U.S. Airlines Take the Great Game of Hardball to Britain
Welcome to the major leagues. The biggest U.S. airlines are already using the threat of Clinton Administration attitudes on “managed trade” to force a payoff for themselves out of British Airways’ proposed $750-million investment in USAir.
American, United, Delta and Federal Express don’t totally oppose the British deal, even though it will strengthen competitors here and abroad. But they want a quid pro quo--the right to originate flights from London’s Heathrow Airport to other countries in Europe, the Middle East, Africa and Asia.
Only the British government can grant such take-off rights--just as U.S. government approval is needed for British Airways to buy 44% of the stock--21% of the voting power--in USAir. So both governments are feeling pressure from industrial hardball.
The U.S. companies expect to use Clinton’s avowed policy to crack open world markets--he opposes the deal unless there’s something in it for the U.S. airlines--while British Airways is counting on its government’s hard bargaining to keep Heathrow restricted.
The Americans may well win their point, possibly without the USAir deal ever getting to Clinton. The present Transportation Secretary, Andrew H. Card Jr., says he will decide by Dec. 24 whether British Airways should be allowed to invest in USAir and practically assume its management. But the Bush Administration’s hand has been forced. “Unless the British government comes forward with meaningful concessions, the deal is dead,” says a Washington veteran of negotiations over airline rights.
Concession means “open skies,” the right of U.S.-based airlines to choose routes and fly them anywhere in the world as they would in this country. It’s thought the U.S. airlines won’t get total free rein, but some commercially significant concessions.
In return, the British would get rights to originate flights to other points in the United States and abroad from Pittsburgh, Philadelphia and Baltimore/Washington airports and the ability to use USAir to feed passengers from markets such as Charlotte and Cincinnati into BA’s international network.
Open skies is already the pattern between the United States and the Netherlands thanks to an agreement negotiated after the Dutch airline KLM bought 20% of Northwest Airlines two years ago. Minneapolis-based Northwest now flies from Amsterdam to 61 cities in Europe and beyond.
And the pace of foreign investment is picking up. Last week Air Canada proposed to invest $450 million for a stake in Continental Airlines, in which Scandinavian Air System has been a shareholder for years.
Those smaller foreign airlines are trying to protect their access to the U.S. market, in what is becoming a business of global giants. At the same time their investments are welcomed by weak domestic carriers such as Continental, which is in Chapter 11 bankruptcy. By U.S. law, foreign ownership cannot go above 25% and foreign management control is prohibited--a precaution because airlines are strategic in time of war.
Still, foreign investment has given rise to fears. Ross Perot said during his Presidential campaign that the strength of the U.S. airline industry was being given away. But he was wide of the mark. Fact is, the big U.S. carriers, American, United and Delta--all with revenues over $9 billion a year, but lean and competitive from a decade of deregulated battles at home--are expanding overseas and winning. “What we’re about is creating a global network,” says an American Airlines official.
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Their only real competition globally is British Airways, formerly state-owned but sold to private investors in 1987. British Airways also has $9 billion in annual revenues, and it makes a profit while U.S. airlines are soaking in red ink.
“Across the North Atlantic, British Airways carries about as many passengers as all the U.S. based airlines together--the Americans and Brits have about 50% of the market each,” says analyst Andrew Nocella of AvMark an airline consulting firm in Arlington, Va.
But the British have an ace in the hole in their flights to the Middle East and Asia. Although the majority of its flights go to Europe and North America, British Airways gets 60% of its $450 million annual profit from the 29% of its business done with the Middle East and India, the Far East and Australia. On those routes, BA is a premier airline with less competition.
Key to that situation is Heathrow, a global transport hub where flights from five continents converge. That’s why the British government is not eager to open Heathrow up--and why the U.S. lines are determined to do so. Flying from Heathrow would enhance their ability to compete across the world.
Yes, you say, but the airline business overall is a shambles. As often as not lately, American, United and Delta lose money. Aircraft orders are being postponed; hoped for growth in travel hasn’t materialized. There is even talk that computers and telecommunications may permanently curb travel.
Don’t you believe it. Travel is growing by leaps and bounds in Asian markets, and the promise of tomorrow is tremendous for the Soviet lands and China. The big U.S. airlines are positioning themselves now.
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It should be noted that Clinton’s approach of demanding a direct benefit for U.S. companies in exchange for access to the U.S. market represents a change from the Bush Administration’s hands-off attitude and is more in tune with the real world, where governments aid their national companies because they see a benefit in doing so.
Wall Street also sees such benefits. As Kevin Murphy, airline analyst for Morgan Stanley, puts it: “It is going to be good for the U.S. economy that U.S. aviation is able to position itself for world commerce via airline hubs” in Tokyo, London and Frankfurt. That’s why the U.S. airlines are playing hardball, and Clinton is taking up the game.
