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Old June 13th, 2005, 04:20 AM   #1
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National Pride & Airline Consolidation

National pride, missed connections
By Don Phillips, International Herald Tribune

PARIS - Negotiators for the United States and Britain were flown to Bermuda in 1946 aboard a U.S. Army Air Corps plane and told bluntly that they could not leave the island until they had agreed on how to manage the peacetime use of a promising new technology that had been forged in war: the modern airplane.

Two years earlier in Chicago, 50 countries had agreed on many rules for commercial aviation but had failed to answer one key point: Would airlines be free to fly worldwide, as President Franklin D. Roosevelt proposed, or would there be tight political restrictions as Britain and many other countries wanted?

"America wanted a free market, but Britain was scared of being crushed by America," said the aviation historian John Brindley of Geneva. "Chicago couldn't agree on economic regulation."

In Bermuda, Britain basically won the argument, and the rest of the world signed on. Governments secured the right to control all aspects of air travel to their country, including airline ownership, by allowing the country to set rules saying that only nationals of a given country could own and control an airline based in that country.

Today, many European airlines lament the victory they won half a century ago with the so-called Bermuda Protocols. While cross-border consolidation would make economic sense in Europe's crowded skies, governments refuse to let flag carriers disappear for reasons that usually boil down to pride.

"Airline ownership restrictions became national rights," said Giovanni Bisignani, director general of the International Air Transport Association. "Now the flags on our aircraft are so heavy they are sinking the industry."

Aviation in Europe was opened to limited competition in the mid-1990s when the European Union ended restrictions on cross-border operations within the (now) 25 countries of the EU. American aviation has been deregulated since the early 1980s.

But the effects on the two sides of the Atlantic have been very different. In the United States, individual states have no power over whether airlines merge. But in Europe, each country - because of the Bermuda Protocols - retains a blocking power.

The result has been striking. In the United States, market forces largely drive consolidation. US Airways and America West Airlines last month agreed on a $1.5 billion merger that would create the fifth-largest airline in the United States and one of its biggest low-fare carriers. To be sure, there are exceptions: some large American carriers, like United Airlines, stay afloat through bankruptcy. And Washington offered support to all U.S. airlines immediately after the terror attacks of Sept. 11, 2001.

But in the past two decades, the number of airlines in North America fell to 79 from 91, despite the rise of low-cost carriers. Over the same period, the number in Europe soared to 247 from 84, according to Airclaims, a London-based insurance industry information group.

The 2001 bankruptcy of Swissair, a national icon, weighed heavily on the country when it was on the verge of sliding into economic malaise, even though the gold-standard carrier was replaced within a short time by a smaller airline named Swiss.

It's "part political, part xenophobic," said Peter Morris, chief economist with Airclaims. "There is a rush when that tail goes by with your name on it."

Chris Tarry of Pantiles Chambers, a business communications company in London, said: "Here you have a market that's massively oversupplied. That means that airlines have to take out capacity or cut cost structure."

Throughout Europe, traditional airlines have reduced costs, cut staff, pushed passengers toward online reservations and - more important - persuaded some pilots' groups to forgo pay increases or even take pay cuts along with new work rules allowing them to fly more hours. That process has also begun in the United States but has gone much more slowly.

Partly as a result, European Union carriers had profits totaling $1.4 billion last year, while U.S. carriers lost $9 billion.

But the changes have been painful, especially in countries where national airlines had many workers and governments were willing to make up deficits. Now, with firm EU rules banning unlimited subsidies, long-unprofitable airlines like Alitalia and Olympic Airways are struggling to stay afloat.

Many countries have sought to at least partly privatize their flag carriers. Sometimes they are downsized. But permanently shutting down a national airline does not seem to be an option - in most cases.

Sabena, the Belgian national airline, went bankrupt in 2001. The privately owned regional airline DAT, renamed SN Brussels, put the old Sabena logo on its tail and started using the former flag carrier's computer code - SN.

There has been no truly major cross-border takeover. Air France controls KLM, and Lufthansa is assuming control of Swiss, but in both cases the targets are maintaining their national identities and operations because the countries made that a condition of any deal.

The arrangement for Air France's control of KLM also has the distinct advantage of allowing KLM to keep a majority of its rights to fly to the United States, negotiated in 1993. A stand-alone Air France could lose many of those rights.

The Air France/KLM combination, completed in May 2004, involved two airlines with little overlap that were strong in different parts of the world. Air France was profitable, but KLM was struggling. On May 19, the combined airline announced a full-year net profit of €351 million, or $428 million, with savings from the merger totaling €115 million.

The Lufthansa-Swiss deal is still being completed. Lufthansa has agreed to pay €310 million for the airline. In the meantime, Swiss is trying to cut costs and improve productivity. Not everything is rosy, though. Swiss pilots in April authorized a strike if their union cannot negotiate the easing of a plan to lay off a significant share of pilots.

In the case of both Swiss and KLM, the airlines not only must keep their identities but also must maintain a major hub operation in each country.

"Every country is keen to keep their own airline," Christine Ritz, a Lufthansa spokeswoman, said, adding that even as the market grows less steady, "the really weak airlines don't die."

Just a year ago, Ryanair, the largest no-frills carrier in Europe, warned that the skies were overcrowded and predicted that some of its competitors would not make it through the winter. "Bloodbath is the operative term," Michael O'Leary, the Ryanair chief executive, said. But that has yet to happen.

Bisignani, of the airline organization, said: "In air transport we are fragmented, constrained and, quite frankly, in many places a financial disaster. The number of significant cross-border mergers is basically two - Air France-KLM and Lufthansa-Swiss. And even these are complex and restrictive."

But Martin Broughton, chairman of British Airways, which also has done its share of cost-cutting, predicted in a speech this spring to the Royal Aeronautical Society that the shakeout in European airlines would come.

"It is obvious that in Europe, there are simply too many major network carriers and too many global hub airports," Broughton said. "They cannot be sustained for too much longer."

But even he added a note of caution.

Aviation "exists in some kind of wonderland," Broughton added, and like the story of Alice in Wonderland, "it does appear to get curiouser and curiouser."
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