Europe Apt to See Merger of Its Airlines : Transportation: Deregulation will help the remaining carriers compete with the giants.

Under intense competition from giant airlines across the Atlantic, Europe is lurching toward the partial deregulation of its skies--and a consolidation of its bewildering and inefficient array of national carriers.

Deregulation, European style, will not be as complete or as chaotic as the American variety that took hold about a decade ago, which gave birth to short-lived carriers and contributed to the disappearance of some familiar airlines.

Instead, the Continent will continue to regulate its airlines’ fares and the routes they may fly. And consolidation will proceed slowly--as demonstrated by the recent collapse of talks between British Airways and KLM Royal Dutch Airlines.

“As long as governments still own airlines, they’re going to resist mergers that submerge their airlines’ national identities, and they’re going to resist complete deregulation,” said Richard Bond, a London analyst for Cresap, a subsidiary of the management consulting firm Towers Perrin.

Meanwhile, the biggest U.S. airlines--American, United and Delta--threaten to cut ever deeper into the vast and profitable transatlantic routes.

U.S. carriers claimed 48% of the transatlantic market in 1990, up from 40% in 1980. And Europe’s airlines fear that trend will accelerate now that Pan Am has folded, TWA has filed for bankruptcy reorganization and healthier carriers have taken their places.

To many European airline executives, the proper response seems simple: Create bigger carriers through mergers that can match the behemoths from the other side of the ocean.

“Let us be allowed to gather our strength to avoid being hacked to pieces by our competitors,” Air France Chairman Bernard Attali said.

That approach, however, is running smack into European Community antitrust policy.

Sir Leon Brittan, the EC antitrust commissioner, said “excessive concentration” of airlines serving the internal European market would result only in higher fares and worse service for passengers. Large and inefficient airlines, he said, are no more able to compete globally than small and inefficient ones.

“The European air transport industry has no objection to competition,” responded Attali, last year’s president of the Assn. of European Airlines. “It simply wants to be able to compete on equal terms and be in a position to face the fast-growing threat of U.S. and Asian carriers.”

Europe is staggering toward a new airline policy just as its airlines--and America’s as well--are coming out of their worst two years ever, largely the result of the U.S. recession and the Persian Gulf War.

In the United States, whose airlines posted a collective $1.8 billion in losses in 1991 and equally terrible earnings in 1990, the result was a host of Chapter 11 bankruptcy filings and the disappearance of such familiar names as Eastern and Pan Am.

In Europe, where 1990 losses reached $2.5 billion (figures for 1991 are not yet available), even the weak generally survived--thanks to the taxpayers. The French government, for example, pumped $370 million into Air France, which lost about $128 million in 1990 and $200 million in the first half of last year.

Still, from the European perspective, the skies now are tilted in America’s favor.

American, United, Delta and Northwest are all bigger than British Airways, Europe’s largest--and the only big European carrier entirely in private hands. The next three U.S. carriers are bigger than Germany’s Lufthansa, which ranks second in Europe.

Karl-Heinz Neumeister, the Assn. of European Airlines’ secretary general, said the creation of mammoth U.S. airlines was an unintended consequence of deregulation, but one that Europe has to live with.

“The U.S. mega-carriers--established by mistake--are a real threat to European aviation,” Neumeister said. “How could we react in self-defense other than with our own mega-carriers?”

Besides, Neumeister said, U.S. airlines enjoy a much larger domestic market than do the European carriers. Because Europe is geographically more compact, cars and railroads carry more traffic. Less than 10% of travelers cover the 250 miles from Paris to Lyon by air, for instance, now that the route is served by high-speed trains.

Consequently, according to the association, U.S. carriers rely on international flights for just 30% of their income, compared to 70% for European airlines. “That means we’re much more vulnerable on the international battlefield,” Neumeister said.

On top of all this, treaties dating back to the years immediately after World War II give U.S. airlines rights to carry passengers between many European cities. On the other side of the Atlantic, European jets sometimes stop in more than one U.S. city on their way to or from Europe, but all passengers must have an international destination.

Europe says that’s unfair. U.S. officials respond that European airlines should not be able to operate within the United States until U.S. carriers have the same privilege within individual European countries, not just within continental Europe.

“Europe isn’t a single country,” said Donald Comlish, vice president of the Air Transport Assn. of America. “The last time I looked, they had a bunch of different national flags flying over there.”

Those national flags are also interfering with European airlines’ urge to merge.

British Airways and KLM, which had been talking merger for six months, seemed like an ideal couple.

British Airways needed a continental hub, and Amsterdam’s Schiphol Airport offered the rare advantage of having room to expand.

KLM, with hardly any domestic market of its own, needed protection from its international competitors. KLM President Pieter Bouw said his airline would even give up its cherished name--the oldest airline name in the world, the company claims--if that was the price of survival.

Yet the talks collapsed last month when the British reportedly demanded 65% of the profits from the merged airline, and the Dutch refused to take less than 40%. Behind the talks’ failure, analysts saw the invisible hand of the Dutch government, which owns 38% of KLM and appoints six of the 11 members of its supervisory board.

It was not the first aborted effort at merger in Europe’s skies.

In 1990, British Airways and KLM each bought a 10% stake in Sabena, the Belgian airline, intending to go up to 20% the next year. That deal turned sour after new management took over at Sabena late in 1990, and British Airways and KLM have gone to the Belgian courts to get their money back.

Air France and Sabena are still negotiating a merger, but until that deal or another like it reaches fruition, no one knows whether the 12-nation European Community will smile or frown on an international combine.

The straws in the wind--and antitrust czar Brittan’s ideological preferences--suggest that the EC will insist that competition not be left in the waiting room.

When the EC’s executive commission allowed Air France to swallow up two competitors within France--UTA and Air Inter--it stipulated that Air France make route licenses and slots available to would-be competitors.

And just last month, the commission fined Ireland’s Aer Lingus nearly $950,000 for terminating an agreement with British Midland governing recognition of each other’s tickets on the London-to-Dublin route.

In that instance, Brittan said Aer Lingus was trying to freeze British Midland out of the lucrative route. The EC commission, he said, was determined “to act against airlines holding dominant positions if they attempt to prevent the development or maintenance of competition.”

One way or another, most analysts feel, consolidation will occur, ultimately trimming the list of major European national airlines from today’s two dozen to perhaps half a dozen.

Deregulation will come sooner, although it will be less sweeping than many airline executives would like.

A proposal by the EC commission would free airlines to set fares for flights within the 12-nation community on routes served by at least three carriers, unless the governments at both ends disapprove. On routes served by fewer carriers, the commission would retain its right to review fares.

Neumeister objects that about 95% of intra-EC routes are served by fewer than three airlines--and would thus remain subject to EC regulation.

Entry into airline routes, now controlled by national governments, would also be liberalized. Carriers would gain new rights to pick up and discharge passengers outside their home country. At airports with no spare capacity, established airlines would have to make takeoff and landing slots available to new competitors.

Attali calls that proposal an attempt to bypass the real issue--the need to enlarge Europe’s airports.

EUROPE’S COSTLY SKIES

Travelling comparable distances, it typically costs both business and economy-class passengers far more to fly between European cities than between U.S. cities. Chart shows pairs of cities similar distances apart.

Trip Business Economy Rome-Paris $1138 $388 New York-Chicago 854 198 London-Paris 493 180 Los Angeles-San Francisco 448 98 Rome-Milan 346 346 New York-Washington 284 125 Paris-Nice 352 211 Chicago-St. Louis 328 78 Paris-Nice 352 211 Chicago-St. Louis 328 78

Sources: Havas Voyages, Los Angeles Times Travel Services.