Commission Says Airline Liberalization Must Go On

IF logic had anything to do with it, air travel would be one of the most open and competitive industries in the world. Dozens of companies fly to each other's destinations, match each other's fares, and try to improve service as they streamline operations.

But the industry is far from open. Although more liberal than a decade ago, it remains bound by rules and 50-year-old bilateral treaties. And profits are certainly not rolling in.

Pierre Jeanniot, who heads the International Air Transport Association, forecasts the world's airlines will lose $2 billion this year, bringing to $13.5 billion the industry's total losses over the past four years.

What's the cause of the industry's red ink? While some industry executives and experts blame deregulation (Air France Chairman Bernard Attali called it "collective suicide" in a speech last November), the balance of the industry thinks the downturn is cyclical and that liberalization needs to continue. A United States airline-industry panel, which made its final recommendations to the White House last Thursday, has added its weight to the majority opinion.

It is not clear how many of the panel's recommendations the Clinton administration will accept. The 15-member commission wants a government corporation set up to handle air-traffic control, limits on the time bankrupt airlines can reorganize, and cuts in existing taxes and delays on the imposition of others. The president and Congress are unlikely to accept lower taxes, having just squeaked through a major tax-hike package.

But the panel's liberalizing moves are generating little controversy. It proposes raising the caps on foreign ownership of US airlines from 25 percent to 49 percent, wherever countries responded with similar market-opening moves. The panel also suggested replacing today's bilateral airline agreements with a multilateral arrangement.

Most US carriers agree. Stephen Wolf, chairman of United Airlines, said in a statement that he strongly supports the negotiation of multilateral agreements among governments. Delta Air Lines agreed. A USAir spokeswoman said the airline was "gratified that the commission rejected the idea of reregulating rates and fares as solutions to the industry's problems."

USAir has a keen interest in the foreign-ownership clause. When British Airways announced it was buying a substantial stake of USAir in January, other US airlines vehemently protested. British Airways relented a bit and bought 21 percent of USAir. But it has made no secret of its ambitions. The carrier has options to invest another $450 million in USAir over the next five years, which would bring its equity share to 32.4 percent. The move cannot be made unless President Clinton and Congress approve the c ommission's proposal.

"British Airways does welcome the general tone of the recommendations," says Margaret Vodopia, a spokeswoman for the airline. "We would like to increase our ownership of USAir."

Airline experts differ on whether a minority share really matters that much.

"As long as the percentage stays under 50 percent, it's irrelevant," says Albert DeLauro, director of transportation consulting services at Towers Perrin, a San Francisco-based management consulting firm. Beyond 49 percent, "I'm not sure anybody at this stage is going to be willing to give up that control.... Are you willing to let people in Iraq own United Airlines?"

"I think the foreign ownership [rule] is already too liberal," counters Paul Dempsey, director of the transportation law program at the University of Denver. "I don't care if foreign citizens own lipstick and potato-chip factories. What I don't want to get into is where our infrastructure is owned by foreign citizens. If we're going to sell off our airlines to foreign citizens, it's the equivalent of selling the Mississippi River."

US commercial airlines ferried two-thirds of the soldiers and 25 percent of the supplies during operations Desert Shield and Desert Storm, he points out.

Deregulation has not helped US airlines escape an ocean of red ink. The top three US airlines would need $15 billion to restore their balance sheets to adequate levels, Mr. Dempsey says. That is about four times the total accumulated profit of the US airline industry since the inception of commercial aviation in the 1920s.

But many analysts say the industry's problems are cyclical. Former Virginia Gov. Gerald Baliles, who chaired the US industry commission, blames the crisis on temporary factors: recession, declines in passenger traffic, and hikes in fuel prices partly related to the Gulf war.

Analysts and airline officials expect the industry to rebound next year - and for liberalization to continue.

"We are on the way to creating a much more flexible, much more relaxed regulatory framework for air transport," says Kees Veenstra of the Association of European Airlines.