowered, albeit slowly and grudgingly.

And yet the industry still follows the flag: BA dominates Britain's long-haul market, despite competition from feisty Virgin Atlantic on a few high-profile routes. Lufthansa dominates Germany, as Air France blankets France.

Even if an airline wants to shed its nationality, it risks alienating its passengers, as BA discovered when it was forced to restore the Union Jack to its tail fins following a storm of protest against ethnic designs.

The tougher global environment is taking its toll on European airlines. But the losers are not the latecomers to privatization and deregulation like Air France and Lufthansa, which had time to marshal their defenses. The losers are the free-market pioneers - especially BA, whose share price is sliding amid increasingly gloomy analysts forecasts. The most recent point to a 200 million-pound loss this year, double previous estimates.

BA has gambled all on moving upmarket, focusing on first-class, business and full-fare coach passengers and freezing out backpackers. It also set up a separate low-cost, no-frills carrier, Go, in a belated response to airlines such as Ryanair and easyJet that have been poaching its short-haul European traffic.

Some critics allege BA is getting a rough deal, as it's easier for foreign carriers to break into the British market than it is for BA to move into theirs. Low-cost carriers have yet to take root in Germany and France, but carriers like Ryanair and easyJet are making their presence felt on the continent too.

BA finally played the national card last week, darkly warning that British Midland, the country's second-largest carrier, ''is now under German influence'' after it announced it was negotiating the sale of a 20 percent stake to Lufthansa. BA never complained when Air UK was snapped up by KLM or British Midland sold Scandinavian Airlines System a 40 percent stake, half of which is now being sold to Lufthansa.

BA's real gripe is that British Midland is allowing Lufthansa - and, worse, its U.S. partner, United Airlines - to get their hands on a priceless asset: 24 percent of the slots at Heathrow to add to nearly 70 percent at Frankfurt. BA complains it has only 38 percent of the Heathrow slots and a minimal number at Frankfurt.

BA was already furious that Virgin Atlantic leased space to Continental Airlines, giving the U.S. carrier direct access to British passengers. But what really irks BA is that it was forced to abort its planned alliance with American Airlines after Brussels and Washington imposed tough conditions.

BA is big enough to ride out the storm. But the turbulence in Europe recalls the shake-out that followed airline deregulation in the United States 20 years ago, when a few well-known carriers and scores of new ones went bust.

The real test for Europe's deregulated market is whether the politicians will stay on the sidelines when the going gets really tough.