Time - Man of the Year/Time_Man_of_the_Year_Compact_Publishing_3YX-Disc-1_Compact_Publishing_1993.iso/moy/112392/1123200.000

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                                                                                BUSINESS, Page 38

Air Wars


As the global dogfight heats up, American carriers protest a
British Airways plan for the latest transatlantic merger

By JANICE CASTRO -- With reporting by 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.