Sky is still the limit

For the past three days, a dozen or so British and American officials have been locked in a dingy conference room in the Department of Transport trying to negotiate a new liberalised agreement on transatlantic air services.

Occasionally they have wandered down the corridor to seek guidance or reaction from their respective airlines before returning to the bargaining table.

They have got virtually nowhere. Indeed, far from bringing the days of unrestricted air travel across the Atlantic nearer, this latest round of bilateral talks appears to have put back still further the prospect of an open skies accord.

As an advertisement for Gatt and the principle of free trade, the negotiations have been as appealing as a French farmers' rally.

Each side has a gold-plated bargaining chip that they guard jealously. Britain's is Heathrow, the busiest international airport in the world; not surprisingly, the powerful US airlines want more access to it.

The US card is its vast but protected domestic market, accounting for about 40 per cent of world air travel. British airlines, and specifically British Airways, want to gain more access to this market by buying into US carriers.

It is easy to see why neither side is anxious to trade its bargaining chip. For the US to dismantle the rules restricting foreign ownership of its airlines would be a lengthy process requiring Congressional approval, with no absolute guarantee of success.

But there is an added disincentive for the big US carriers: they are already losing money hand over fist on their domestic operations because of the emergence of new, low-cost carriers. So they hardly need additional competition from profitable airlines such as BA.

For Britain, opening up Heathrow to a queue of US airlines would be to strike at the heart of BA's profit centre. The owner of the airport, BAA, calculates that flying into Heathrow as opposed to one of London's other two airports is worth pounds 15m per route.

Thus there is deadlock. Unfortunately, that is what tends to happen when the interests of producers - in this case the airlines - are placed above those of consumers, who have barely had a look in.

But progress towards liberalisation has not only stalled over the Atlantic.

Since the start of this year the airline market of the European Union has, in theory, been open to almost unfettered competition.

The third aviation liberalisation package, signed at the end of last year by all member states, allows airlines within the EU to set their own fares free of government interference and fly between any two points in the union, except within another member state.

In practice, nothing has happened. By and large, European air fares remain exorbitant and most routes continue to be served by just two flag carriers. By happy coincidence, these offer identical price tariffs and schedules. What competition has emerged has been strictly limited to the margins.

Indeed, European liberalisation is under threat of reversal in some areas - witness the ill-fated attempt to merge SAS, Swissair, KLM and Austrian Airlines under the banner of the Alcazar project.

There is a narrow, physical reason why Europe's skies are not opening: the infrastructure necessary to cope with it, in the air and on the ground, is inadequate. However, that is being put right by massive investment in new air traffic control systems and airport capacity.

The more fundamental obstacle is the lack of political will among member governments which, by unhappy timing, find themselves committed to liberalising Europe's skies at a time of savage recession.

Faced with mounting losses and low or no growth, the inevitable has happened and Europe's state- owned airlines are replenishing their depleted resources with more state aid and retreating into their protectionist shells.

If the outlook seems bleak then consider this. The day is approaching when Britain will negotiate its air service agreements, not bilaterally but collectively through the EU. One shudders to think of the outcome.

----------------------------------------------------------------- THE WORLD'S TOP 20 LOSSMAKERS ----------------------------------------------------------------- Airline Net loss 1992 (dollars m) USAir 1,205 United Airlines 933 American Airlines 735 Delta Air Lines 566 Air France 549 Northwest Airlines 386 Varig (Brazil) 380 Air Canada 358 Iberia 341 Continental Airlines 299 Aer Lingus 278 Iberia 255 Vasp (Brazil) 249 KLM 241 Lufthansa 239 SAS 192 Aerolineas Argentines 190 Mexicana 142 America West 132 Olympic Airways 128 ----------------------------------------------------------------- Source: IATA, Association of European Airlines -----------------------------------------------------------------