The European airline industry took two important steps towards a more rational business environment last week. Neither was straightforward, painless, or universally welcomed - a bitter foretaste of the years ahead.

The first was the announcement by the European Court of Justice's senior legal advisor, the advocate general, that he believed bilateral agreements between European countries and the USA were against European trade law. This means that the court itself will almost certainly find the same when it reaches a decision later this year. The advocate general's opinion came as no surprise. It will mean, however, that the network of bilateral agreements, one of the last remnants of the old protectionist model, will be open to destruction in a series of court actions by companies aggrieved at being shut out from lucrative airports and routes.

The second was the brouhaha raised by the US Department of Transportation's decision to demand 224 London Heathrow slots - all of which were to go to US carriers - as the price of antitrust immunity for British Airways' alliance with American Airlines. The next few moves in the game were utterly predictable: the two airlines pulled out of the deal; the UK government cancelled open skies negotiations; and a BA rival, BMI British Midland, called for talks to restart under threat of legal action. The question is: why did the US government start this chain of events in the first place? British Airways had made it quite clear that such a high price would be unacceptable; did the US authorities really think this was a bluff?

Almost certainly not (although BA's subsequent claim that any price would have been too high almost certainly was). No, the most likely explanation is that the US government deliberately charged too high a price - effectively, they wrecked the talks on purpose.

Although the UK government was so keen for BA to get its alliance that it held the open skies talks as a hostage - if BA wasn't happy with its terms, the UK minister, John Spellar, would walk out - the US government was not equally keen to get the alliance for American. A report by the General Accounting Office last month found that the agreement would have only dubious benefits for US consumers, and so the USA had no compelling motive for a deal signed. It may still turn out, however, that the US government has been too clever by half, and that the end of the UK/US talks was the best thing for the European industry.

As the European advocate general pointed out, any bilateral agreement between the USA and an individual European country will be tilted far in the favour of the US side - superior economic muscle tells. EU/US negotiations would be between two blocs of roughly the same size - in fact, in population and total economic output, the EU outranks the USA, and so is likely to get a much better deal.

Second, with the UK denied a bilateral open-skies agreement this time, it will be eager to try again - with the hope of getting better terms next time. It could try to draw up a deal before the European Commission takes negotiating power for itself, but it has only a few months to do so - and runs the risk that the deal would then be promptly declared illegal. A more sensible option would be to throw its considerable diplomatic weight behind EU-US negotiations - setting an example this way could prompt other European countries to commit to the EU-wide process, rather than attempt to defend their own indefensible bilaterals after the court's decision.

Third, if and when the court sends the European airline industry into a state of unregulated chaos - or, as a Commission spokesman put it with exquisite understatement, "certainly rather a difficult situation" - one of the chief barriers to consolidation of the over-fragmented and inefficient airline sector will have disappeared. The merger between British Airways and KLM is a case in point - talks collapsed in September 2000 for several reasons, one of which was that KLM could have lost the right to operate Schiphol-US flights under existing bilateral agreements. Such a merger, suggests the European Commission, could now go ahead - and, as is surely clear by now, the European airline industry is well overdue for mergers.

No-one should forget that there is more to the business than transatlantic flights - while the debate so far has revolved around US bilaterals, the court's judgement could throw European bilaterals around the world into doubt. The scene is set for the European airline industry's largest shake-up ever.

Source: Flight International