Creating Global Airlines

NY Times 7oct03

The merger agreement between KLM, the Dutch airline, and Air France is more than an intriguing business story. It is an important symbol, perhaps even a landmark, in Europe's continuing integration. Asking a country to give up its gleaming 747's flying the national colors is almost as difficult as asking it to give up its currency to join a monetary union. Politicians, after all, can be like little children when it comes to big planes. That is one reason why Europe's airlines, unlike other businesses, have not been allowed to operate freely in what has ostensibly been a single economic market for a decade.

It makes no more economic sense for most countries in the European Union to maintain airlines with global pretensions than it does for state governments in America to have their own flagship carriers. But the Dutch willingness to surrender KLM to a holding company based in Paris is driven not only by the logic of European integration, but also by the promise of a long-overdue deregulation of the trans-Atlantic market. Both airlines say they can best capitalize on this prospect if they can offer a more extensive network to travelers. A merger would create such a network.

American consumers stand to gain if the airlines' premise is correct and arcane regulatory barriers are lowered not just on both continents, but for travel between them. Last week, negotiators from the European Union and the United States began talks with just such a goal in mind.

In the past, international routes have been allotted on the basis of bilateral agreements. The United States negotiated so-called open-skies deals with France and the Netherlands, for example, and these bilateral agreements allowed airlines based in either country to fly to any destination in the other. Because late last year the European Union wrested from its members the power to regulate aviation, open-skies deals can now be negotiated for flights to all of Europe.

The global airline industry is overly protected. One of globalization's oddities is that a business that does so much to lower barriers for others is itself tethered by protectionist restrictions. In a world of truly global automakers, banks and food conglomerates, airlines remain distinctly national.

Rationalizing Europe's industry will reduce the number of old flagship airlines but still expand competition, as bigger airlines and successful low-cost niche players are freed to fly anywhere. Yet for the same process to take place in the trans-Atlantic market, anachronistic limits on foreign ownership must be lifted. Marketing alliances are a half-measure to get around these limits. Travelers would benefit even more if successful airlines on either side of the Atlantic were allowed to expand on the other side.

source: http://www.nytimes.com/2003/10/07/opinion/07TUE1.html?tntemail0=&pagewanted=print&position= 7oct03